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NBFC Compliance: A Complete Guide

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Last Updated on February 10, 2024 by Kanakkupillai

NBFC Compliance is becoming more complex. Previously, banks benefited from using non-banking financial institutions.

NFCs must do these steps to file their returns on the newly-launched XBRL platforms:

  • Get the Reserve Bank of India User ID and password;
  • An XBRL RBI installation is necessary.
  • You should update your profile frequently through the XBRL Portal.

What are the Functions of NBFC?

NBFCs serve several purposes. Here are a few examples:

  • Hire Purchases and Leases
  • Financing retail
  • Venture Capital Services for Rural Financing
  • MSME Financed by Trade Financing

NBFC Registraion Process

An NBFC refers to any company registered under the Companies Act 2013 that engages in providing loans and advances; purchasing government or local authority-issued shares/stocks/bonds/debentures/security; leasing; hire purchase arrangements; insurance business activities or chit operations are among its services;

However, non-bank financial companies (NBFCs) do not include organizations whose primary businesses have agriculture or industrial activity, product acquisition/sale/provision of services other than commodities, or sale/purchase/construction of real property.

A Non-banking Financial Company also refers to any company that receives payments in one lump sum through contributions or other methods (like a Residuary Non-Banking Company). Therefore, any non-banking organization that wants to carry out such activities should apply for NBFC registration.

NBFC Registration Process Cancellation

The firm’s owner must understand the causes of the NBFC Registration Process revocation.  In addition to NBFC P2P, the NBFCs for lending within the P2P marketplace are known as Non-Banking Financial Company P2P.

  • A Non-Bank Financial Company may not accept deposits or provide loans alone due to operational inefficiencies;
  • If the NBFC fails to adhere to Act standards or restrictions and RBI capital requirements such as capital requirements.
  • When an NBFC fails to abide by RBI directives, it could occur, for instance, when they fail to keep or provide necessary documents as per RBI Act 1934 for inspection by inspectors as mandated – in such a scenario, penalties would likely ensue for such infringersNBFCs can also collect deposits, loans, and advance, acquire shares, stocks, and any other securities which a state or local government issues. Companies Act of 2013 is the law that governs businesses of this kind. They do not operate as banks. NBFCs do not serve as banks but can conduct all lending activities simultaneously.

What is NBFC return and compliance?

NBFC return and compliance are the various returns and other KYC and KYR due diligence processes that non-banking financial companies (NBFCs) in India need to comply with. The RBI, the central bank of India, has these requirements.
NBFC return and compliance mainly for the purpose of safeguarding NBFC as well as preventing investors’ and borrowers’ rights violations.
The returns and other requirements cover a wide range of areas, including:

  • Deposits: NBFCs that accept public deposits must file regular returns on their promises, including the amount of deposits outstanding, the interest rates offered, and the terms and conditions of the deposits.
  • Prudential norms: NBFCs must comply with a set of prudential norms, such as capital adequacy, asset classification, and provisioning. These norms ensure that NBFCs have adequate financial strength to meet their obligations to their depositors and borrowers.
  • Risk management: NBFCs must have a sound risk management framework in place. This includes having policies and procedures to identify, measure, monitor, and control risks.
  • Corporate governance: NBFCs must have a strong corporate governance framework in place. This includes having an independent and qualified board of directors that exercises effective oversight of the company’s management.

The RBI monitors NBFCs’ compliance with the return and compliance requirements through various means, including audits, inspections, and off-site surveillance. NBFCs that fail to comply with the requirements may be subject to penalties, such as fines or restrictions on their operations.

Here are some of the specific returns that are required to be filed by NBFCs:

  • DNBS-01: Quarterly return on financial performance
  • DNBS-02: Quarterly return on prudential norms
  • DNBS-03: Quarterly return on statutory liquid assets
  • DNBS-06: Monthly return on deposits
  • DNBS-10: Annual return on financial statements
  • DNBS-13: Annual return on foreign investment

NBFCs are also required to comply with several other regulatory requirements, such as:

  • Maintaining a least capital adequacy ratio of 15%
  • Classifying assets into diverse risk categories and making adequate provisions for bad debts
  • Having a sound risk management framework in place
  • Having a durable corporate governance agenda in place

The reporting requirements for NBFCs are constantly evolving, so it is important for NBFCs to stay up-to-date on the latest requirements. The RBI publishes a comprehensive list of the reporting requirements for NBFCs on its website.

Types NBFC Description Due date
DNBS-04B NDSI and NBFCs The Capture :

For NBFCs NBFCs NDSI, The specifics resulting from a mismatch in future cash flows and the inflows are based on the maturity pattern of assets and liabilities at their expiration.

Facts and information on interest rates

You can pay monthly up to 10 days before the due date.
NESL All Non-Banking Finance Companies You must report your debts to NESL. Within a week of next month’s start,
CIC Reporting All Non-Banking Finance Companies The four CICs must be aware of the loan provided by each NBFC. Before Tuesday, the 10th day of the following month.

