Non-Banking Financial Company (NBFC) Annual Compliances

Introduction

Non-Banking financial company referred to as NBFC hereinafter in this article, is also a type of company incorporated under the provisions of the Companies act. These are companies who are engaged in the business/activity of –

• Lending loans and finances 
• Acquiring securities like shares, stocks,  debentures and bonds
• Involved in insurance business
• Leasing business
• Hire-purchase activity
• Chit business

But cannot/prohibited to do business (that is these under mentioned business should not be core business of the NBFC)

• Agricultural activity
• Industrial activity
• Purchase and sale of movable goods
• Construction of immovable property
• Sale and purchase of immovable property

Note : Financial activity means that the company has financial assets of 50 percent or more of its total assets and income from it is also more than 50 percent. Furthermore finance is the principal business of the company.

Difference between a Bank and a NBFC –

The activities of a NBFC are also similar to a Bank as both are involved in the activity of lending financing and making investments, however the principal difference between both is as follows -

• NBFC is not permitted to accept demand deposits.
• It is not part of payment and settlement system and is not permitted to issue cheques, drawn upon the NBFC.
• NBFC depositors do not have the facility of deposit insurance and credit Guarantee Corporation.

Compliance as to registration of NBFC with RBI –

According to the rules of RBI act, a NBFC can start a business without obtaining permission from it if the net owned fund of the company is less than 2 crore rupees. Further some NBFC’s are required to get themselves registered with their concerned regulators that are –

• Stock broking companies, venture capital fund and merchant banking companies are registered SEBI
• Insurance NBFC with IRDA 
• Nidhi Company under companies act
• Chit companies under chit Chit fund act
• Housing finance companies with National housing bank

Requirements as per registration with Reserve bank of India (RBI)

• It should be registered under section 3 of companies act
• Should have minimum net owned fun of rupee two crore.

What are different types of NBFC’s?

Different types of NBFC’s recognised by RBI are -

• NBFC Investment and Credit company  (NBFC-ICC) – This category has been created recently after harmonisation of three categories that are Asset Finance Company, Loan company and Investment company to give grater operational flexibility to different categories
• Infrastructure finance company
• Systematically Important Core Investment Company
• Infrastructure Debt fund
• NBFC; Micro Finance Institution
• NBFC-Factors
• Mortgage Guarantee Company
• NBFC- Non-Operative Financial Holding Company

Compliance for a non-deposit company (NBFC) having assets less than 500 crore rupees –

It shall not be required to follow regulation that are both prudential and business conduct regulations, like Fair practice code and Know your customer provided it does not have customer interface and has accessed public funds.

• Company having customer interface will have to follow FPC and KYC regulations.
• Company accepting public funds will be subjected to Prudential norms regulation.

Rules and compliances for accepting deposits –

1. Can NBFC’s accept deposits and what are the conditions for the same?

To accept deposit the NBFC first has to take permission that it has to obtain Certificate of registration from RBI and specific licence to accept deposits. Other NBFC’s can accept deposits but to a limited extent. Cooperative societies can accept deposits from its members, same is the case with Nidhi companies which can accept deposits only from their members and can lend loans only to its members. However it would not be out of place to mention that Reserve bank of India has not granted permission to new NBFC since the year 1997 for accepting public deposit. No certificate has been issued in the regard. The maximum interest which a NBFC can give on deposits is 12.5 percent.

2. Specific compliance rules to be adhered by Deposit taking NBFC’s

According to the rules RBI act,

• NBFC accepting deposit has to maintain a minimum level of liquid assets.
• The minimum level of liquid asset which NBFC is required to maintain is 15 percent.
• Out of those 15 percent, NBFC is required to invest at least 10 percent in approved securities.
• The rest of 5 percent can be invested in unencumbered term deposits with any scheduled bank.
• The investment made by NBFC in government securities have to be in dematerialised form. This is a mandatory requirement as per RBI.
• The securities have to be kept at the registered office of the NBFC, and if it wants to keep it in some other place then prior approval has to be taken by NBFC.
• The maintained liquid assets are kept for payment of claims of depositors.

Prudential norms to be followed by NBFC’s -

The norms vary according to two conditions that are systematic importance of the NBFC and whether NBFC can accept deposits or not.

• NBFC’s permitted to accept deposits have to comply with statutory liquidity requirements.
• The guidelines are in relation to various activities of NBFC like asset classification, exposure norms, capital adequacy, investment restriction on immovable property, income recognition, disclosure in balance sheet to be made, and provisioning requirements.

