REGULATING NON-BANKING

This role is, perhaps, the most unheralded aspect of our activities, yet it remains among the most critical. This includes ensuring credit availability to the productive sectors of the economy, establishing institutions designed to build the country’s financial infrastructure, expanding access to affordable financial services and promoting financial education and literacy.

Information pertaining to Non-Banking Financial Institutions


RIA No Information Sought Reply given/ Information provided Date of Reply
3 The Non-Banking Financial Companies are lending cash against gold deposits and collecting interest against the loan amount. How much percentage of the cost of the gold deposited can be given as loan and what shall be the interest to be collected against the loan according to the Reserve Bank of India’s specifications. In terms of extant instructions, Non-Banking Financial Companies (NBFCs) are required to maintain a Loan-to-Value (LTV) ratio not exceeding 75 percent for loans granted against the collateral of gold jewellery.

The interest rates charged by NBFCs are governed by the terms and conditions of the loan agreement entered into by the borrower and the NBFC. The Reserve Bank has not specified any interest rate that can be charged by any NBFC. However, in order to ensure transparency in such matters, the NBFCs have been advised by the Reserve Bank to adopt a Fair Practice Code with the approval of their Boards. They are also advised to lay out appropriate internal principles and procedures in determining interest rates and other charges. The latest circular issued to NBFCs on Fair Practices Code is Master Circular DNBS (PD) CC No. 340/03.10.042/2013-14 dated July 1, 2013 which is available on our website www.rbi.org.in > sitemap > Master Circulars – Fair Practice Code. http://rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx

April 10, 2014
RIA No4357/ 2013-14
  1. Kindly inform me about the maximum rate of interest that can be charged by a Non-Banking Financial Company in regard to loans lent to loanees/borrowers against the security of Gold Ornaments.
The Reserve Bank has not prescribed any ceiling on interest rate that can be charged by an NBFC. The interest rate chargeable, on all loans including loans against Gold Ornaments, is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFC. However, in order to ensure transparency in such matters, the NBFCs have been advised by the Reserve Bank to adopt a Fair Practices Code (FPC) with the approval of their Boards.

The latest circular issued to NBFCs on FPC is Master Circular DNBS (PD) CC No. 340/03.10.042/2013-14 dated July 1, 2013 which is available on our website www.rbi.org.in > sitemap > Master Circulars – Fair Practice Code Available at the link: http://rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx

