NBFC Compliance – A Complete Guide

Non-Banking Financial Companies (NBFCs) are one of the most important pillars of India’s financial ecosystem. They play a key role in driving credit access, supporting businesses, and contributing significantly to the country’s GDP.

Because NBFCs deal with public and institutional funds, they are subject to strict supervision by the Reserve Bank of India (RBI) and other regulators. These compliance requirements evolve regularly to match changing economic conditions, financial trends, and risk environments.

For every NBFC, understanding what needs to be done, when, and how is essential.

Non-compliance can lead to heavy penalties, cancellation of the NBFC licence, and even closure of business operations.

Why NBFC Compliance Matters?

Compliance ensures that NBFCs function transparently, protect investor confidence, and maintain financial stability. RBI’s directions are designed to make sure NBFCs manage risk properly and operate ethically while serving customers efficiently.

In September 2016, the RBI issued a set of consolidated rules known as the Master Direction

NBFC Non-Systemically Important Non-Deposit Taking Company (Reserve Bank) Directions, 2016.

These directions outline the dos and donts for NBFCs, covering everything from accounting

standards to customer practices. There’s a separate master direction for larger NBFCs (those with asset sizes above 500 crore) or those that accept public deposits.

Applicability of RBI Master Directions

The Master Directions apply mainly to NBFCs that do not accept public deposits and have assets below 500 crore.

Exemptions include:

– NBFCs that don’t raise public funds and have no customer interface.

– NBFCs that raise public funds but don’t deal directly with customers.

– NBFCs with customer dealings but no public funds.

– Smaller entities such as NBFC-Factors, Microfinance Institutions, and Infrastructure Finance

Companies with assets below 500 crore.

Key Definitions

• Public Funds: Include money raised through bank finance, inter-corporate deposits, public deposits, and the issue of commercial papers, debentures, or other borrowings. Instruments mandatorily convertible into equity within 5 years are not treated as public funds.
• Customer Interface: Refers to any direct interaction between the NBFC and its customers during lending, borrowing, or financial transactions.

Prudential Regulations

1. Accounting Standards: NBFCs must follow ICAI standards unless conflicting with RBI directions.

2. Investment Policy: Must be approved and followed by the board.

3. Call Loans: Policy for short-term loans should be documented and followed.

4. Asset Classification: Assets classified as Standard, Sub-Standard, Doubtful, or Loss Assets.

5. Provision for Standard Assets: Maintain 0.25% of outstanding assets as provision.

6. Consolidation: All group NBFC assets are considered for the 500 crore threshold.

7. Balance Sheet: Disclose provisions for bad debts and doubtful loans separately.

8. Loan Against Own Shares: Not permitted.

9. Loan Against Listed Shares: Maintain a 50% loan-to-value ratio; correct within 7 days if exceeded.

10. Report any change in address, directors, or auditors to RBI within 6 months.

Fair Practices Code (FPC)

All NBFCs dealing with customers must adopt a Fair Practices Code approved by their board. It

includes:

– Transparent loan terms and conditions

– Clear loan appraisal and disbursement process

– Grievance redressal system

Governance and Miscellaneous Requirements

1. Prior RBI Approval: Required before change in control, opening branches, or setting up ventures

abroad.

2. Credit Rating: Any change must be reported to RBI within 15 days.

NBFC Compliance Checklist

– File all required returns and statements within 60 days of financial year-end.

– Ensure 50% of total assets and income are from financial activities.

– Upload the auditor’s certificate confirming compliance on the RBI website.

Monthly Compliance

1. Monthly Return for NBFCs-NDSI with assets above 100 crore.

2. NBS_ALM1 Statement of short-term dynamic liquidity within 10 days of month-end.

3. NBS6 monthly return showing exposure to capital markets.

Quarterly Compliance

1. NBS1 Financial parameters (Deposit-taking NBFCs)

2. NBS2 Statement of capital funds and risk assets

3. NBS3/3A Statutory liquid asset returns

4. NBS7 Capital fund statement for non-deposit taking NBFCs

5. SCRC Statement of assets securitized or reconstructed

Half-Yearly Compliance

1. NBS_ALM2 Asset-liability mismatches (within 20 days of half-year end)

2. NBS_ALM3 Interest rate sensitivity analysis

Yearly Compliance

1. ALM Return Asset-liability management and interest rate exposure

2. NBS1A Annual return on deposits (by September 30)

3. NBS8 Annual return for NBFCs with assets 100500 crore

4. NBS9 Annual return for NBFCs with assets below 100 crore

5. NBS4 Repayment of deposits (for rejected/cancelled NBFCs)

Company Law Compliance (Under Companies Act, 2013)

1. MGT-7 Annual Return (within 60 days of AGM)

2. AOC-4 Filing of financials (within 30 days of AGM)

3. DIR-12 Report changes in directors (within 30 days)

NBFC Compliance by Type

1. Non-Deposit Taking NBFCs: File Monthly Returns, NBS_ALM1, NBS7, and ALM Returns.

2. Deposit-Taking NBFCs (Assets > 100 Crore): File NBS6 and NBS_ALM2.

3. Deposit-Taking NBFCs (Others): File NBS1, NBS2, NBS3, and NBS4.

4. Residuary NBFCs: File NBS3A, NBS1A, and Schedule A.

5. NBFCs with 50100 Crore Assets: File Quarterly Return.

6. NBFCs with 100500 Crore Assets: File NBS8.

7. NBFCs with < 100 crore Assets: File NBS9.

8. All NBFCs: File Special Return (General info and Net Owned Funds) and Branch Information

Return.

Conclusion

Compliance isn’t just a legal requirement; it’s the backbone of trust and credibility for every NBFC. Adhering to RBI guidelines, filing returns on time, and maintaining transparency help NBFCs operate confidently, attract investors, and grow sustainably in a changing financial landscape.

FAQs:

1. What is NBFC compliance?
It refers to the regulatory requirements NBFCs must follow under RBI guidelines and the Companies Act, including timely filing of returns, maintaining asset quality, and ensuring ethical customer practices.

2. Why is NBFC compliance important?
It keeps operations transparent, protects customer trust, prevents financial risks, and helps the NBFC avoid penalties, licence cancellation, or operational restrictions.

3. Who issues compliance rules for NBFCs?
The Reserve Bank of India issues Master Directions that dictate how NBFCs should manage risks, maintain records, and interact with customers.

4. Which NBFCs must follow the RBI Master Directions?
Mainly non-deposit-taking NBFCs with assets below 500 crore. Some smaller entities and NBFCs without public funds or customer interfaces get exemptions.

5. What are the key monthly compliance requirements for NBFCs?
Returns like Monthly NDSI, NBS_ALM1 for liquidity, and NBS6 for capital market exposure must be filed depending on the NBFC category.

6. What annual returns must an NBFC file?
Reports like ALM Returns, NBS1A, NBS8, and NBS9 apply based on asset size and deposit-taking status, along with filings under the Companies Act, such as MGT-7 and AOC-4.

7. What is the Fair Practices Code for NBFCs?
A mandatory framework ensuring transparent lending, fair customer treatment, responsible recovery practices, and a proper grievance redressal setup.

8. What happens if an NBFC fails to comply with RBI guidelines?
It can face monetary penalties, restrictions on operations, loss of licence, or even closure in severe cases.

9. How does asset classification work for NBFCs?
Loans are tagged as Standard, Sub-Standard, Doubtful, or Loss Assets based on the borrower’s repayment behaviour and overdue period.10. Do all NBFCs need RBI approval for organisational changes?
Yes, major changes such as control transfer, opening branches, or setting up overseas ventures require prior approval.