May 21, 2011

RBI compliences for NBFCs



Section 45-IA of the Reserve Bank of India Act, 1934 provides that No non-banking financial
company shall commence or carry on business of a non-banking financial institution
(a)   Obtaining a certificate of registration issued under Chapter IIIB; and 
(b) Having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify.
Reserve Bank of India vide its PRESS RELEASE dated 8th April 1999 has announced that
“in order to identify a particular company as a non-baking financial company (NBFC), it will
consider both, the assets and the income pattern as evidenced from the last audited balance
sheet of the company to decide its principal business. The company will be treated as an
NBFC if its financial assets are more than 50 per cent of its total assets (netted off by
intangible assets) and income from financial assets should be more than 50 per cent of the
gross income. Both these tests are required to be satisfied as the determinant factor for
principal business of a company.”

Reserve Bank of India vide its Notification No. DNBS 132 / CGM (VSNM) – 99, dated
20/04/1999 has increased the requirement of “net owned fund” from Rs.25 lakh to Rs.200
Lakh for the NBFC which commences business of a non-banking financial institution on or
after April 21, 1999.

Meaning of Business of a non-banking financial institution
 Section 45-I(a) of the Reserve Bank of India Act, 1934:

“business of a non-banking financial institution” means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f);
Meaning of Financial Institution:

Section 45-I(c) of the Reserve Bank of India Act, 1934

“financial institution” means any non-banking institution which carries on as its business or part of its business any of the following activities, namely:-
(i)          the financing, whether by way of making loans or advances or otherwise, of any activity other than its own;
(ii)        the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature;
(iii)      letting or delivering of any goods to a hirer under a hire‑ purchase agreement as defined in clause (c) of section 2 of the Hire Purchase Act, 1972 (26 of 1972);
(iv)       the carrying on of any class of insurance business;
(v)         managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;
(vi)       collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person,

but does not include any institution, which carries on as its principal business
(a)     agricultural operations; or
(aa)    industrial activity; or
(b)     the purchase or sale of any goods (other than securities) or the providing of any services; or
(c)      the purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable property by other persons;

Explanation‑ For the purposes of this clause, "industrial activity" means any activity specified in sub‑clauses (i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act, 1964 (18 of 1964).

Meaning of NBFC:

Section 45-I(f) of Reserve Bank of India Act, 1934:

“non-banking financial company” means –
(i)          a financial institution which is a company;
(ii)        a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or leading in any manner;
(iii)      such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.


  Sub-section (4A) of Section 58B of the Reserve Bank of India Act, 1934 provides

“If any person contravenes the provisions of sub-section (1) of section 45-IA, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.”

Section 58C provides as follows

(1) “Where a person committing a contravention or default referred to in section 58B is a company, every person who at the time the contravention or default was committed, was incharge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the contravention or default and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention or default was committed without his knowledge or that he had exercised all due diligence to prevent the contravention or default.”

(2)     Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the same was committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary, or other officer or employee of the company, such director, manager, secretary, other officer or employee shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly."







Under Reserve Bank of India Act, 1934

Section 45-IA
NBFC have to make application for registration with RBI and shall not commence or carry on business of a non-banking financial institution without obtaining registration from RBI and maintaining NOF.

NOF requirement for NBFC registered

Before 21/04/1999          = Rs.25 lacs
On or after 21/04/1999    = Rs.200 lacs
One time
Section 45-IB

Maintenance of percentage of assets

Invest and continue to invest 5% to 25% (specified by RBI) of deposits outstanding on the last working day of the second preceding quarter in unencumbered approved securities.
Notification No. DFC.121/ED(G)-98 dated 31.01.1998 and No. DFC(COC) NO.108-ED(JRP)-97 dated 30.04.1997
NBFC accepting / holding Public Deposit
Section 45-IC

Reserve Fund

Every NBFC shall create a reserve fund and transfer therein a sum not less than 20% of its net profit every year as disclosed in the profit and loss account and before any dividend is declared.
Section 45-M

Duty of NBFC to furnish statements etc., required by Bank

When asked for


Under Non-Banking Financial Companies Acceptance of Public Deposit (Reserve Bank) Directions, 1998

Notification No.DFC.118/DG(SPT)-98 dated 31.01.1998

Para 4
Minimum Credit Rating, Prohibition on acceptance of Deposit, repayable on demand, Period of Deposit (12 to 60 Months only), Ceiling on quantum of deposits (depends on status, rating, etc.), Status in case of Downgrading of credit rating, Regularisation of Public Deposit accepted earlier, Ceiling on the rate of interest (max 11%), Payment of Brokerage, etc.