February 25, 2014
  1. Kindly furnish me the prevailing rules, regulations, norms, notifications, orders etc. pertaining to the charge of interest on loans lent by Non-Banking Financial
Instructions in regard to rate of interest chargeable on all types of loans including loans against security of Gold Ornaments are consolidated in our Master Circular on the Fair Practices Code referred to above.
  1. Kindly inform me as to the applicability of the AP Pawn Brokers Act, 2002 to the (Act No. 6 of 2002, passed by the Andhra Pradesh Legislature & came into force with effect from 15.10.2003) in regard to the loans and advances lent by Non-Banking Financial Companies to the public at large against the security of Gold/gold ornaments.
All loans, including loans against the security of Gold/gold ornaments, granted by NBFCs, registered with the Reserve Bank of India under Section 45-IA of the RBI Act, 1934, are governed by the provisions of the said Act and the guidelines issued in this regard by the Reserve Bank.
  1. Kindly inform me the prevailing rules, regulations, norms, guidelines, notifications etc. in regard to auctioning of securities by Non-Banking Financial Companies in the event of failure of the loanees to repay the borrowed amount.
Our guidelines with regard to auction of jewellery, in the event of non-repayment of loans, are available in Para C of our above referred circular, read with para V of our circular DNBS.CC.PD.No.356 / 03.10.01/ 2013-14 September 16, 2013 on Lending Against Security of Single Product – Gold Jewellery, which is available on our website www.rbi.org.in > Sitemap > NBFC List > NBFC Notifications. Available at the link: (http://rbidocs.rbi.org.in/rdocs/ Notification/PDFs/CCN356160913L.pdf)
  1. Kindly inform me the prevailing rules and regulations in regard to maximum and minimum duration for which loans can be granted by Non-Banking Financial companies against the security of Gold ornaments and the periodicity of compounding of interest.
The Reserve Bank has not prescribed maximum and minimum duration of loans and the periodicity for compounding of interest on loans granted by NBFC against any kind of security including Gold ornaments. The Non-banking Financial Companies have discretion to determine the duration and the periodicity of compounding of interest on the loans granted. However, the rate of interest disclosed should be annualised rate so that the borrower is aware of the exact rate that would be charged to the account.
4080/ 13-14 DNBS Which of the Foreign or Indian, Private banks, NBFC, Financial Institute and the Banks/ NBFC and here quotd Bank or NBFC can charge compound interest (cumulative interest)? If they can charge cumulative interest then RBI or which of it's Department or Department of Non-Banking Supervision (DNBS) or which Authority has been permitted to charge this? Particularily which Bank / NBFC can charge cumulative interest and express in detail the permission given to them?
  1. Citi Financial Consumer Finance India Ltd. called as “Citi Financial”,
  2. HDFC Bank Ltd.,
  3. Kotak Mahindra Bank Ltd.,
  4. Kotak Mahindra Prime Ltd.,
  5. Reliance Capital Ltd.,
  6. Barclays Bank Ltd.,
  7. ICICI Bank Ltd.,
  8. India Bulls.
Non-Banking Financial Companies (NBFC) are registered with the Reserve Bank under Section 45 IA of the RBI Act, 1934. The Reserve Bank has not prescribed any specific interest rate that should be charged by NBFCs or “cumulative interest”. The interest rates charged by NBFCs are governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFC. Further, our Master Circular on this subject (Fair Practices Code) states that “The NBFCs should convey in writing to the borrower in the vernacular language as understood by the borrower by means of sanction letter or otherwise, amount of loan sanctioned along with the terms and conditions including annualised rate of interest and method of application thereof and keep the acceptance of these terms and conditions by the borrower on its record.” In order to ensure transparency in such matters, NBFCs have been advised by the Reserve Bank to adopt a Fair Practices Code with the approval of their Boards.

The latest circular issued to NBFCs on Fair Practices Code is Master Circular DNBS (PD) CC No. 340/03.10.042/2013-14 dated July 1, 2013 which is available on our website www.rbi.org.in > sitemap > Master Circulars – Fair Practice Code at the link http://rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx?did=333 The Department of Non-Banking Supervision regulates and supervises the Non-Banking Financial Companies and has issued the above guidelines to them.

