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Introduction

As per the RBI Act of 1934, the Reserve Bank of India (RBI) has been entrusted with the power to govern and supervise the Non-Banking Financial companies in India. These financial institutions are commonly known as NBFCs. RBI governs NBFCs as per the prevailing RBI Regulations.

What are NBFCs?

NBFC simply means any company incorporated under the present Companies Act of 2013 or the previous Companies Act of 1956, which undertakes the following activities as as its primary activity:

1. Providing loans and advances
2. Acquisition of securities such as stocks, shares, bonds and debentures whether issued by the government or any local authority or any other market securities of a like nature
3. Hire-purchase, Leasing, Insurance and Chit fund business

NBFC’s principal business is to raise capital funds from the public and investors and then use it to lend to borrowers. In India, NBFCs cater to the general public by offering various banking as well as non-banking services. NBFCs unlike banks don’t hold banking licences issued by RBI. Therefore they function as an alternative institution to banks and other conventional financial institutions.

List of Laws and Regulations applicable to NBFCs

The following are the major regulations applicable to NBFCs operating in India:

• RBI Act, 1934: The RBI Act empowers the Reserve Bank to regulate and govern the banking and finance sector in India including the Banks and NBFCs. The Chapter III B of the act specifically talks about the NBFCs.
• Companies Act 2013: Every NBFC needs to be incorporated as a company as per the Companies Act, 2013 before registering with the RBI and obtaining the Certificate of Registration.
• RBI Master Directions: RBI has issued many directions for regulating NBFCs such as NBFC (Acceptance of Public Deposits) Directions 2016, Monitoring of Frauds in NBFCs Directions 2016, NBFCs Auditor’s Report Directions 2016, NBFCs Returns Directions, 2016 etc
• Directions issued by RBI: In various landmark decisions by SC such as Central Bank of India v. Ravindra, 2001 and Sudhir Shantilal Mehta v. CBI, 2009 it has been held that directions issued by RBI have statutory force and they can be considered as law in force.

Key Regulations Applicable to NBFCs

• Incorporation and Registration Regulations

1. The incorporation and registration of NBFCs are overseen by both MCA and RBI. Every NBFC shall obtain a Certificate of Registration from the RBI and be incorporated as a company under the Companies Act 2013 or 1956 before commencing its business as NBFC.
2. Every NBFC has to follow the provisions mentioned in Chapter III B of the RBI Act 1934. Furthermore, section 45-IA of the same act provides all the conditions that need to be followed to be registered as NBFC.

• Post Registration Regulations

1. Registration with CICs: Every NBFC is required to be a member of all the Credit Information Companies (CICs) in India. These CICs are the Credit Bearous licenced under the CIC Companies (Regulation) Act 2005 whose primary function is to prepare credit reports and credit scores. As of now, there are four well-recognised CICs in India, which are — CIBIL, EQUIFAX, EXPERIAN and CRIF High Mark Credit Information Services.

2. CERSAI Registration: CERSAI stands for Central Registry of Securitisation Asset Reconstruction and  Security Interest, which is a Government of India company, licensed under section 8 of the Companies Act, 2013. The purpose of this registry is to serve as a registration system under Chapter IV of the SARFAESI Act, 2002. 
3. Information Utility Submissions: Currently, National E-Governance Service Limited (NeSL) is the only information utility registered in India. RBI through a circular in 2017, made it compulsory for all financial institutions including banks and NBFCs to submit information relating to creditors as per section. 215 of IBC, 2016.
4. Filing of timely returns with RBI: Every NBFC has to file applicable returns to RBI within the specified period. Returns can be broadly divided into four categories i.e. Monthly, Quarterly, Half-yearly and Yearly.
5. Maintenance of Accounts: Every deposit-taking NBFC needs to maintain the records for every deposit for 8 calendar years and otherwise for every transaction the NBFC should maintain and preserve the records for a minimum of 10 years from the date when the transaction ended.
6. Statutory Filings: All the statutory filing mandated by MCA, RBI and other regulators such as SEBI should be timely filed. If any NBFC fails to do so they can be subjected to hefty penalties and severe actions such as cancellation of licence, taking over management or assets etc.

• Additional Regulations

1. Central KYC Registration: All the entities which are governed by RBI, need to mandatorily do the CKYC registration. This registration is managed by CERSAI. CKYC is a centralised repository which contains the records of customers availing financial services.
2. Adoption of Fair Practice Code: The Fair Practice Code issued by RBI is a set of guiding principles that financial institutions need to follow. The purpose of this code is to ensure transparency and non-discrimination between the customer and the institution.

3. FIU-IND Registration: This registration is compulsory for all the NBFCs. This registration is done to fulfil the objectives of the Prevention of Money Laundering Act, of 2002. The objective is to provide intelligence for safeguarding the national financial system against terror funding and money laundering.
4. Adoption of Anti Money Laundering Policy & IT Policy: Every NBFC is required to adopt an AML and IT policy. The policy should set the standards for combating money laundering and should be communicated to every concerned employee.

• Scale-Based Regulation 2023

1. Recently RBI issued the Master Direction – RBI (NBFC – Scale-Based Regulation) Direction, 2023 after which the previous 2016 regulation on Non-Systematic and Systematic NBFCs is no longer applicable.
2. Net Owned Fund (NOF) criteria for NBFCs will also be increased from Rs. 2 Cr to Rs. 10 Cr in a phased manner by March 2027. However, for NBFCs having no public funds such as NBFC – P2P, NBFC – AA etc the NOF will stay the same.
3. Another important change brought by the regulation is NPA classification which is to reduce the overdue period from 180 days to 90 days in a phased manner by March 2026.
4. The regulation also mandates the constitution of Risk Management Communities to enable the boards of NBFCs to focus on risk management. 
5. Moreover, the regulation also provides for classifying multiple NBFCs that are part of groups as one and consider there their asset on a standalone basis to classify them in the middle layer.
6. This new Regulation categorises NBFCs into four layers as per their operation to decide their compliance requirement. The four layers are as follows:

Base Layer	Non-deposit taking NBFCs having asset size of Rs. 1000 Cr.
Middle Layer	All deposit taking NBFCs and all non-deposit taking NBFCs having asset size greater than Rs. 1000 Cr
Upper Layer	NBFCs specifically identified by RBI
Top Layer	Any NBFC can be put in this layer by RBI if it is of the opinion that there is a substantial increase in potential systematic risk from any NBFC in the Upper Layer.

Conclusion

NBFCs play a vital role in the Indian financial system, and RBI along with other institutions ensures their smooth functioning through various legislation and regulations. Which provides for everything from incorporation to reporting. The recent Scale-Based Regulation 2023 further strengthens the existing framework by categorising NBFCs based on their operation and risk in order to implement stricter requirements for higher tiers. All these regulations together ensure a level playing field, protects consumers, and promotes the stability of the financial sector.