Brief Overview of Non-Banking Financial Company (NBFC) Compliances

Non-Banking Financial Company is a financial institution having activities that are similar to bank and provides banking services without requiring holding a banking license. NBFC’s in India are supervised and regulated by Reserve Bank of India. Thus it’s mandatory for such company to obtain a certificate of registration from RBI before commencing the business. The NBFC Company gets registered under the Companies Act, 2013 and is regulated by RBI under Section 45 I (a) of RBI Act, 1949. The predominant activities of NBFC’s financial activities related to investments, giving loans and advances, hire-purchase, insurance business, leasing, chit-fund business, acquisition of shares, bonds, debentures, stocks and government or local authority bonds/ securities which are marketable. 

The NBFC compliances mean the due date and returns that is required to be filed by NBFC’s. The list is provided as per the guidelines issues by RBI.  NBFC’s are required to comply with the compliances, as provided under the non-banking financial company returns instruction of 2016.  

Meaning of Non-Banking Financial Company (NBFC)

A Non-Banking Financial Company is a company which is engaged in the business of loans and advances, acquisition of share, stocks, bonds, debentures issued by the government or local authority or other marketable securities of nature such as leasing, hire-purchase, insurance, chit business but will not include business with the nature such as agriculture, industrial, purchase or sale of any goods.  

In simper words a Non-Banking Financial Company’s preeminent business is to receive deposits under any scheme in one lump sum or in instalments. 

Governing authority 

Being similar to that of banking sector, the business of NBFC’s are governed under chapter III B and C and chapter V of Reserve Bank of India. But the registration of NBFC’s is similar to that of incorporating a company. Thus, the NBFC companies can get incorporated under Companies Act, 2013 if it complies with Section 3 of Companies Act.

In terms of Section 45-IA of RBI, Act, 1934 no Non-Banking Financial Company can commence or carry on business without 

• Obtaining certificate of registration from bank and without holding INR 2 crore. 
• In case of venture capital, merchant banking companies are registered with SEBI.
• Insurance company should acquire registration of certificate from IRDA. 

Types of Non-Banking Financial Company

• Asset finance company – an AFC is a financial institution carrying on its principle business by financing for tangible assets for the growth of economic and income arising there from, such as automobiles, industrial machines etc. 
• Investment Company – acquisition of securities are the principle business of the investment companies.
• Loan company – the companies which is a financial institution carrying on its business by providing financial assistance in the means of loans or monetary advances. 
• Infrastructure finance company – is a non-finance company, with 75% of its total assets in infrastructure loans, minimum net owned funds INR 300 crore, minimum credit rating of A, CRAR OF 15%
• Systematic important core investment company (CIC-ND-SI) – the nature of the business is by acquiring shares and securities with the asset size of INR 100 crore or above. The company should hold 90% of its assets in form of shares, the value of equity shares should not be less than that of 60%, the company can make an investment in bank deposits, money market instruments, government securities, loan to and investments in debt issuances of group companies or guarantee issued on behalf of group companies. 
• Infrastructure debt fund – these companies are to facilitate a long term loan debt into infrastructure projects. 
• Micro finance institution – NBFC-MFI doesn’t have 85% of its assets in the nature of qualifying assets satisfying the following criteria – 
• The borrower of the loan shouldn’t have an annual income of INR 1, 00, 000 in rural household and INR 1, 60, 000 in semi-urban household.
• Total indebtedness of the borrower doesn’t exceed INR 1, 00, 000.
• Tenure of the loan doesn’t exceed 24 months for loan amount in excess of INR 15, 000 with repayment facility without penalty. 
• Repayment of the loan is subjective to the repayable capacity of the borrower. 

Difference between NBFCs and banks 

• NBFC’s cannot accept demand deposits 
• NBFC’s cannot issue cheques or draw on itself
• Deposit insurance and credit guarantee is not available and can’t be availed as possible in banks.

Advantages of NBFC’S – 

• Low cost and time – it is an easy task to register a NBFC as compared in registering a bank. The time and cost are both an excess in terms of opening a bank.
• Easy recovery of loans – since NBFC’s are very systematic and they offer considerably less loan amount with flexible return period making the recovery from the borrower easy. 
• Fast distribution of fund – availing a loan from NBFC is far simpler with less paper works and documentation than compared with the procedure that involves traditional banking process. 
• Interest rate – as compared to the traditional banking, NBFC’s offers competitively less rates of interest on business loan.
• Eligibility – customer despite having a low credit score one can easily qualify for a 100% of loan from an NBFC. 

