NBFCs are the key pillars of the financial sector, elevating financial inclusivity for those experiencing capital or credit issues. The advent of NBFCs has harmonized the financial sector and broadened credit accessibility, spanning almost all kinds of entities regardless of footprint or sector.
NBFCs in India experience stringent operational norms to keep things transparent and legitimate. They have a long list of compliances to follow underpinned by governing authority i.e. Reserve Bank of India. This article delves into the NBFC compliance checklist to ascertain what rules exactly apply to them.
Meaning of NBFC
NBFC is define under section 45I(f) of the Reserve Bank of India Act, 1934 means a financial institution involved in the business of loans and advances, stocks, hire-purchase, acquisition of shares, chit business, insurance business, or other business as notified by the RBI.
However, an NBFC does not include any institution whose principal business is agriculture activity, industrial activity, purchase or sale of goods, or providing any services and doesn’t hold any assets of customers other than its own.
Types of NBFCs
- Investment and Credit Company (ICC): An ICC is an NBFC that primarily deals in investing in shares, bonds, or debentures; Lending and Asset financial activities.
- Infrastructure Finance Company (IFC): An IFC is an NBFC that provides long-term finance for infrastructure projects.
- Core Investment Company (CIC-ND-SI): A CIC-ND-SI is an NBFC that holds more than 90% of its assets in the form of investments in shares, bonds, or debentures of other group companies.
- Microfinance Institution (MFI): An MFI is an NBFC that provides small loans and other financial services to low-income households.
- Factoring Company: Factors are NBFCs that primarily deal in factoring business, which involves buying accounts receivable of businesses and providing them with funds.
- Housing Finance Company (HFC): An HFC is an NBFC that provides finance for the purchase or construction of houses.
- Account Aggregators (NBFC-AA) – Involving the functions of account aggregation.
- Infrastructure Debt Fund NBFC (IDF-NBFC)- It provides the long-term debt flow into infrastructure projects.
- Peer to Peer Lending (P2P)- Involving the business of a peer-to-peer lending platform, majorly IT driven.
- Mortgage Guarantee Companies (MGC)
Understanding the Significance of NBFC Compliance
Unlike other institutions or entities, NBFCs experienced stiff regulations to stay compliant. The operational norms for them have increasingly tightened to keep them on track. The recently launched RBI guidelines have made things even more challenging for them.
As per the Master Direction, NBFC Returns (Reserve Bank) Directions, 2016, these entities are required to file myriad returns to the Reserve Bank concerning their:
- Deposit acceptance
- ALM
- Prudential Norms Compliance
Non-compliance can lead to several repercussions, including stiff penalties. Therefore, knowing these directives is as important as paying attention to business operations.
Applicability of Directions and Important Compliances
- Annual Return: NBFCs are needed to submit an annual return to the RBI in the given format within 90 days of the end of the financial year.
- Audited Financial Statements: NBFCs are needed to prepare and submit audited financial statements to the RBI in the given format witing 6 months from the end of the financial year.
- Prudential Norms: NBFCs are needed to maintain the minimum capital adequacy ratio, maintain minimum liquidity requirements, and follow asset classification and provisioning norms as specified by the RBI.
- KYC Norms: NBFCs are required to follow the Know Your Customer (KYC) norms while opening accounts of customers.
- Fair Practices Code (FPC): The FPC outlines the standards and practices to be followed by NBFCs while conducting business activity. NBFCs are required to follow the FPC while dealing with customers.
- Submission of Returns: NBFCs are needed to submit many periodic returns to the RBI. These involve monthly and quarterly retune on prudential norms, asset, classification, and provisioning, among others.
- Audit and Inspection: NBFCs are subject to periodic audits and inspections by the RBI to make sure the compliance with regulatory requirements.
- Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT): NBFCs are required to follow AML/CFT instructions issued by the RBI to prevent money laundering and terrorist financing activities.
