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NBFC Compliance

"Discover expert guidance for simplified compliance with India's new NBFC regulations post the Sahara case. Ensure adherence with RBI's screening through our team's assistance."

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NBFC Compliance - Overview

Non-Banking Financial Companies (NBFCs) are entities registered under the Companies Act 2013, engaged in various financial activities such as accepting deposits, providing loans and advances, acquiring stocks, shares, bonds, debentures, and government securities. These companies play an active role in the financial sector. To operate legally, NBFCs must obtain a license from the Reserve Bank of India (RBI).

In recent times, the regulatory framework for NBFCs has become more intricate. Previously, NBFCs held certain advantages over traditional banks and enjoyed relatively straightforward compliance requirements. However, the landscape changed after a high-profile case involving Sahara, which prompted the RBI to impose stricter regulations on NBFCs. Notable regulations include those related to the securitization of standard assets and guidelines for private placement of NBFCs.

The RBI has taken proactive measures to tighten oversight and regulation in the NBFC sector. This includes the introduction of rules to prevent speculative activities within NBFCs. These changes are aimed at ensuring greater financial stability, transparency, and security within the sector.

The securitization of standard assets refers to the process where financial assets, such as loans, are pooled together and transformed into tradable securities. The guidelines for private placement pertain to the issuance of securities to a select group of investors rather than through public offerings. These regulations are designed to ensure that NBFCs operate responsibly and maintain the integrity of the financial system.

In summary, NBFCs are non-banking financial entities regulated by the RBI under the Companies Act 2013. Recent regulatory changes have made compliance more complex, with stricter rules being implemented following high-profile cases. The RBI's efforts are directed towards enhancing the stability and credibility of the NBFC sector, with a focus on preventing risky activities.

Types of NBFCs or Non-Banking Financial Companies

There are various types of Non-Banking Financial Companies (NBFCs) categorized based on their liabilities and activities. These distinctions help define their roles and functions within the financial landscape. Here are the different types of NBFCs based on liabilities and activities:

NBFCs based on Liabilities:

  1. Deposit Accepting NBFCs: These are NBFCs that accept deposits from the public. They play a role similar to banks in terms of collecting deposits, but they cannot offer checking accounts.

  2. Systematically Important (NBFC-ND-SI): These are NBFCs that have been identified by the Reserve Bank of India (RBI) as systemically important due to their potential impact on the financial system's stability.

  3. Non-Deposit Accepting NBFCs: These NBFCs do not accept deposits from the public. They mainly provide financial services like loans, advances, and investments.

  4. Other Non-Deposit Holding Companies: This category includes non-deposit holding companies that may not fit into the other mentioned categories. These companies are typically engaged in financial activities but do not accept deposits.

NBFCs based on Activities:

  1. Investment and Credit Company (ICC): These NBFCs primarily engage in the business of loans and advances, investment in stocks and securities, and other credit-related activities.

  2. Infrastructure Finance Company (IFC): These NBFCs focus on financing infrastructure projects. They play a critical role in supporting the development of infrastructure in the country.

  3. Systemically Important Core Investment Company (CIC): CICs are companies that primarily hold investments in the form of equity shares for the long term, but they do not trade or deal in those shares.

  4. Mortgage Guarantee Companies: These NBFCs provide mortgage guarantee services to lenders, reducing the risk associated with lending for home loans.

  5. NBFC- Non-Operative Financial Holding Company (NOFHC): These companies are set up to hold the investments in financial sector entities but are not actively involved in financial operations.

  6. NBFC- Microfinance Companies (MFIs): These NBFCs focus on providing financial services to economically disadvantaged sections, particularly in rural and semi-urban areas.

  7. NBFC-Factors: These NBFCs engage in factoring activities, which involve buying receivables from businesses to provide them with immediate funds.

  8. Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC): IDF-NBFCs provide long-term debt financing to infrastructure projects through the issuance of bonds.

Compliance for NBFCs is essential to ensure they operate within the regulatory framework and contribute to financial stability. Regulations issued by the Reserve Bank of India (RBI) cover various aspects such as capital adequacy, risk management, reporting requirements, and governance standards, ensuring the smooth functioning of these financial entities while mitigating risks to the financial system.

