Overview of NBFC Annual Compliances

The NBFC Annual compliances set by the Reserve Bank of India for Non-Banking Financial Companies have become more complex. In the past, NBFCs enjoyed certain advantages over banks. Compliance standards for NBFCs used to be more straightforward and flexible. However, following the Sahara case, RBI has introduced new, stricter compliance regulations for NBFCs, subjecting them to increased scrutiny. Some important rules include those pertaining to the Securitisation of Standard Assets and Guidelines for Private Placement of NBFCs.

Non-Banking Financial Companies operate under the Companies Act 2013, engaging in activities such as receiving deposits, providing loans, etc. These entities play an active role in financial activities and are regulated by the Reserve Bank of India. Operating an NBFC business without obtaining a NBFC licence or NBFC registration from the Reserve Bank of India is not permitted.

Understanding Concept of 'Principal Business' in NBFC Annual Compliances

The expression 'Principal Business' within the domain of NBFC Annual Compliances pertains to financial operations wherein more than 50 percent of a company's financial assets constitute the total assets and the income generated from these financial assets constitutes over 50 percent of the gross income. Any company fulfilling both of these criteria is deemed eligible for NBFC registration. It should be noted that RBI does not provide a specific definition for the term 'principal business.'

Regulations for Non-Deposit Accepting NBFCs with Asset Size below Rs. 500 Crore

Non-deposit accepting NBFCs with an asset size below Rs. 500 Crore are subject to specific regulations based on their interaction with public funds and client interface, including:

1. No Access to Public Funds and No Client Interface:

NBFCs falling under this category will not be subject to any regulatory guidelines, whether prudential or related to business conduct.

2. Client Interface without Access to Public Funds:

NBFCs engaging with clients but without access to public funds will be subject to business conduct regulations only. This includes guidelines such as First-Year Compliance and Know Your Customer or KYC norms.

3. Access to Public Funds without Client Interface:

If NBFCs have access to public funds but do not have a client interface, they will be exposed to limited prudential regulations.

4. Access to Public Funds and Client Interface:

NBFCs that have both access to public funds and a client interface will be subject to both limited prudential regulations and business conduct guidelines. These regulations aim to ensure a balance between prudent financial practices and appropriate conduct with clients.

Categories of NBFCs Registered with RBI

The different categories of NBFCs registered with RBI in India are:

1. Investment and Credit Company

Investment and Credit Companies are an important category of Non-Banking Financial Companies registered under the Reserve Bank of India. Their primary focus lies in offering financial services related to investments and credit across diverse sectors of the economy.

2. Mortgage Guarantee Company

Mortgage Guarantee Companies are NBFCs that specialise in offering mortgage-related services, particularly guaranteeing mortgage loans. They play a critical role in facilitating access to housing finance by mitigating risks associated with mortgage lending.

3. NBFC-Factors

NBFC-Factors are a specific category of NBFCs that focus on factoring services. Factoring involves the purchase of accounts receivable (invoices) from businesses, providing them with immediate liquidity. These NBFCs play an important role in enhancing cash flow for businesses.

4. NBFC-Micro Finance Institutions

NBFC-Micro Finance Institutions cater to the financial needs of low-income and underserved segments of the population by giving microfinance services, including small loans and financial support, to empower individuals and promote financial inclusion.

5. Infrastructure Finance Company

Infrastructure Finance Companies are NBFCs that specialise in financing infrastructure projects. They support the development of infrastructure, such as roads, bridges, etc.

6. Systemically Important Core Investment Company

Systemically Important Core Investment Companies (CICs) are NBFCs that hold substantial investments in group companies. They are systematically important and play a significant role, requiring regulation by the RBI.

Types of NBFCs Based on Liabilities

The different categories of NBFCs based on liabilities in India are:

1. NBFC Accepting Deposits

NBFCs that accept deposits from the public fall under this category. They are authorised to collect and hold deposits, subject to regulatory guidelines issued by the Reserve Bank of India. These NBFCs provide a source of funds for their operations and often offer various deposit products to attract savers.

2. NBFC Non-Deposit Accepting

NBFCs that do not accept deposits from the public are classified as non-deposit accepting NBFCs. They rely on sources other than public deposits for their funding, such as capital market borrowings, bank loans and other financial instruments. These NBFCs typically provide specialised financial services.

3. NBFC ND - Systematically Important

NBFCs designated as Non-Deposit Taking (ND) Systemically Important NBFCs are those that, despite not accepting public deposits, play a significant role within the financial system due to their size and interconnectedness. They are subject to enhanced regulatory oversight by the RBI to ensure financial stability.