February 24, 2014
1
RIA 433/05-06 DNBS
Is it permissible for a non-banking financial company (NBFC) to carry on business without registering with the Reserve Bank of India? If not, and if a NBFC carries on such business, what action would be taken against such a company? As per Section 45 IA of the Reserve Bank of India Act, 1934, no NBFC shall commence or carry on the business of non-banking financial institution (NBFI) without obtaining certificate of registration (CoR) from the Reserve Bank of India. Business activities to be carried on by such NBFCs are provided under Section 45 I(c) of the RBI Act, 1934. The Reserve Bank of India may take appropriate action against any person (NBFC) contravening the provisions of RBI Act, 1934 and the Directions issued there under. March 28, 2006
2
RIA 461/05-06 DNBS
What are the businesses that a company which is registered as a Residuary Non-Banking Company (RNBC) with RBI can undertake? A company registered as a RNBC is defined as a non-banking institution, in terms of the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. RNBCs are companies which receive any deposit under any scheme or arrangement, by whatever name called, in one lumpsum of in installment by way of contributions or subscriptions or by sale of units or certificates or other instruments, or in any other manner and which, according to the definitions contained in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, or as the case may be, the Miscellaneous Non-Banking Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1977, is not
  1. an equipment leasing company
  2. a hire purchase finance company
  3. a housing finance company
  4. an insurance company
  5. an investment company
  6. a loan company
  7. a mutual benefit company
  8. miscellaneous non-banking company, and
  9. a mutual benefit company.
April 25, 2006
3
RIA 472, 473/2005-06 DNBS
Does law permit a NBFC governed by RBI rules to disburse loan amt by cash/ through bearer cheque The mode of disbursal of loan amounts by NBFCs is not governed by RBI regulations. As regards the business practices of NBFCs, these are matters of contract between the NBFC and the borrower and therefore the loan transaction between the borrower and NBFC is regulated by the terms and conditions of the contract. Any grievances in this regard can be raised before the appropriate courts (both civil and criminal) including the local Consumer Forums, as you may deem fit. We may also add that no guidelines have been issued by Reserve Bank relating to vehicle financing by NBFCs. April 25, 2006
4
RIA 182, /2007-08 DNBS
Rules and Regulations to form a Banking and Non Banking Financial Organizations As far as Non – Banking Financial companies (NBFC) are concerned, as per Section 45 – IA (1) of Reserve Bank of India Act, 1934, no NBFC shall commence or carry on business of a non – banking financial institution without –
  1. Obtaining a certificate of registration; and
  2. Having the net owned fund (NOF) of rupees twenty - five lakh or such other amount, not exceeding rupees two hundred lakh. Currently, an NBFC requires NOF of Rs 200 lakh to be eligible for registration as a non banking financial institution and you may refer to RBI's website, www.rbi.org.in ( go to Sitemap>NBFC list>Forms/returns) for other details and specimen application form for certificate of registration to commence / carry on the business of a non- banking financial institution by a company and the requirements to be complied with and documents to be submitted to RBI by NBFCs for obtaining Certificate of Registration from RBI.
  3. As regards query about licensing of new bank, at present RBI is not considering any request for opening of new banks in the private sector. As and when RBI considers it necessary to invite applications for opening of new banks in the private sector, a public announcement indicating the detailed norms for setting up a bank will be made. The same will also be made available on the RBI website www.rbi.org.in
  4. Banks are regulated by Reserve Bank of India under provisions of the Banking Regulation Act, 1949 and Reserve Bank of India act, 1934.
August 21, 2007.
5
RIA 1648, /2007-08 DNBS
"Does the money lending business under hire purchase require registration / permission from RBI; if yes under what provision of law?" Granting of License/ permission for money lending activity is under the jurisdiction of concerned State Governments. In case any non-banking financial activity (e.g. hire purchase and leasing) is to be undertaken, such activity cannot be commenced or carried on without a Certificate of Registration from RBI as per Section 45 IA of RBI Act, 1934. April 9, 2008
2673/13-14 DNBS Are Non-Banking Finance Companies (NBFC) in India allowed to give loans to NPA accounts of nationalized and private banks? NBFCs lend based on their own credit appraisal mechanism. Dec 11, 2013
Whether they are regulated to a point of Rate of Interest charged by them? Or they can charge whatsoever they would like to under the guidelines of honorable RBI? Rate of Interest on loans is a contractual obligation between NBFC and borrower. RBI has not issued any guidelines in this regard. However, the Board of each NBFC has to adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium, etc and determine the rate of interest to be charged for loans and advances. NBFC cannot charge interest that are seen to be excessive. The rate of interest should be annualized rates so that the borrower is aware of the exact rates that would be charged to the account. Further, the rate of interest and the approach for gradations of risk and rationale for charging different rate of interest to different categories of borrowers has to be disclosed by the NBFC to the borrower or customer in the application form and communicated explicitly in the sanction letter.

In addition, the Board of the NBFC has to adopt Fair Practice Code issued by the Bank vide Master Circular DNBS(PD) CC No. 340 / 03.10.042/ 2013-14 dated July 1, 2013 which deals, inter alia, with transparency in interest rates charged to the borrower.

If a NBFC is charging any amount of ROI to any client then can a complaint can be made, if yes to whom? Grievances can be addressed to the Grievances Redressal Officer of the company. In case the NBFC does not respond, the matter can be taken up with the concerned Regional Office of the Department in whose jurisdiction the company is registered.
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