Nbfc Annual Compliance

The regulatory landscape for Non-Banking Financial Companies (NBFCs) in India has become increasingly complex, particularly following significant incidents such as the Sahara case. Once benefitting from simpler and more lenient regulations, NBFCs are now subject to stringent compliance requirements from the Reserve Bank of India (RBI). Key regulations include the Securitization of Standard Assets and guidelines for the Private Placement of NBFCs, aimed at mitigating speculative practices within the sector.

Understanding Non-Banking Financial Companies (NBFCs)

NBFCs are registered under the Companies Act of 2013 and engage in various financial activities, including:

  • Receiving deposits
  • Providing loans and advances
  • Acquiring stocks, bonds, shares, debentures, and government securities

All NBFCs must obtain a license from the RBI to operate legally.

Defining "Principal Business" in NBFCs

The term "Principal Business" refers to financial activities that constitute more than 50% of a company’s total assets and generate over 50% of its gross income. While the RBI does not explicitly define this term, it has clarified that companies involved primarily in financial activities can register and be supervised by the RBI. Companies engaged in agriculture, real estate transactions, or industrial activities do not meet the criteria for NBFC registration.

Regulations for Non-Deposit Accepting NBFCs

For non-deposit accepting NBFCs with assets below ?500 crore:

  • If they do not access public funds and lack client interfaces, they are generally exempt from both prudential and business conduct regulations.
  • Those with client interfaces are subject to business conduct regulations like Know Your Customer (KYC) requirements.
  • NBFCs with access to public funds are subject to both limited prudential and business conduct regulations.

Categories of NBFCs Registered with the RBI

  1. Investment and Credit Companies (ICC)
  2. Mortgage Guarantee Companies (MGC)
  3. Non-Banking Financial Company - Factors (NBFC-Factors)
  4. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
  5. Infrastructure Finance Company (IFC)
  6. Systematically Important Core Investment Company (CIC-ND-SI)

Types of NBFCs Based on Liabilities

  • Deposit Accepting NBFCs
  • Non-Deposit Taking NBFCs
  • Systematically Important Non-Deposit Taking NBFCs

 Post-Incorporation NBFC Compliance Steps

Upon obtaining a Certificate of Registration (COR) from the RBI, NBFCs must:

  1. Register with Credit Information Companies (CICs)
  2. Register with the Financial Intelligence Unit (FIU-IND)
  3. Complete Central KYC Registration
  4. File NBS-9 Return with the RBI
  5. Adopt a Fair Practice Code

Fair Practice Code (FPC)

Established by the RBI on September 28, 2006, the FPC outlines standards for transparency and non-coercive recovery practices in lending.

Credit Information Companies (CICs) in India

  1. CIBIL: The first credit bureau in India, allowing individuals to check their credit scores online.
  2. Equifax: Operating since 2010, it compiles consumer financial data and aids in managing individual credit profiles.
  3. Experian: Provides insights into consumers' creditworthiness.
  4. CRIF High Mark: Focuses on establishing trustworthiness in customer financial profiles.

Financial Intelligence Unit (FIU-IND) Registration

All NBFCs must register with the FIU-IND, providing client details as required by the Prevention of Money Laundering Act. This registration is essential for protecting the financial system from illicit activities.

Central KYC Registration

Central KYC (CKYC) is crucial for streamlining customer data in financial services. It reduces the compliance burden on NBFCs by centralizing KYC processes.

Central Registry of Securitization and Asset Reconstruction and Security Interest of India (CERSAI)

CERSAI was established to identify and prevent fraudulent activities during lending processes and to deter borrowers from securing multiple loans against the same asset.

Submission of Financial Information

Under Section 215 of the Insolvency and Bankruptcy Code (IBC), lenders must submit financial information to designated utilities. This includes:

  • Mandatory submission of financial data regarding secured interests.

Optional submission by operational creditors.

Annual Compliance Requirements

  1. NBS-9 Filing: Required for NBFCs with an asset size under ?100 crore by June 30.
  2. Statutory Meeting: Provides investors with an update on the company's progress and addresses any special issues.
  3. Maintenance of Accounts: Books must be maintained in compliance with the Income Tax Act, Companies Act 2013, and GST Act.
  4. GST Return Filing: Registered vendors must file GST returns detailing purchases, sales, and input tax credits.
  5. Income Tax Return Filing: Mandatory annual filing based on income sources.
  6. Annual Return Filing: Form AOC-4 and MGT-7 must be submitted within specified time frames.

Event-Based Compliances

Changes in directors, registered offices, or capital structures must be reported to the Registrar of Companies (ROC). Foreign Direct Investment (FDI) regulations permit 100% FDI under the automatic route, with some restrictions

Essential Compliance Checklist for NBFCs

Annual Compliance

  • Un-audited NBS-7 return by June 30.
  • Statutory auditor's certificate on income and assets.
  • FDI-related information by June 30.
  • Audited financial statements filed within one month of sign-off.
  • Declaration regarding non-acceptance of public deposits.

Monthly Compliance

  • Monthly return due by the 7th of each month.

Periodical Compliances

  • Appointments or resignations of directors reported within 30 days.

Types of Returns

Deposit-Taking NBFCs

  • NBS-1: Quarterly return on deposits.
  • NBS-2: Quarterly return on prudential norms.
  • NBS-3: Quarterly return on liquid assets.
  • NBS-4: Annual return for companies holding public deposits.
  • NBS-6: Monthly return on capital market exposure.

Non-Deposit NBFCs

  • NBS-7: Quarterly statement on risk assets ratio.
  • NBS-2: Monthly return on financial parameters.
  • ALM Returns: Monthly and half-yearly statements on liquidity and interest rate sensitivity.

By adhering to these compliance requirements, NBFCs can operate effectively and maintain regulatory standing, ensuring sustainable growth in the financial landscape.

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Frequently Asked Questions

A Non-Banking Financial Company (NBFC) is a financial institution that provides banking services without meeting the legal definition of a bank. They engage in activities such as loans, asset financing, and investment in securities, but do not accept demand deposits.

NBFCs in India are primarily governed by the Reserve Bank of India (RBI) regulations, including the Companies Act, 2013, and specific guidelines issued by the RBI on issues like KYC norms, fair practices, and asset classification.

The "Principal Business" criterion mandates that financial activities must constitute over 50% of a company’s total assets and generate more than 50% of its gross income for it to be registered as an NBFC.

No, non-deposit taking NBFCs face fewer regulations. If they do not access public funds or have client interfaces, they are exempt from many prudential and business conduct guidelines.

The RBI recognizes several categories of NBFCs, including Investment and Credit Companies, Mortgage Guarantee Companies, NBFC-Factors, NBFC-Micro Finance Institutions, and Infrastructure Finance Companies.

The Fair Practice Code (FPC) outlines standards that NBFCs must adhere to while conducting lending operations, focusing on transparency, ethical treatment of customers, and non-coercive recovery practices.

Central KYC registration is a process to centralize customer identification data for financial services. It simplifies compliance for NBFCs, reducing paperwork and enhancing customer verification processes

Non-compliance with RBI regulations can result in penalties, suspension of operations, or revocation of the license to operate as an NBFC. This can severely impact the business's reputation and financial stability.

NBFCs must file returns monthly, quarterly, and annually, depending on their category and specific regulatory requirements. For example, deposit-taking NBFCs have different return schedules compared to non-deposit taking ones

Changes in directors or registered office must be reported to the Registrar of Companies (ROC) within 30 days. The company must file the necessary forms, along with supporting documents, to effect these changes legally.

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