Introduction: In the 1960s, the RBI made an attempt to regulate the NBFCs by issuing directions relating to the maximum amount of deposits, the period of deposits and rate of interest they could offer on the deposits accepted. Norms were laid down regarding maintenance of certain percentage of liquid assets, creation of reserve funds and transfer thereto every year a certain percentage of profit and so on. To protect the interest of depositors, these directions and norms were revised and amended from time to time.
In the year 1977, the RBI issued two separate sets of guidelines, namely (i) NBFC Acceptance of Deposits Directions, 1977 and (ii) MNBD Directions, 1977 for MNBCs. In 1997, the RBI Act was amended and the RBI was given comprehensive powers to regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a certificate of registration and have minimum net owned funds. Ceilings were prescribed for acceptance of deposits, capital adequacy, credit rating and net owned funds. This is the only sector which had number of committees trying to regulate its working. The first was the Shah Committee in 1992, followed by the Shere Committee, Khanna Committee and various committees of the RBI.
Based on the report of the Task Force headed by Shri C. M. Vasudev submitted in 1998, the Govt. of India framed Financial Companies Regulation Bill, 2000, to implement the recommendations requiring statutory changes as also consolidate the law relating to NBFC and unincorporated bodies with a view to ensuring depositor protection. The regulations and directions related to NBFCs are divided into following categories:
Regulatory norms (under chapter IIIB and IIIC).
RBI Acceptance of Public Deposits Directions.
RBI NBFCs Prudential Norms Directions.
RBI NBFCs Auditors Report Directions.
Now let’s discuss these provisions and regulations in detail for complete understanding of the NBFCs
REGULATORY NORMS (UNDER CHAPTER IIIB AND IIIC).
First we discuss regulatory norms under chapter IIIB.
Certificate of Registrations: With effect from January, 1997, in order to commence (new company)/ carry on (existing company) the business of a Non- banking financial institution, and NBFC must obtain a certificate of Registration from RBI. The prerequisite for eligibility for such a CoR is that the NBFC should have a minimum Net Owned Fund (NOF) of Rs. 25 Lakh (which has been raised to Rs. 2 Crore from April 21, 1999 for any new applicant).
RBI ACCEPTANCE OF PUBLIC DEPOSITS DIRECTIONS
The RBI issues directions to regulate acceptance of deposits by NBIs/ FIs. These directions contain provisions regulating the amount/ period of deposits, rates of interest, brokerage etc. They also exempt from their purview certain types of borrowings/ money received by these companies. Main provisions related to deposit acceptance are as under.
On quantum of public deposits: The RBI prescribes how much deposits an NBFC can accept, depending upon the nature of business, NOF and credit rating given the NBFC. At present following norms are applicable:
Loan and investment companies : If the company has NOF of Rs. 25 Lakh, minimum investment grade (MIG) credit rating, complies with all the prudential norms and has CRAR of 15 percent – 1.56 times of NOF
Equipment leasing and hire purchase finance companies : If company has NOF of Rs. 25 Lakh and complies with all the prudential norms (a) with MIG credit rating and 12% CRAR – 4 times of NOF (b) without MIG credit rating but CRAR 15% or above – 1.5 times of NOF or Rs. 10 crore whichever is less.