The above mentioned requirements and compliances which NBFC have to make will be discussed here after in details –

Returns to be filed by different types of NBFC’s is as under –

Returns to filed by NBFC’s which accepts deposits –

• NBS-1 – Have to be filled quarterly in the first schedule.
• NBS-2 – Have to be filled quarterly and relates to prudential norms.
• NBS-3 – Have to be filled quarterly and relates to Liquid assets of NBFC.
• NBS – 4 – Have to be filled annually, and this relates to critical parameter by a rejected company holding public deposits.
• NBS-5 – This has been withdrawn as NBS-1 has to be now filled quarterly.
• NBS-6 – Has to be filled monthly, this relates exposure on capital market and has to be submitted by NBFC taking deposit who have total asset worth 100 crore or more.
• Asset Liability Management return has to be filled half yearly and by NBFC’s who have total assets worth 100 crore or more or by NBFC’s who have public deposits worth more than 20 crore.
• NBFC accepting public deposit have to file Auditors report and Audited balance sheet.
• Branch information report.

Returns to be filed by NBFC- Non-deposit – Systematically Important companies (NBFC-ND-SI)

Systematic important NBFC’s are those NBFC’s who have a total asset size of 500 crore rupees or more as per the last balance sheet (Audited) of the NBFC. These are considered important because of their large asset worth, they are important for overall financial health of the economy.

• NBS-7 – Have to be filled quarterly, it includes statements pertaining to risk asset ratio, capital funds, risk weighted assets etc
• Every month a report has to be submitted describing the important financial parameters of the NBFC.
• Branch information return
• Asset liability management (ALM) return which includes –
• Statement describing the short term liquidity, has to be filled every month.
• Statement describing the structural liquidity, has to be filled half yearly
• Statement describing the interest rate sensitivity, has to be filled half yearly.

Return by NBFC non deposit having total assets between 50 crore to 100 crore –

These type of NBFC’s have to submit a quarterly return on important financial parameter. The company has to provide basic information’s like address, name of the company, profit and loss statement of last three years.

Other returns to be filled –

• All types of NBFC’s have to file a certificate stating that the company is engaged in the business of Non-Banking financial institution (NBFI) and it is required to hold CoR. The certificate will further state the asset and income pattern of the company. The certificate has to be certified by a statutory auditor and has to be filled by March end, every year.
• NBFC which has received foreign direct investment (FDI) has to submit a half yearly certificate, stating that it has fulfilled the minimum capitalisation regulations and that the activities of NBFC are within the norms of FEMA rules. 
• Information pertaining to overseas investment by NBFC, a quarterly return has to be filled with the Department of statistics and information and the regional office of DNBS in thi regard.

Disclosure to be made in the balance sheet of the NBFC –

All NBFC’s shall disclose separately the provisions made as per Para 9 without netting them against the value of assets or the income, the provisions to be made shall separately indicate –

• Debts which are bad or doubtful
• Depreciation in investment
• These provisions will not be appropriated from loss reserves or general provisions and will be debited to profit and loss account of the company
• Balance sheet has to be prepared by the year financial year end that is 31st of every march. If NBFC wants to extend its balance sheet date it has to take approval from Reserve bank of India before approaching the registrar of companies for the same.
• The company will annex with its balance sheet the particulars of ANNEX-1 of Companies act.

Compliance as per transaction in government securities –

• All NBFC’s will undertake transaction of government securities through demat account or CSGL account.
• NBFC will not transact government security in physical form.
• It shall not transact government security through a broker or an agent.

Compliance as per Know your customer (KYC) requirements –

• It is the responsibility of the NBFC to ensure that there is full compliance of KYC requirements prescribed by RBI, even if it is dealing through an agent or a broker.
• The NBFC has to disclose all information pertaining to KYC with RBI for verification by it and it will solely be responsible for any violation of KYC norms.
• Due diligence of authorised agents like brokers and agents have to be done by the company who are involved in the process of KYC. The details of due diligence have to be kept with the company for verification if needed.
• An introduction is required from a person who has already completed his full KYC process for a new customer.
• Customer has to give one documentary proof of address (it can be current or permanent), it has to be given at the time of updating and opening of deposit account.
• In case local address is not given, NBFC can take a declaration of local address, no proof is required to be submitted for such address.
• Customers categorised as low risk need not submit proof of address at the time of updating security check.
• In case of customers who are perceived to be of higher risk, NBFC will put in place a system of review which will be carried periodically and will form other due diligence measures to be carried on such high risk customers.
• Full KYC norm exercise will be done every two year on High risk customers.
• Fresh photograph will be taken of minor customers when they become majors.
• Full KYC exercise will be done every 10 years on low risk customers.
• KYC and asset liability management exercise will be applicable on every branch, even branches in foreign countries. And this has to be followed particularly in those countries who insufficiently apply recommendations of Financial action task force (FATF).