Lending Rules for NBFC

There are several lending rules that every Non-Banking Financial Company has to follow to defend their status of a valid NBFC that they acquire after a lot of hard work and going through long paperwork.

Non-Banking Financial Companies are those companies that are duly registered under The Companies Act 1996 or 2013 and work like banks. Interestingly, they are not banks and cannot be used interchangeably with banks. However, they are regulated by the rules and regulations set by the Reserve Bank of India. There are also lending rules fixed for NBFCs by the RBI. In this article, we will be discussing those rules. 

Are all NBFCs eligible to accept deposits? What are the rules attached to deposits? 

Notably, not all NBFCs have permission to accept public deposits. Only the following NBFCs can accept or hold public deposits that too to a limit of 1.5 times their Net Owned Funds:

1. Those that have specific authorization from Bank and
2. Those have an investment-grade rating.

However, the Reserve Bank decided that only banks should be approved to accept public deposits as public policy. The RBI has also not issued any Certificate of Registration (CoR) to new NBFCs since 1997, allowing them to accept public deposits

The scenario has changed, and the maximum rate of interest that an NBFC can offer is 12.5%. This interest can be paid or compounded at rest but not shorter than monthly rests. NBFCs can accept or renew public deposits for a minimum period of no less than 12 months and no more than 60 months. However, they still cannot accept deposits that are repayable on demand.

The Reserve Bank actively publishes a list of NBFCs that hold a valid Certificate of Registration and are further eligible to accept deposits on its official website, i.e., www.rbi.org.in.

The RBI often prohibits some companies from accepting public deposits whose list was published on its website. RBI actively keeps both of these lists updated. Everyone is always advised to check both of these lists before placing any deposits with any NBFC.

Are NBFCs eligible to accept deposits from NRIs?

NBFCs are ineligible to accept deposits from NRIs. This rule has become effective from April 24, 2004. However, deposits made by debit to the NRO account of NRI can be accepted by NBFC but with the attached provisos:

1. Such an amount should not represent inward remittance or 
2. Transfer made from NRE/FCNR (B) account.

Nevertheless, there is no impact on existing NRI deposits, and they can renew them.

What is the maximum rate of interest that various NBFCs can charge to their borrowers?

The RBI has taken a back door exit in governing interest rates for financial institutions to charge their borrowers. However, this rule does not apply to NBFC - Micro Finance Institutions. The deciding factor of the rate of interest charged by the company is the terms and conditions of that loan agreement executed between the borrower and the NBFCs. It is the utmost duty of the NBFCs to be transparent in the following matters:

• Their work,
• The rate of interest and
• How different categories of borrowers can reach the rate of interest.

NBFCs should disclose all these things to their borrowers and be communicated explicitly in the sanction letter.

What are the other responsibilities of the NBFCs registered with the RBI regarding submitting compliance and additional information?

A. Submission of returns by deposit-taking NBFCs

1. NBS-1: Submission of Returns on deposits in First Schedule quarterly.
2. NBS-2: NBFC accepts public deposits and is obligated to submit returns to Prudential Norms every quarter.
3. NBS-3 Quarterly return on Liquid Assets
4. NBS-4 Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn at present as submission of NBS-1 has been made quarterly.)
5. NBS-6: NBFCs with total assets of ₹ 100 crore and above need to submit a monthly return on exposure to the capital market.
6. Half-yearly ALM return by NBFC, which is holding public deposits amounting to more than ₹ 20 crores or asset size of more than ₹ 100 crore
7. They shall maintain the proper Audited Balance Sheet and Auditor Report.
8. To be submitted by NBFC accepting public deposits.
9. Branch Info Return.

B. Returns to be submitted by NBFCs-ND-SI

1. NBS-7: Submission of statement of capital funds, weighted risk assets, risk asset ratio, etc., quarterly.
2. Monthly Return on Essential Financial Parameters.
3. ALM returns:
   a.Statement of short-term dynamic liquidity in ALM format [NBS-ALM1] needs to be submitted monthly.
   b.Statement of structural liquidity in the format of ALM [NBS-ALM2] to be submitted half-yearly,
   c.Statement of Interest Rate Sensitivity in ALM format [NBS-ALM3] to be submitted half-yearly
4. Branch Info return

C. Quarterly return on critical financial parameters of non-deposit taking NBFCs, which have assets ranging between ₹ 50 crores to ₹ 100 crore

The following, but not limited to, basic information of non-deposit taking NBFCs with asset size between ₹ 50 crores and ₹ 100 crores should be submitted quarterly:

• Name of the company,
• Address,
• Net Owned Funds,
• Profit or loss during the last three years.

Other generic reports also need to be submitted by all NBFCs

Conclusion: 

The Reserve Bank of India regulates NBFCs, and every NBFC must keep themselves updated about recent notifications published by RBI. They do not have an option to break such rules or lose their status as an NBFC.