Essential Requirements for NBFC Annual Compliances in India

The online return filing method for NBFCs has been transferred from COSMOS platform into XBRL system by RBI. The essential requirements for NBFC annual compliances in India are:

1. Reserve Bank of India User ID and Password:

NBFCs must obtain a User ID and Password from the Reserve Bank of India to access and submit their supervisory returns through the XBRL system.

2. XBRL RBI File Installation:

NBFCs need to install an XBRL RBI file to facilitate the preparation and submission of returns in the XBRL format. This software is essential for converting financial data into XBRL-compliant documents.

3. Regular Profile Updates on XBRL Portal:

NBFCs are required to keep their profiles up to date on the XBRL portal. Regularly updating the profile information ensures accurate communication and compliance through the XBRL system.

Post-Incorporation NBFC Annual Compliances

After receiving the Certificate of Registration from the RBI, Non-Banking Financial Companies must adhere to several key NBFC annual compliances:

1. Membership with Credit Information Companies

To fulfil NBFC annual compliances, NBFCs are required to become members of all Credit Information Companies in India. These CICs are essential for accessing credit scores and credit information of individuals and entities. The prominent CICs include:

• CIBIL (Credit Information Bureau India Limited): CIBIL is the first Credit Bureau in India and provides credit scores to individuals upon request.

• Equifax Credit Information Services Private Limited: Equifax collects and manages financial information and credit profiles of consumers.

• Experian Credit Information Company of India Private Limited: Experian assesses consumer creditworthiness and repayment capacity.

• CRIF High Mark Credit Information Services Private Limited: CRIF High Mark helps assess the creditworthiness of customers, particularly preferred by banks and lenders.

2. Adoption of Fair Practice Code

NBFCs are required to adopt and adhere to the Fair Practices Code as per Reserve Bank of India guideline as part of NBFC annual compliances. The Fair Practices Code sets standards for transparent lending practices, terms and conditions for loans and mandates a non-coercive approach to loan recovery and is an important NBFC annual compliance to be followed.

3. CIC Registration

NBFCs must register with Credit Information Companies (CICs) to access credit information and credit scores of individuals and entities as part of NBFC annual compliances. Registration with CICs is vital for assessing the creditworthiness of borrowers. The list of significant CICs has been mentioned before to highlight the importance of NBFC annual compliances to be followed.

4. FIU-IND Registration

Post-incorporation, every NBFC must obtain Financial Intelligence Unit-India (FIU-IND) registration as part of NBFC annual compliances. This registration requires the submission of client details as per the Prevention of Money Laundering Act (PMLA). FIU-IND registration is important for providing financial intelligence to prevent financial crimes, including money laundering and terrorism financing.

5. Central KYC Registration

Many NBFCs opt for Central Know Your Customer registration, a critical requirement for NBFC annual compliances. Central KYC helps in gathering and maintaining customer records in financial services. Central Registry of Securitisation and Asset Reconstruction and Security Interest (CERSAI) is the authority for Central KYC registration.

6. CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India)

CERSAI is responsible for preventing fraud during lending transactions, particularly related to equitable mortgages. It discourages and prevents the practice of taking multiple loans against the same asset or property from different banks. It is also the authority for CKYC registration in India.

7. Submission of Financial Information to Information Utilities

As per Section 215 of the Insolvency and Bankruptcy Code, 2016, creditors are obligated to submit financial information and details of assets with security interests to Information Utilities as part of NBFC annual compliances. This step is important for maintaining accurate financial records and supporting the insolvency process.

List of NBFC Annual Compliances

The important NBFC annual compliances have been given below:

1. NBS-9 Filing with RBI

NBFCs-ND (Non-Deposit Taking) with an asset size less than Rs 100 crore are required to file NBS-9 returns with the Reserve Bank of India to adhere to NBFC annual compliances. This filing provides essential financial information to the RBI for regulatory purposes.

2. Convene Statutory Meeting

A Statutory Meeting is convened by NBFCs to inform investors about the progress of the company since its incorporation as part of NBFC annual compliances. This meeting also serves as a platform to present and seek approval for important matters related to incorporation, share allocation, contracts and asset utilisation.

3. Maintenance of Accounts

NBFCs are legally obligated to maintain accurate books of accounts, including vouchers and receipts. Compliance with various legal laws, including the Income Tax Act, Companies Act 2013 and GST Act, is essential for NBFC annual compliances. Each law has distinct requirements for the types of books to be maintained, the duration of record-keeping and compliance obligations.

