You may have recently heard or read that the RBI has canceled the registration of several non-banking financial organizations. If you’ve ever wondered why an NBFC license was revoked or how the RBI went about doing so, this blog will help you understand the process. The number of Non-Banking Financial Companies (NBFCs) in India is rapidly declining, owing to new criteria for net-owned funds. The incidence of cancellation has increased significantly in recent years, making it more difficult for current businesses to function. The NBFC License can be surrendered if necessary. The NBFC Registration Cancellation will be discussed in this article.
Since choking out a slew of non-banking financial companies in India for unethical business practices, the Reserve Bank of India has been on high alert.
In addition to tightening compliances, the Reserve Bank of India is focusing on establishing new criteria through amendments to avoid illegal practices.
What is NBFC?
Non-Banking Financial Companies (NBFCs) are businesses that offer financial services and banking services but do not fulfill the legal definition of a bank. They are governed by the Reserve Bank of India’s banking laws and provide banking services such as loans, credit facilities, TFCs, retirement planning, investing, and money market stocking. They are, however, prohibited from accepting any type of deposit from the general public. These groups play an important role in the economy, providing services in both urban and rural areas, and awarding loans to help new businesses expand.
NBFCs also offer a variety of financial services, such as chit-reserves and advances. As a result, it has become a highly important portion of our nation’s Gross Domestic Product, with NBFCs alone accounting for a 12.5 percent increase in our country’s GDP. Most individuals prefer NBFCs to banks because they are safer, more efficient, and faster at aiding with financial needs. Furthermore, a variety of loan packages are offered, and their services are flexible and transparent.
Net-Owned Fund – What Does It Mean?
An entity can challenge the Reserve Bank of India’s cancellation order in the proposed judiciary. Clause 7(I) of Section 45-IA of the RBI Act, 1934 allows the concerned entity to exercise such authority. Under this paragraph, the term “Net Owned Fund” is defined as follows:
(Accumulated Balance of Loss + Other Intangible Assets + Deferred Revenue Expenditure) – Total Paid-Up Equity Capital + Free Reserves
The Most Important Reasons for the Cancellation of the NBFC Registration
The following are some of the major causes for the cancellation of the NBFC registration:
- In the case of a Non-Banking Financial Company, it works to preserve conformity with the Act’s NBFC Registration requirements or the Reserve Bank of India’s additional circumstances at the time the Registration Certificate was granted. For example, if a firm or entity fails to meet the requirement of getting paid-up capital, NBFC Registration Cancellation may occur.
- If the account box or other records have been tampered with.
- If the Non-Banking Financial Company fails to relinquish the account book or other essential record during the audit conducted by the Reserve Bank of India’s auditing team.
- If a Non-Banking Financial Company takes a deposit that the Reserve Bank of India has deemed illegal.
- When the Reserve Bank of India receives a complaint, it is less likely to take immediate action against the defaulter. It’s because they owe it to both sides to provide them an equal opportunity to express their views on the issues. Before making a decision, the Reserve Bank of India considers various factors, such as the financial state of the Non-Banking Financial Company, when processing the complaint.
- If the Non-Banking Financial Company is having trouble adhering to the company’s capital compliances.
- If the Non-Banking Financial Company fails to follow the RBI’s instructions. Following the publication of guidelines, Reserve Bank of India personnel can pay a surprise visit to a business to see if the order has been obeyed or not.
- Take advantage of personal benefits if the Non-Banking Financial Company changes the interest rate on the loan. This is a serious offense because it has the potential to permanently harm the company’s future and operations.
- In the situation of a depositor who has designated a Non-Banking Financial Company as a defaulter on account of deposit payback. Depositors might approach the Company Law Board or a client in such circumstances to file a complaint against the defaulter to retrieve their funds.
- If the Non-Banking Financial Company’s business operations in India come to an end. Non-banking financial companies are only permitted to conduct financial activities by the business principle. This signifies that a company’s financial assets account for more than half of its total assets, and cash inflow from financial assets accounts for more than half of its total income. A company that meets this criterion can function as a Non-Banking Financial Company.
The RBI’s Position on the Cancellation of NBFC Registration
The RBI may cancel the Certificate of Registration (COR) in the exercise of the authority granted on it by section 45-IA (6) of the Reserve Bank of India Act, 1934, preventing such Non-Banking Financial Firms from participating in the activity of Non-Banking Financial Institutions.
The Reserve Bank of India is entirely responsible for regulating and monitoring NBFCs to promote the financial institutions’ healthy growth. It has the authority to grant and revoke NBFC licenses.
The following are some of the RBI’s views on the cancellation of NBFC registrations:
- Assume that any of the business companies discovered to be in a condition of misbehavior is acquiring financial services that violate the RBI’s regulations. In that case, RBI may issue a license revocation order.
- Before suspending a company’s operations, the Reserve Bank of India sends a communication to the defaulters outlining the reasons for the suspension. The RBI, as a recognized legal entity, ensures that the judicial framework is implemented through the accurate interpretation of the dispute.
- It allows the corporations involved to take their cases to the courts. The Reserve Bank of India will issue a revocation order as soon as it has interpreted the case and determined that revocation is in the public interest.
- It is important to recall that violations of the Reserve Bank of India’s policies are subject to a penalty under Section 58 B (6) of the RBI Act. As a result, the Reserve Bank of India will not be able to circumvent any of its laws on license revocation under any circumstances.
Grounds for NFBC License Cancellation
- Non-Banking Financial Companies can seek judicial assistance under Section (7) of the Reserve Bank of India Act, 1934.
- Non-Banking Financial Company can also file an appeal with the Central Government of India
- The appeal must be filed within one month of the NBFC Registration date being notified by the Reserve Bank of India license revocation.
- The decision-making process for such a matte must be completed within one month of the NBFC Registration date being notified by the Reserve Bank of India license revocation.
Non-Banking Financial Companies (NBFCs) have a considerable impact on the Indian financial system. It has compiled the range of easy financing available to the economically disadvantaged. It has also separated the processes of a regular loan disbursement from those that were previously only available to large corporations. Overall, a Non-Banking Financial Company is critical to the nation’s progress.
However, this does not imply that such financial institutions disregard the law. As a result, in defiance of the law, the Reserve Bank of India is now taking concrete steps to prevent unethical business activities.