 

Annual Compliances

Types of NBFC Description Due dates
DNBS-2 Return Non-NDSI NBFCs They also contain asset and debt components. Also, they show the compliance of nondeposit-accepting non-NDSI NBFCs to different standards. On or before the 30th of May (either an audited or a provisional base), if provisional, the audit must be filed within 30 days after finalization.
DNBS-010 All NBFCs & ARCs NBFCs must be constantly regulated to ensure compliance. The balance sheet must be done within 15 days.

 

Additional NBFC compliances:

Types NBFC Description Due Day
DNBS09-CRILC SMA Details NBFCs-NDSI & NBFCs-D & NBFC-Factors The form SMA-2 was used for reporting the NBFCs D, NBFCs NDSI and NBFCs-Factors with more significant exposure than $5 million per day. SMA-2 Accounts are currently classed as SMA-2.
CKYCR REs Every regulated company, including NBFCs, is legally required to undergo a KYC process before disbursing monies or establishing accounts. After ten business days, the account will be closed.
CERSAI All Financial Institutions Making secured loan payments As quickly as possible, shift the protected property to a new location for safety.
FIU-IND The entire regulated industry These transactions must be reported according to Rule 3 in the PMLA Rules 2005. After seven days of the date you first became aware that the transaction may be unusual, the 15th of next month.

 

Prudential regulation of RBI Master direction

Apart from the NBFC Compliances listed overhead, non-banking entities must obey the following regulations:

  • Accounting for investment: An NBFC’s Board of Directors is responsible for implementing its Investment Policy. The criteria used to categorize assets are current and long-term, for example.
  • Multiple NBFCs – The total assets for all NBFCs are to be verified. 500 crores.
  • Loans secured against company shares are prohibited, meaning that NBFCs cannot offer or accept loans against their shares.
  • Policy on Demand and Call Loans. The Board of Directors (BOD) should establish a firm-wide policy.
  • Asset Classification: Appropriate NBFCs should categorize their assets under the subsequent categories:
  • Standard Resources;
  • Sub-Standard Assets;
  • Loss Assets;
  • Doubtful assets
  • Disclosure on the balance sheet: Non-Banking Financial Companies will be required to disclose separately for bad or doubtful debts and depreciation of investments.
  • Non-banking Financial companies should allocate standard assets equivalent to 0.25 % of their outstanding.

Penalties for Non-Compliance

RBI would impose huge penalties if you neglect the rules and regulations. Penalties for non-compliance vary according to the type of NBFC. One of the severest outcomes would be cancellation of the NBFC License or dissolution of the company.

Frequently Asked Questions

1. What exactly is an NBFC?

Popular financial firms, NBFCs, offer loans and advances and purchase stocks, debts, equity, and other marketable assets from a local authority or government.

2. Which NBFCs are subject to compliance with the NBFC Act?

Once established, NBFCs need to follow the many compliance criteria set forth by their regulatory authority. To evade incurring fines, these compliances must be met on the agenda.

3. What is the DNBS-01 Return?

Returns include financial data such as assets and liabilities components, profit-and-loss accounts, exposure to sectors of concern, etc.

4. What exactly is the DNBS-05 return?

This information relates to NBFCs, which took public deposit but had the CoR refused.

5. What does DNBS-06 mean?

The RNBCs return will include information on financial components such as asset and liability elements and compliance to certain standards.

6. Which NBFCs are excluded from the RBI’s registration requirement?

While not all NBFCs must register at the RBI, those governed by them do. Besides Insurance Businesses, the Nidhi Chit National Housing Bank is completely NBFC. However, each is governed under different regulations.

7. What are the steps to appeal RBI’s deregistration of NBFCs?

RBI can revoke a NBFC’s registration certificate if it violates terms in the RBI Act. If the NBFC does not agree with the RBI’s order, they can appeal. You can appeal within thirty (30 days) of when the RBI order was issued, cancelling the registration certificate.

8. Which authority does RBI hold over NBFCs?

RBI Act of 1935 grants RBI authority to inspect, monitor, supervise, and regulate NBFCs that meet primary business’s 50-50 criteria. Reserve Bank also has the right to fine NBFCs if they do not comply with the RBI Act and its regulations.

9. What is the new NBFC regulation?

NBFCs’ new regulatory requirements include the revised NOF, IPO finance cap, ICAAP (Industry-wide Capital Advisory Program) for NBFCs, RMC structure, board-approved policies and disclosure requirements.

10. Which regulations must an NBFC follow?

An NBFC must comply with several NBFC standards, such as submitting returns like DNBS-01. DNBS-01. DNBS-04. DNBS-06. They essentially meet reporting standards, for example, filing an audited annual balance sheet besides a profit and loss statement, a Declaration of Auditors to Act as Auditors of the Company, and preserving a leverage ratio of no further than 7.

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