Annual Compliance of NBFCs

The annual compliance requirements for Non-Banking Financial Companies (NBFCs) have indeed become more efficient and stringent in recent times. These measures are aimed at enhancing transparency, reducing risks for both consumers and the government, and ensuring the overall health of the financial sector. NBFCs, particularly those falling under the Non-Deposit category, have specific obligations to fulfill regarding annual statements and returns.

For NBFCs categorized as Systemically Important (NBFC-ND-SI) under the Non-Deposit category, there are certain key annual compliance obligations:

  1. Filing of Annual Documents and Statements: NBFCs are required to file various annual documents and statements that provide insights into their financial health and operations. These documents typically include details about their capital funds, risk asset ratio, profitability, and other relevant financial indicators.

  2. Capital Funds and Risk Asset Ratio: NBFCs need to disclose information about their capital funds and risk asset ratio. This is crucial for evaluating the company's ability to absorb losses and its overall financial strength.

  3. Disclosure Norms: Disclosure norms have been enhanced, and NBFCs are now required to provide more comprehensive information about their operations. This includes details about capital adequacy and liquidity.

  4. Capital Adequacy: Capital adequacy refers to the extent to which an NBFC's capital is sufficient to cover its risk exposure. NBFCs need to maintain a certain level of capital adequacy to ensure their financial stability. As you mentioned, the recent addition of capital adequacy and liquidity norms emphasizes the importance of maintaining a robust financial position.

  5. Capital Maintenance: NBFCs are generally required to maintain a minimum capital adequacy ratio of 15%, which ensures that they have enough capital to cover potential losses. This ratio is a critical measure of the company's financial strength and its ability to absorb unexpected shocks.

  6. Prudential Norms: NBFCs are required to adhere to prudential norms set by regulatory authorities. These norms include guidelines related to various aspects such as asset classification, provisioning, risk management, and more.

These stricter compliance measures and enhanced disclosure norms are designed to ensure that NBFCs operate with sufficient financial strength and transparency, minimizing the potential risks to both consumers and the broader financial system. By adhering to these requirements, NBFCs contribute to maintaining financial stability and trust in the financial sector.

S No. Particulars Time Limit Details
1 Unaudited March Monthly Return/NBS7 On or before 30th June The Unaudited March Monthly Return or NBS7 is a financial report that provides an overview of the NBFC's financial position as of the end of March. It includes information about assets, liabilities, income, and expenditure. This report is crucial for regulatory assessment and should be submitted to regulatory authorities by the specified deadline.
2 Audited March Monthly Return Upon Completion The Audited March Monthly Return follows the Unaudited March Monthly Return and involves the audit of the financial data provided in the unaudited report. The timing for submission depends on the completion of the audit process, ensuring accuracy and transparency in the financial information presented.
3 Statutory Auditors Certificate on Income and Assets On or before 30th June This certificate is issued by the statutory auditors of the NBFC and validates the accuracy of the company's reported income and assets. It provides assurance to regulatory bodies and stakeholders that the financial information is reliable and compliant with auditing standards.
4 Information about Companies having FDI/Foreign Funds On or before 30th June NBFCs receiving foreign direct investment (FDI) or foreign funds are required to report this information to regulatory authorities. This reporting ensures transparency in foreign investments and helps monitor cross-border financial activities within the NBFC sector.
5 Resolution of Non-acceptance of Public Deposit Before the commencement of the new Financial year This resolution signifies the NBFC's decision not to accept public deposits. It should be passed and documented before the start of the new financial year, indicating the company's stance on public deposits, which influences its financial operations and obligations.
6 Declaration of Auditors to Act as Auditors of the Company Annual basis This declaration is made by the appointed auditors of the NBFC to confirm their willingness and availability to serve as the company's auditors for the upcoming year. It underscores the continuity of the auditing process and the auditors' commitment to their role.
7 File Audited Annual Balance Sheet and P&L Account One month from the date of signoff The audited annual financial statements, including the Balance Sheet and Profit and Loss (P&L) Account, are critical documents that reflect the NBFC's financial performance and position. Timely submission ensures accurate representation of the company's financial status.