4. GST Return Filing and Income Tax Return Filing

Under the Goods and Services Tax, registered vendors, including NBFCs, must file GST returns. These returns include details of purchases, sales, GST collected on sales and input tax credits. Filing GST returns requires proper documentation of sales and purchase invoices.

All individuals and businesses, including NBFCs, are required to file income tax returns annually. ITR provides information about income and tax liability to the Income Tax Department. Both of these are essential for NBFC annual compliances in India.

5. Annual Financial Statement Filing with MCA

NBFCs incorporated under the Companies Act, 1956, must file their annual financial statements with the Ministry of Corporate Affairs to fulfil NBFC annual compliances. This filing includes Form AOC-4 NBFC (IND AS) for financial statements and Form MGT-7 for the annual return. These filings must be made within specific timelines, usually within 30 days of the conclusion of the annual general meeting.

Event-Based Compliances for NBFCs

The event-based compliances for NBFCs have been given below:

1. Change in Directors/ Registered Office/ Capital Structure

Any changes in the board of directors, the registered office address or alterations in the capital structure of an NBFC require compliance with relevant rules and regulations. These changes typically involve notifying the Registrar of Companies and following the prescribed procedures for making amendments. Accurate and timely reporting is essential to remain compliant.

2. Foreign Direct Investment

In India, Non-Banking Financial Companies usually permit 100% Foreign Direct Investment through the automatic route. Nevertheless, it's essential to highlight that in certain instances, FDI may face limitations or specific conditions. NBFCs need to remain updated about the current FDI policies and regulations to ensure full compliance with any imposed restrictions or requirements that pertain to their particular circumstances. Adhering strictly to the guidelines established by the Reserve Bank of India and other pertinent authorities regarding FDI within NBFCs is of paramount importance.

The table showing the NBFC annual compliances along with NBFC monthly compliances and additional NBFC compliances has been given below:

NBFC Monthly Compliance:

NBFC Annual Compliances:

Additional NBFC Compliances:

Essential NBFC Compliance Checklist for Non-Deposit and Deposit-Taking Companies

NBFC Annual Compliances:

The NBFC Annual Compliances for Non-Deposit and Deposit-Taking Companies are:

1. Unaudited March Monthly Return (NBS-7)

Submit the unaudited March monthly return (NBS-7) on or before June 30th of each year as part of NBFC annual compliances.

2. Statutory Auditors Certificate on Income and Assets

Obtain a statutory auditor's certificate verifying income and assets and submit it on or before June 30th.

3. Information about Companies with FDI/Foreign Funds

Provide information about companies with Foreign Direct Investment or foreign funds on or before June 30th.

4. Audited March Monthly Return (NBS-7)

After completion, file the audited March monthly return (NBS-7) to complete NBFC annual compliances.

5. File Audited Annual Balance Sheet and P&L Account

Submit the audited annual balance sheet and profit & loss account within one month from the date of sign-off.

6. Resolution of Non-Acceptance of Public Deposit

Resolve and document the decision of non-acceptance of public deposits before the commencement of the new fiscal year.

7. Declaration of Auditors to Act as Auditors of the Company

Finally, as part of NBFC annual compliances, obtain a declaration from auditors agreeing to act as auditors of the company on an annual basis.

Monthly Compliances:

The NBFC monthly Compliances for Non-Deposit and Deposit-Taking Companies are:

1. Monthly Return

File the monthly return by the 7th of every month.

Periodical Compliances:

The NBFC periodical Compliances for Non-Deposit and Deposit-Taking Companies are:

1. Appointment of Director

Ensure the appointment of directors within 30 days of their appointment.

2. Resignation of Director (DIR-12 + Challan Report)

Notify and report the resignation of directors, including the DIR-12 form and challan report, within 30 days of their resignation.

3. Adoption of Any Notification in the Ensuing Board Meeting

Adopt and file any relevant notifications or decisions made in the ensuing board meeting with the Reserve Bank of India.

Types of Returns

The different kinds of returns filed by NBFCs in India include:

Returns by Deposit-Taking NBFCs:

1. NBS-1 (Quarterly Return on Deposit in the First Schedule):

This quarterly return captures financial details such as Profit and Loss Account, components of assets and liabilities and is essential for monitoring deposit-taking NBFCs.

2. NBS-2 (Quarterly Return on Prudential Norms):

This return provides details related to various prudential norms, including asset classification, capital adequacy, Net Owned Funds (NOF), provisioning and more.

3. NBS-3 (Quarterly Return on Liquid Assets):

Filed quarterly, this return captures information about statutory investments in liquid assets.