Not applicable subject to

1)   not accepting Public Deposit
2)   passed a resolution under para 9
Para 4A, 4B
Branches, agents, closures of branches
Para 5
Information to be included in the Board’s report
e.g. total no. of accounts of public deposit, total amount due or unpaid, etc.
Para 6
Safe custody of approved securities
Para 7
Employee Security Deposit
Para 8
Copies of balance sheet and accounts together with the Directors’ report, auditors’ report, notes on accounts, returns in Form – NBS 1 and intimation of any change in address, directors, principal officers, specimen signatures etc should be furnished to the Reserve Bank within 30 days of the occurrence of event.
Para 9
Non-applicability of Direction to certain types of NBFC
a)   Insurance company
b)   Loan company, an investment company, a hire purchase company or equipment leasing company not holding or accepting public deposits and pass a resolution to the effect within 30 days of the commencement of the financial year
c)    An investment company (investing only in group companies not less than 90% of its assets) and pass a resolution that has not accepted and would not accept Public Deposit and would not trade in such shares/ securities within 30 days of the commencement of the financial year.

Every year within 30 days from the commencement of financial year

All NBFC, which wants to claim exemptions


Under Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998

Notification No.DFC.119/DG(SPT)-98 dated 31.01.1998

Para 3, 4, 5, 6

Income recognition

Income from NPA shall be recognized only when actually realised. All unrealised income on NPA shall be reversed.

Income from investment

Dividend income on shares and units of Mutual Funds shall be taken on cash basis.
Income from Bonds and Debentures from Govt. Securities may be taken on accrual basis.
Income from securities (guaranteed by Central Govt. or State Govt.) may be taken on accrual basis.

Accounting Standards

Accounting standards shall be followed

Accounting of investment

Board of Directors shall frame investment policy
Other requirement regarding accounting of investment
Para 6A

Need for Policy on Demand / Call Loans

Policy for demand / call loan shall be framed
All NBFC giving loan etc.
Para 7, 8, 9

Asset classification

Assets shall be classified as Standard, Sub-standard, Doubtful and Loss assets.

Provisioning requirements

Provision for assets (i.e. loans, advances or other credit facilities including bills purchased & discounted, Leased and hire purchased assets) shall be made

Disclosure in the Balance Sheet

Provision as in para 8 should be disclosed without netting off
Para 9A

Constitution of Audit Committee

Company having assets of Rs.50 crore and above shall constitute an Audit Committee.
NBFC having assets of Rs.50 crore and above
Para 9B, 9BB

Accounting Year

Every NBFC shall prepare its B/S and P/L as on 31st March

Schedule to the Balance Sheet

Every NBFC shall append to its B/S particulars in the format as set in schedule
Para 9C

Transaction in Government Securities

NBFC shall hold investment in approved securities in a dematerialised form only.
Para 10

Requirement as to Capital adequacy

NBFC shall maintain minimum capital ratio
NBFC accepting / holding Public Deposit
Para 11

Loan against NBFC’s own shares prohibited

No loan against own shares shall be given
Para 11A

NBFC failing to repay public deposit prohibited from making loans and investments

As long as default exists
NBFC accepting / holding public deposit
Para 11B

Restrictions on investment in land and building and unquoted shares

Restriction has been specified (10% of NOF)
NBFC accepting / holding public deposit
Para 12

Concentration of credit / investment

Restriction has been specified (Lend or invest to single person 15% and group 25%) (Both lend and invest 25% and 40% respectively)
NBFC accepting / holding Public Deposits
Para 13

Submission of half-yearly return

Half yearly return in Form – NBS-2 to be submitted
Half Yealy
NBFC accepting / holding Public Deposit and RNBFC
Para 13A

Information in regard to change of address, directors, auditors, Principal officer, etc. to be submitted by NBFC’s not accepting/holding public deposit

Within 30 days from the date of occurrence of any change
Whenever change occur
Para 13B

Exposure to Capital Market

Quarterly return in Form NBS-6
NBFC holding public deposit of Rs.50 crore or more and RNBFC having liabilities of Rs.50 crores or more
Para 13C

Norms relating to Infrastructure Loan

Restructuring of Infrastructure Loan.

All NBFC giving Infrastructure Loan

Under various Notification / Press release issued by Reserve Bank

Circular No. DNBS (DD) CC.No. 15/02.01/2000-01 dated 27/06/2001
Asset – Liability Management (ALM) System
All NBFC having assets more than Rs.100 crores

Notification No. RBI/2005-06/157 dated 6th September 2005

Monthly return on important financial parameters on NBFC not accepting / holding public deposits and having assets size of Rs.100 crores and above
All NBFC having assets more than Rs.100 crores


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