We have covered the different types of the NBFCs in our earlier articles which deal with its meaning and types.
To regulate these NBFCs, RBI gets a number of powers under the Reserve Bank of India Act, 1934. RBI lays down different norms regarding functioning and governing of NBFCs through these powers. This Article takes an overview of some of the important powers available to RBI. The sections referred are of the Reserve Bank of India Act, 1934.
Registration of NBFC
The most fundamental power is with reference to the registration of the NBFCs. According to Section 45-IA, no NBFC can commence or carry-on the business of a non-banking financial institution without obtaining a certificate of registration from the Bank and having a Net Owned Funds of INR 2 crores (subject to revised norms from 1st October 2022, covered here).
Power of Bank to remove directors from office(45-ID)
If RBI finds that the affairs of an NBFC are carried out in a way detrimental to the interest of the depositors or creditors, or financial stability, RBI may supersede the Board of Directors of such company for a period not exceeding 5 years.
However, RBI shall give an opportunity of being heard to every concerned person before making such an order. After superseding the Board, RBI may appoint an administrator who shall be bound to follow the directions issued by RBI. From the date of supersession, every person in the Board vacates their office and all the power and duties are transferred to the administrator. RBI may appoint an alternate director for the director removed from the Board.
Bank to regulate or prohibit issue of prospectus or advertisement soliciting deposits of money (45J)
RBI may, by general or special order, do the following things for the public interest–
- regulate or prohibit the issue by any NBFC of any prospectus or advertisement soliciting deposits of money from the public
- Specify the conditions subject to which any such prospectus or advertisement, if not prohibited, may be issued.
Power of RBI to issue policy and directions (45JA)
If RBI finds that affairs of NBFC is detrimental to the interest of the depositors or in a manner prejudicial to the interest NBFC, RBI may determine the policy and give directions to all or any of the NBFCs.
The directions may relate to income recognition, accounting standards, provisions for bad and doubtful debts, capital adequacy based on risk weights for assets, credit conversion factors for off-balance-sheet items, and deployment of funds by NBFC. NBFC is bound to follow such directions and policy.
One of the Directions relate to outsourcing of activities by the NBFC which we have covered here.
Power of RBI to collect information from NBFCs as to deposits and to give directions (45K and 45L)
RBI may at any time ask NBFCs to furnish details, statement, information connected to deposits received by it. RBI also may ask for information related to paid-up capital, reserves or other liabilities, investments (whether in Government securities or otherwise), the persons to whom, and the purposes and periods for which, finance is provided and the terms and conditions, including the rates of interest.
Section 45M mandates every NBFC to furnish details asked by RBI within given time.
Power of RBI to prohibit acceptance of deposit and alienation of assets
If RBI finds that an NBFC is in violation of any section or any direction issued, RBI may prohibit such NBFC from accepting deposits.
For the public interest and interest of the depositors, RBI may impose restrictions on assets of NBFC for 6 months. Such assets shall not be available for transfer, mortgage or to create any charge without the permission of RBI.
Power of RBI to file winding up petition (45-MC)
If the RBI finds that any NBFC is not able to pay the debt or is disqualified to carry the business of NBFC or is prohibited to accept deposit for more than 3 moths or is detrimental to public interest, RBI may file petition for winding up of the NBFC under the Companies Act, 2013.
Power to cause inspection (45N)
RBI may take an inspection at any time through its officers, employees, or any other person. It is the duty of every director, committee members, officers, and employees of the NBFC to present necessary documents for the inspection within time stipulated by the RBI. RBI may take statement on oath.
The wide powers of RBI ensure that RBI can effectively regulate the NBFCs and their business practices. NBFCs shall design their compliance systems adequately to ensure that they comply with all such regulations.
- Team Efficax