Since NBFC’s are governed by RBI, such companies can’t carry on business unless and until an incorporation certificate been obtained. Though NBFC’s are governed by RBI, the company’s incorporation is to be compiled under section 3 of the Companies Act, 2013. It must meet the requirement of minimum of INR 2 crore of Net Owned Funds (except for NBFC-MFI, CIC). Calculation of net owned fund can be done from last audited balance sheet of the firm. 

Documents required for NBFC registration 

• Incorporation certificate 
• Detailed information on the company along with their prospectus
• Copy of PAN and CIN number of the company 
• Address proof 
• Certified copy of Articles of Association and Memorandum of Association 
• List of directors 
• Credit or CIBIL report of the directors 
• Resolution of board 
• Certificate issued by auditor that the company is not holding the public deposit and does not accept it as well and ownership specifying funds on date of application 
• Information relating to bank accounts, loan, balances etc are to be complied 
• Self attested ITR returns of the company by the director
• Business plan for consecutive three years, cash flow, and income statement has to be compiled. 

Registration process of NBFC 

The applicant company is required to apply online as well submit a physical copy of the application with the required documents to the Regional Office of the Reserve Bank of India. The application can be accessed via RBI portal. 

Step 1 – Registration of the company under Companies Act, 2013 

Step 2 – Minimum Net Owned Funds of a company should be INR 2 crores or more

Step 3 – appointment of director from same experience. The appointed director shall be an independent director. 

Step 4 – Good CIBIL score of the director will reflect on registration of an NBFC

Step 5 – filing up application form of COSMOS with the RBI official portal

Step 6 – Submitting the required documents with the application form

Step 7 – CARN will be generated 

Step 8 – Hard copy of the documents needs to be submitted with RBI’s regional branch 

Step 9 – After scrutinizing the application the licence shall be given to the company 

Registration fees 

• During the course of registration, the company has to remit Ministry of Corporate Affairs (MCA). The amount shall be based on company’s authorized capital. 
• SPICe+ should be filled by the company to pay fees. 
• The fee can be remitted by the acting authority such as directors, by entering the details such as DIN and DSC will be required for making the fees. 

NBFC’s submission on compliances and other information with RBI

NBFC-ND-SI (Non- Deposit Category) is required to submit an annual statement of capital funds, risk assets ratio etc. The submission can be made electronically as well physically to the registrar of regional RBI. 

• Further to it the capital adequacy and other disclosure norms have been incorporated in NBFC company norms direction, 2007. 
  • Capital adequacy of 15% to be maintained 
  • Disclosure of Balance Sheet 
• CRAR
  • Maturity patterns for assets and liabilities
• ALM Returns are required to be submitted by NBFC-ND-SI
  • Monthly – ALM1 – Statement of short term dynamic liquidity 
  • Half-yearly – ALM2 – Statement of short term structural liquidity
  • Half-yearly – ALM3 – Statement of interest rate sensitivity 

Essential NBFC compliances checklist 

Quarterly compliances –

• NBF-1 – quarterly returns on deposits on first schedule. NBFC’s having asset size between INR 50 Crores to INR 100 crores. 
• NBF-2- quarterly return on prudential norms is required to be submitted by NBFC which accepts public deposits
• NBF 2: CA & CEO Cert – certifying NBS 2
• NBF-3 – quarterly return of liquid assets by the deposit taking NBFC.
• NBF 3A – quarterly return of liquid assets (residuary non-banking company)
• NBF-7- quarterly statement of capital fund, risk weighted assets and risk assets ration etc along with unaudited monthly returns and statutory auditors certificate on income and assets to be filed on or before June 30th. 
• NBF 7: SA & CEO Cert. – Certifying NBF 7 

Annual Compliances –

• NBF-4- annual return of critical parameters by a rejected company holding public deposits
• NBF-8- annual return filed by non-deposit taking NBFC’s with asset sized from INR 100 crore to INR 500 crore.
• NBF-9 – annual return on NBFC-ND-SI with asset size below INR 100 crore. 
• NBF_ALM1 – statement of short term dynamic liquidity (within 10 days of the end of every month)
• ALM return – Asset liability mismatch and interest rate exposure. 
• NBF_ALM 1- statement of short term dynamic liquidity to be filed within 10 days of the closer month. 
• NBF_ALM 2- Details of any mismatch in assets, liabilities and interest rate exposure. The filing of such form has to be made within 20 days of the closure of half year. 
• NBF_ALM 3 – interest rate sensitivity. 