Duties and Responsibilities of Auditors in relation to NBFCs
- Audit of Financial Statements: Auditors are responsible for auditing the financial statements of NBFCs to provide an opinion on the accuracy and reliability of the financial information presented. This includes verifying the financial transactions, accounting policies, and disclosures made by the NBFC in accordance with the applicable accounting standards and regulations.
- Reporting of Frauds: Auditors are required to report any frauds or irregularities detected during the audit to the management and the audit committee of the NBFC. They are also required to report to the RBI if the frauds are material or if there is any violation of regulatory norms.
- Compliance with Regulatory Norms: Auditors are required to verify and ensure that the NBFC is complying with the regulatory norms and guidelines issued by the RBI. This includes verifying compliance with the prudential norms, KYC norms, and anti-money laundering (AML) and combating of financing of terrorism (CFT) guidelines.
- Review of Internal Controls: Auditors are required to review the internal control systems of the NBFC to assess their effectiveness in preventing and detecting frauds, errors, and irregularities. They are also required to provide recommendations for improving the internal control systems.
- Certification of Compliance: Auditors are required to issue a certificate of compliance with regulatory norms to the NBFC, as prescribed by the RBI, at the end of each financial year.
- Communication with Shareholders: Auditors are required to communicate with the shareholders of the NBFC through the management on matters related to the audit, including any significant findings or issues identified during the audit.
- Continuing Professional Development: Auditors are required to maintain their professional competence and keep themselves updated with the latest developments in the accounting and auditing standards, regulations, and best practices.
NBFCs Compliances as Specified by the RBI
- Minimum Capital Adequacy Ratio (CAR): NBFCs are required to maintain a minimum CAR of 15% of their risk-weighted assets. The CAR is a measure of a company‘s financial strength and ability to absorb losses.
- Liquidity Norms: NBFCs are required to maintain a minimum level of liquidity to meet their obligations as they arise. The liquidity requirements are specified based on the nature and size of the NBFC’s business.
- Asset Classification and Provisioning Norms: NBFCs are required to classify their assets into standard, sub-standard, doubtful, and loss categories based on their quality and performance. They are also required to make adequate provisions for their non-performing assets (NPAs).
- KYC Norms: NBFCs are required to follow the KYC norms while opening accounts of customers. This includes obtaining the customer’s identity and address proof, verifying their credentials, and maintaining records of the same.
- Fair Practices Code (FPC): NBFCs are required to follow the FPC while dealing with customers. The FPC outlines the standards and practices to be followed by NBFCs while conducting business activities.
- Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT): NBFCs are required to follow AML/CFT guidelines issued by the RBI to prevent money laundering and terrorist financing activities.
- Prudential Norms on Income Recognition, Asset Classification, and Provisioning: NBFCs are required to follow the prudential norms on income recognition, asset classification, and provisioning as specified by the RBI.
- Submission of Periodic Returns: NBFCs are required to submit various periodic returns to the RBI, including monthly and quarterly returns on prudential norms, asset classification, and provisioning, among others.
- Audit and Inspection: NBFCs are subject to periodic audits and inspections by the RBI to ensure compliance with regulatory requirements.
- Corporate Governance: NBFCs are required to comply with the corporate governance guidelines issued by the RBI, which includes maintaining a proper board structure, appointing independent directors, and ensuring transparency and accountability in their operations.
Regulatory Changes by Scale-Based Regulation Framework (SBRF)
- Constitution of Risk Management Committee (RMC): The board is able to concentrate on risk management, NBFCs introduces RMC, which is either at the Board level or executive one. The RMC shall be manageable for examining the whole risks faced by the NBFC involving liquidity risk and will report to the Board.
- NPA Classification: This norm denotes to move the overdue period of more than 90 days for all sections of NBFCs. A path has been given to NBFCs in Base Layer to attach the 90 days NPA norm by 31st March, 2026.