4. NBS-4 (Annual Return of Critical Parameters):

This annual return is filed by rejected companies that previously held public deposits. It helps assess the repayment status of such NBFCs.

5. NBS-6 (Monthly Return on Exposure to Capital Market):

Monthly return required from deposit-taking NBFCs with total assets of Rs. 100 crore or more, providing details of their exposure to the capital market.

6. ALM Return (Asset Liability Management Return):

Filed semi-annually by NBFCs holding public deposits exceeding Rs. 20 croreor having an asset size of more than Rs. 100 crores. It includes statements related to short-term dynamic liquidity.

7. Requires Audited Balance Sheet and Auditor's Report:

Certain deposit-taking NBFCs accepting public deposits need to furnish their audited balance sheet and auditor's report.

8. Return Related to Branch Information:

Submission of information related to the branches operated by the NBFC.

Returns by Non-Deposit NBFCs:

1. NBS-7 (Quarterly Statement):

Provides information on risk assets ratio, capital funds and risk-weighted assets. Filed quarterly by non-deposit NBFCs.

2. NBS-2 (Monthly Return on Critical Financial Parameter):

A monthly return focusing on critical financial parameters of Non-Deposit NBFCs-ND-SI.

3. ALM Returns (Asset Liability Management Returns):

ALM returns for non-deposit NBFCs include:

• Monthly statement of short-term dynamic liquidity (NBS-ALM-1)
• Half-yearly statement of structural liquidity (NBS-ALM-2)
• Half-yearly statement of interest rate sensitivity (NBS-ALM-3)
4. Branch Info Return (Quarterly Return on Important Financial Parameters):

Filed quarterly by non-deposit-taking NBFCs with assets of more than Rs.50 croresand less than Rs.100 crores. It includes information like company name, address, Net Owned Fund and profit/loss over the last three years.

Prudential Regulation of RBI Master Direction

The Reserve Bank of India has established prudential regulations through its Master Direction for non-banking entities. In addition to the NBFC annual compliances mentioned earlier, non-banking entities must adhere to the following regulations:

1. Accounting for Investments:

The Board of Directors of an NBFC is responsible for formulating and implementing the company's investment policy. This policy should include criteria for categorising assets as current or long-term investments.

2. Multiple NBFCs:

All NBFCs are aggregated collectively for the purpose of verifying compliance with the asset size limit of Rs. 500 crores. This means that the total asset size of all NBFCs under common ownership or control will be considered together.

3. Loans against Company Shares Prohibited:

Non-banking financial companies are not permitted to lend against their own shares. This regulation prohibits the lending or borrowing of funds using the company's shares as collateral.

4. Policy for Demand or Call Loans:

NBFCs wishing to offer Demand or Call Loans must have a policy in place that outlines the terms and conditions governing such loans. This policy must be established by the Board of Directors.

5. Asset Classification:

Applicable NBFCs must classify their assets into specific categories, including:

• Standard Assets
• Sub-Standard Assets
• Loss Assets
• Doubtful Assets
6. Disclosure in the Balance Sheet:

Each applicable Non-Banking Financial Company should have a separate disclosure provision in its balance sheet for doubtful or bad debts. This ensures transparency in reporting the financial health of the company and potential risks.

7. Provision for Standard Assets:

Non-Banking Financial Companies are required to make provisions for standard assets at 0.25 percent of the outstanding amount. This provision acts as a cushion against potential credit losses.

Penalties for Non-compliance

Penalties for non-compliance with RBI regulations and NBFC annual compliances can be severe for NBFCs. These penalties include the following:

1. Monetary Penalties: RBI holds the power to levy fines on NBFCs due to different breaches. The penalty amount is based on the severity of the violation and the consequences of it.
2. Licence Suspension: The RBI has the ability to temporarily suspend an NBFC's licence for a defined duration in the event of non-compliance with regulatory obligations. In the suspension, NBFC is restricted from engaging in its financial operations.
3. Licence Revocation: In extreme cases of non-compliance or repeated violations, RBI can revoke the NBFC's licence, effectively shutting down its operations. This is a severe consequence and is typically reserved for cases of serious misconduct or prolonged non-compliance.
4. Restrictions on Business Activities: RBI may impose restrictions on specific business activities or transactions of the non-compliant NBFC until it rectifies the issues.
5. Legal Actions: RBI can initiate legal proceedings against the NBFC and its management for non-compliance, leading to fines, penalties and even imprisonment in some cases.
6. Dissolution of the Company: In extreme situations, where non-compliance poses a significant risk to the financial system or public interest, RBI may initiate proceedings to dissolve the NBFC and wind up its operations.

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