Monthly compliance – 

• NBF-6- monthly return on exposure to capital market by deposit taking NBFC with total assets of INR 100 crore or more. The compliance has to be made on or before 7th of the month. 

NBFC compliances under Companies Act, 2013 

• MGT 7 – Annual return has to fill within 60 of AGM.
•  AOC 4 – Filing of annual financials ie. Filing of balance sheet and profit and loss statement should be compiled within 30 days before AGM.
•  DIR 12- DIR 12 has to be filed within 30 days in case of any change in regards to the appointment of new or removal of directors.

Return and compliance 

• NBFC registered with RBI 
  • NBS 1 RETURN – NBFC that receive or manage public funds is required to file NBS 1. The objective behind filing this return is to take financial information like profit and loss account, assets and liabilities, disclosure in sensitive area etc. 
  • NBS 2 RETURN – NBFC that receive public funds file a quarterly refund to prudential norms. The objective behind filing this return is to comply with different strategic principles such as the division of assets, financial sufficiency etc. 
  •  NBS 3 RETURN – the objective behind this is to find the information about the official investment in liquid assets.
  • NBS 4 REIMBURSEMNT – the form for reimbursement should be filed by the rejected company. Earlier it was done on NBS 5 and now it stands suspended. 
  • Half yearly ALM returns by NBFC should be filed by NBFC’s having public deposits more than INR 20 Cr. Or when asset size exceeds INR 100 Cr. 
• Non- Deposit NBFC’s should submit return as follows – 
  • NBF 7 – the details of quarterly statement that lays down information related to risk asset ratio, capital fund etc. 
  • ALM RETURN – 
  • Monthly – ALM1 – Statement of short term dynamic liquidity, 
  • Half-yearly – ALM2 – Statement of short term structural liquidity, 
  • Half-yearly – ALM3 – Statement of interest rate sensitivity.
  • Branch info return – quarterly return on the important financial parameters of non-deposit taking NBFC with assets of more than INR 50 Cr but less than INR 100 Cr.
• NBFC return for NBFC’s with an asset size below INR 500 Cr.
  According to RBI regulation have changed and all non-deposit taking NBFC’s with assets less than INR 500 Crores. It must submit two annual returns
  • NBS 8 – for every NBFC with asset size between INR 100 Cr. to INR 500 Cr. are required to file this return.
  • NBS 9 – for every NBFC with asset less than INR 100 Cr. are required to file this return. 

  The deadline to file both the returns is May 30th or within 60 days from the end of every year. The main objective of NBS 8 & NBS 9 is to get the financial details like profit and loss, assets and liabilities, branch information.

• RBI returns for Non Residuary banking companies
  ARC RETURN – NBFC ARC should file the return to get various operational details and to acquire the financial parameters of the company.
  NBS 1A and NBS 3A – All residuary financial institution must submit these returns. These refer to return on financial indicators to capture the statutory investment in liquid asset, profit and loss etc.

RBI compliances that is applicable to every NBFC’s irrespective of nature of business 

• Filing annual report – every NBFC is required to provide the annual report within 15 days before holding an AGM along with the audited financial statements of the company. 
• Statutory auditors certificate – all NBFC’s should provide an annual certificate from a statutory auditor with certificate of registration (CoR) denoting that the company carries on business as a NBFC company. 
• Change in direction or principle officer – within one month of duration the NBFC has to intimate RBI in regards the change of directors or a principle officer. The intimation has to be made in writing compressing information such as 
  • Name(s) of the appointed director or principle officer 
  • Designation of the appointed person
  • Name and residential status of the director 
  • Specimen signature of the appointed officer. 

 Final words

NBFC though easy to incorporate and regulate, it’s compliances are complicated and peer scrutiny should be made before filing the compliances as laid down by the Reserve Bank of India. Thus, NBFCs should adhere to the above said compliances and file their returns promptly. In case of failure the companies are subjected to heavy fine and penalties.