Monthly Compliances of NBFC-ND (Non-Deposit Taking):

S No. Particulars Time Limit Details
1 Monthly Return By 7th of every month The Monthly Return is a report submitted by NBFC-NDs detailing various financial and operational aspects. It provides regulatory authorities with up-to-date information on the company's activities and performance. Submission by the 7th of each month ensures timely reporting.
2 Upload Monthly By 7th of every month In addition to submitting the Monthly Return, relevant documents and data are uploaded as part of the compliance process. The deadline for uploading these materials coincides with the submission of the Monthly Return.

Periodical Compliances of NBFC-ND (Non-Deposit Taking):

S No. Particulars Time Limit Details
1 Appointment of Director Within 30 days of appointment When a new director is appointed in the NBFC-ND, the company needs to inform regulatory authorities within 30 days of the appointment. This ensures that regulatory records remain accurate and up to date.
2 Upload Monthly Return Within 30 days of appointment Similar to the monthly return mentioned earlier, this return is uploaded within 30 days of the appointment of a new director. It maintains the reporting continuity and ensures accurate information sharing.

Types of Returns

  • If the company fail to compile the annual return, it can lead to a penalty, hence the best way to ignore penalty, the Section 8 company has to follow the compliances within the prescribed period of time.

Returns By Deposit Taking NBFCs (NBFC-D):

  1. NBS-1 - Quarterly Financial Information: Captures financial information like asset and liability components, profit and loss account on a quarterly basis.

  2. NBS-2 - Quarterly Prudential Norms: Provides information about prudential norms such as asset classification, NOF (Net Owned Fund), capital adequacy, provisioning, and more.

  3. NBS-3 - Quarterly Liquid Assets: Captures information on liquid assets and statutory funds, focusing on investment in liquid forms.

  4. NBS-4 - Annual Return of Critical Parameters: Captures repayment status of rejected NBFCs that accept public deposits.

  5. NBS-6 - Monthly Return on Capital Market Exposure: Filed by NBFC-D with total assets of Rs. 100 crore or more, providing information related to capital market exposure.

  6. ALM Returns - Asset Liability Management Returns: Filed half-yearly by NBFC-D with public deposits exceeding Rs. 20 Crore or assets exceeding Rs. 100 Crore. It includes statements of short-term dynamic liquidity, structural liquidity, and interest rate sensitivity.

  7. Audited Balance Sheet and Auditor's Report: Required to be submitted by NBFC-D accepting public deposits, providing audited financial information.

  8. Return related to Branch Details: NBFC-Ds need to submit a return detailing branch information.

Returns By Non-Deposit NBFCs (NBFC-ND):

  1. NBS-7 - Quarterly Return: Provides information on capital funds, risk assets ratio, risk-weighted assets, and other relevant financial data.

  2. NBS-2 - Monthly Return on Critical Financial Parameter (NBFCs-ND-SI): ALM Returns filed monthly, including statements of short-term dynamic liquidity.

  3. ALM Returns - Asset Liability Management Returns: Filed half-yearly and include statements of structural liquidity and interest rate sensitivity.

  4. Branch Info Return: Filed quarterly by NBFC-NDs owning assets between Rs. 50 crores and Rs. 100 crores. Provides critical financial parameter information.

These returns and reports collectively contribute to maintaining the financial stability, transparency, and regulatory compliance of NBFCs, whether they are deposit-taking or non-deposit taking. Adherence to these requirements supports effective oversight, risk management, and confidence in the financial sector.

FAQ

Frequently Asked Questions

NBFCs normally accept money from banks or sell business papers or documents to shared assets to raise funds. Then the company will on-loan these funds into little and medium business or enterprises, retail clients, etc.
All the operations of NBFCs are regulated and managed by the Reserve Bank of India (RBI) under the framework of the Reserve Bank of India Act, 1934.
NBFCs can provide services like loans and credit facilities, retirement underwriting, planning, currency exchange, money markets and merger business activities.
NBFC or Non-Banking Financial Companies represents non-banking financial institutions which perform capacities such as banks without banks in rural regions. MFI is miniaturized scale account establishments which work at a further littler level than Non-Banking Financial Companies or NBFC. MFI provides little credits to the persecuted segments of the general or rural public.
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