Post-Registration Compliance for NBFCs

Registering as a Non-Banking Financial Company (NBFC) is an important milestone for any financial business in India. However, the journey doesn’t end with registration. After obtaining an NBFC license from the Reserve Bank of India (RBI), there are several ongoing compliance requirements that your company must adhere to. Failing to meet these obligations can lead to penalties or even the cancellation of your license. Here’s what you need to know about post-registration compliance for NBFCs.

1. Regular Financial Reporting

One of the primary responsibilities of an NBFC is to regularly submit financial reports to the RBI. These reports help the RBI monitor the financial health and operations of your NBFC registration online. Key reports include:

• Quarterly Returns: NBFCs must file quarterly returns that detail their financial performance, including assets, liabilities, and income statements.
• Statutory Audits: A qualified Chartered Accountant must audit annual financial statements and submit them to the RBI.

These reports must be accurate and timely, as they are crucial for maintaining transparency and trust with the regulatory body.

2. Capital Adequacy Requirements

The RBI mandates that all NBFCs maintain a minimum Capital Risk-Weighted Assets Ratio (CRAR). This ratio ensures that the company has enough capital to absorb potential losses and protect depositors and creditors.

• CRAR Requirement: Currently, NBFCs must maintain a CRAR of at least 15%. This means that they must fund 15% of their risk-weighted assets with capital.
• Tier-I and Tier-II Capital: NBFCs must ensure that at least 10% of the CRAR is from Tier-I capital, which includes core capital like equity and reserves.

Maintaining the required CRAR is essential for the stability and credibility of your NBFC.

3. Asset Classification and Provisioning Norms

NBFCs must classify their assets (loans and advances) based on their performance and make provisions for potential losses. This classification helps in identifying non-performing assets (NPAs) and managing credit risk.

• Standard Assets: Classify loans that perform well as standard NBFC assets. Set aside a general provision of 0.25% for these assets.

• Sub-Standard Assets: Categorize loans overdue for more than 90 days as sub-standard. Allocate a provision of 10% for these assets.

• Doubtful and Loss Assets: Loans overdue for extended periods need higher provisions, up to 100% for those classified as loss assets.

Properly classifying and provisioning assets helps your NBFC prepare for potential defaults.

4. Adherence to the Fair Practices Code

NBFCs must adopt and implement a Fair Practices Code (FPC) to ensure transparency and fairness in their dealings with customers. The FPC covers:

• Loan Application and Processing: Communicate loan terms and conditions to customers.
• Interest Rates and Charges: Ensure that interest rates and other charges are reasonable and transparent.
• Customer Grievance Redressal: Establish a mechanism for addressing customer complaints promptly and effectively.

Adhering to the FPC helps in building customer trust and maintaining ethical standards in business operations.

5. Anti-Money Laundering (AML) Compliance

NBFCs must implement measures to prevent money laundering and the financing of terrorism. This includes:

• Customer Due Diligence (CDD): Verify the identity of customers and assess the risk they pose before engaging in business with them.
• Suspicious Transaction Reporting (STR): Report any transactions that appear suspicious or unusual to the Financial Intelligence Unit (FIU).
• Record Keeping: Maintain records of transactions and customer information for at least five years.

AML compliance is crucial for protecting your NBFC from legal and reputational risks.

6. Corporate Governance and Board Oversight

Good corporate governance is essential for the success and sustainability of an NBFC. This involves:

• Board Meetings: Hold regular board meetings to discuss and review the company’s operations and compliance status.
• Appoint independent directors to offer unbiased oversight and ensure that decisions serve the best interests of stakeholders.
• Audit Committee: Establish an audit committee to oversee financial reporting, internal controls, and compliance with regulatory requirements.

Strong governance practices help in maintaining the integrity and reputation of your NBFC.

7. Filing Annual Returns

In addition to quarterly reports, NBFCs must also file annual returns with the RBI. These returns provide a comprehensive overview of the company’s financial performance and compliance status over the year.

• Annual Compliance Certificate: An NBFC must submit a compliance certificate signed by the CEO or CFO, confirming adherence to RBI guidelines.
• Auditor’s Report: Include the statutory auditor’s report along with the annual financial statements.

Timely filing of annual returns is essential to demonstrate ongoing compliance and avoid penalties.

8. Reserve Fund Maintenance

NBFCs must create a reserve fund by transferring at least 20% of their net profit each year before declaring any dividend. This fund acts as a financial cushion to absorb unforeseen losses.

• Reserve Fund Usage: The NBFC must seek RBI approval before using the reserve fund.
• Fund Management: Manage the reserve fund prudently and comply with regulatory requirements.

Maintaining a healthy reserve fund is vital for the long-term stability of your NBFC.

Conclusion

Post-registration compliance is a continuous process that requires diligent attention and strict adherence to RBI guidelines. By meeting these compliance requirements, your NBFC can operate smoothly, build trust with stakeholders, and contribute to the financial ecosystem. Ensuring that your company remains compliant not only protects your business from legal issues but also enhances its credibility and growth potential.