- Initial Public Offer (IPO) Funding: For the financial subscription to IPO shall be a ceiling of INR 1 Crore to each borrower, but NBFCs are confirmed to fix more limits on conservative.
- Net Owned Funds (NOF): As per the recent regulatory changes by the RBI, the regulatory minimum NOF for NBFC-ICC, NBFC-MFI and NBFC-Factors has been increased to INR 10 crore. This means that these NBFCs are required to maintain a minimum NOF of INR 10 crore to operate as an NBFC.
Requirements for complying with the NBFC’s Compliances
Mandatory compliances for Non-Deposit taking Non-Systematically Important Company:
| Sl. No. | Particulars | Reporting Time | To be submitted by | Reference of Act / Rules or Circular |
| 1. | NBFC-ND has to pass a Board resolution stating that it has neither accepted public deposit nor would accept any public deposit during the year. | within thirty days of the commencement of every financial year | NBFC- Non-deposit Systematically Important Company
(NBFC-ND) | Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (Point (iv) and (v) of Para 2 of the Directions, 2016) |
| 2. | The company has to file NBS-9 (Annual Return) for NBFC (non-deposit taking) with asset size below 100 Cr and NBS-8 for NBFC (non-deposit taking) with asset size between 100 Cr to 500 Cr. New form DNBS02 has been introduced to facilitate this filing in XBRL mode. | Within 60 days from the end of the financial year i.e by 30th May. | NBFC – ND | Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016 |
| 3 | Statutory Auditor Certificate (SAC) (To report that the NBFC is engaged in the business of NBFI, requiring the CoR.). New form DNBSS010 has been introduced to facilitate this filing in XBRL mode. | within one month from the date of finalization of the balance sheet and in any case not later than December 30th of that year | All NBFCs | Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016 |
| 4 | 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. | Every year | All NBFCs | Section 45-IC, Reserve Bank of India Act, 1934 |
| 5 | Annual Return on Foreign liabilities & Assets | Every yearon or before 15th July | All companies including NBFC having foreign Investment | A.P. (DIR Series) Circular No.45 dated March 15, 2011 |
| 6 | Certificate from Statutory Auditor on compliance of FDI norms | Half-yearly – within 30 days | NBFCs having FDI | Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016 |
| 7 | Overseas investment return. New form DNBS13 | Quarterly – within 45 days of closure of quarter | NBFCs having overseas investment return | Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016 |
| 8 | No loan against own shares shall be given | Ongoing | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 (Chapter IV) |
| 9 | Transaction in Government Securities- NBFC shall undertake transactions in Government securities through its CSGL account or its Demat account. | Ongoing | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 (Chapter IV) |
| 10 | NBFCs shall lay down grievance redressal mechanism within the organization | Ongoing | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 |
| EVENT BASED COMPLIANCES | ||||
| 11 | Intimation to RBI-Information about the change of address, directors, auditors, Principal officer, specimen signature, etc. should be furnished to RBI | Within 1 month from the date of occurrence of any change | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 (Chapter IV) |
| 12 | Prior written permission from RBI for change in control (transfer of share amounting to 26% of the paid-up capital) and change in management more than 30% of the Directors excluding Independent Directors. | NA | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 (Chapter IX) |
| 13 | Prior approval for the opening of subsidiary/joint venture/representative office abroad | NA | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 (Chapter X) |
| 14 | NBFC shall not become a partner in the firm including LLP | NA | All NBFC | Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 |
FAQs
What is an NBFC?
A Non-Banking Financial Company (NBFC) is a financial institution that provides banking services without meeting the legal definition of a bank. NBFCs can engage in various financial activities like loans, asset financing, and investments, but they cannot accept demand deposits.
What are the key regulatory bodies governing NBFCs in India?
The primary regulatory body for NBFCs in India is the Reserve Bank of India (RBI). The Ministry of Corporate Affairs (MCA) also regulates some aspects, particularly for companies registered under the Companies Act.