CHAPTER III-B of RBI Act 1934 — NBFCs & FINANCIAL INSTITUTIONS
This is the most important chapter for banking/NBFC regulatory examination purposes.
Section 45H of RBI Act 1934 — Applicability
Chapter III-B generally does not apply to:
- Banks
- SBI etc.
- RRBs
- Co-operative banks
- Certain specified credit societies etc.
Core idea
This chapter is primarily the NBFC/non-banking institution regulatory framework.
Section 45I — Definitions
Key concepts:
Financial institution
Broadly institutions engaged in:
- Financing
- Investment in securities
- Hire purchase
- Insurance
- Chits
- Certain money collection schemes.
Certain principal businesses are excluded.
NBFC
Broadly:
- Financial institution which is a company; or
- Company whose principal business is receiving deposits/lending; or
- Other notified categories.
Deposit
Very broad definition, but excludes several categories such as:
- Share capital
- Certain bank borrowings
- Specified financial institution funds
- Security/dealer deposits
- Earnest money
- Certain business advances
- Chit subscriptions etc.
Section 45IA — Registration + Net Owned Fund
🔥🔥 EXTREMELY IMPORTANT
An NBFC cannot commence/carry on NBFC business unless:
- It has Certificate of Registration (CoR) from RBI; and
- It satisfies the Net Owned Fund (NOF) requirement.
The Act permits RBI to prescribe NOF up to ₹100 crore through notification and allows different amounts for different categories.
RBI examines:
- Ability to repay depositors
- Proper conduct of affairs
- Adequate capital
- Earning prospects
- Public interest
- Financial-system stability
- Other depositor/public-interest considerations.
RBI can:
- Grant CoR
- Impose conditions
- Cancel CoR
- Reject registration.
Appeal against rejection/cancellation is provided.
NOF concept
Broadly:
Paid-up equity capital + free reserves
minus:
- accumulated losses
- deferred revenue expenditure
- intangible assets
- specified group/subsidiary investments and exposures.
Exam Hook
NBFC = CoR + NOF
Without these, carrying on NBFC business is not permitted.
Section 45IB — Maintenance of assets
NBFC must maintain prescribed percentage of deposits in:
Unencumbered approved securities.
Act specifies:
- Minimum 5%
- RBI can prescribe higher percentage up to 25%.
Shortfall
→ Penal interest.
Memory
45IB = Liquid assets/security requirement.
Section 45IC — Reserve Fund
Every NBFC must:
- Create reserve fund.
- Transfer at least 20% of net profit every year to it.
- Transfer before dividend declaration.
Withdrawal:
- Only for permitted purposes.
- Report to RBI within 21 days.
Memory
NBFC Reserve Fund = 20% of annual net profit.
Section 45ID — RBI power to remove directors
RBI can remove an NBFC director where necessary for:
- Public interest
- Depositor/creditor protection
- Financial stability
- Proper management.
Director gets opportunity to make representation, subject to urgent protective action.
Removed director may be prohibited from NBFC management for up to 5 years at a time.
RBI can appoint replacement.
Exam Hook
RBI can directly remove an NBFC director.
Section 45IE — Supersession of NBFC Board
🔥 Important
RBI can supersede Board of an NBFC for reasons including:
- Public interest
- Depositor/creditor interest
- Proper management
- Financial stability.
Maximum
Board can be superseded for a period which, in aggregate, cannot exceed 5 years.
RBI appoints an Administrator.
Administrator exercises Board powers.
Memory
45ID = Remove individual director
45IE = Remove entire Board
Section 45J — Advertisement/prospectus
RBI can:
- Regulate NBFC deposit advertisements.
- Prohibit them.
- Prescribe conditions.
Simple
RBI controls how NBFCs solicit public deposits.
Section 45JA — RBI policy & directions
🔥🔥 Very important.
RBI can issue NBFC directions regarding:
- Income recognition
- Accounting standards
- Provisioning
- Capital adequacy
- Risk weights
- Credit conversion factors
- Deployment of funds
- Lending/investment restrictions.
Exam Hook
This is a statutory foundation for prudential regulation of NBFCs.
Section 45K — Deposits: information + directions
RBI can require NBFCs/non-banking institutions to provide:
- Deposit amounts
- Purpose
- Tenor
- Interest rate
- Terms and conditions.
RBI can also regulate:
- Interest rates
- Deposit periods
- Deposit acceptance.
Failure to comply can lead RBI to prohibit acceptance of deposits.
Section 45L — Financial institutions
RBI can:
- Call for information.
- Require returns.
- Give directions.
Information can cover:
- Capital
- Reserves
- Liabilities
- Investments
- Borrowers
- Purpose of finance
- Tenor
- Interest rates.
Difference
45K → Deposits
45L → Financial institutions/credit system
Section 45M — Duty to furnish information
Every non-banking institution must:
- Furnish information/returns called by RBI.
- Comply with RBI directions.
Simple
RBI asks → NBFC must provide/comply.
Section 45MA — Powers/duties of auditors
Auditor must check whether required information has been furnished to RBI.
RBI can:
- Issue directions to auditors.
- Require special audit.
- Appoint auditor.
- Require special audit report.
NBFC bears audit cost.
Section 45MAA — Action against auditors
If auditor fails to comply with RBI directions/orders:
RBI can:
- Remove/debar auditor
- For up to 3 years at a time.
Exam Hook
RBI’s supervisory reach extends to the NBFC’s auditor.
Section 45MB — Prohibit deposits & alienation of assets
RBI can:
- Stop an NBFC from accepting deposits.
- Restrict disposal/transfer of assets.
Purpose
Prevent further deterioration and protect depositors.
Section 45MBA — Resolution of NBFC
🔥 Modern resolution provision.
RBI can frame a resolution scheme involving:
- Amalgamation
- Reconstruction
- Splitting viable/non-viable businesses
- Creation of Bridge Institution for critical functions.
Scheme may include:
- Reduction of senior management remuneration.
- Cancellation of specified shares.
- Sale of assets.
Exam Hook
45MBA = NBFC resolution mechanism.
Section 45MC — Winding up
RBI can apply for winding up of an NBFC if:
- It cannot pay debts.
- It loses qualification under Section 45IA.
- Deposit prohibition has continued for at least 3 months.
- Its continuation is detrimental to public/depositor interest.
Failure to meet lawful demand within 5 working days, coupled with RBI certification, can establish inability to pay debt for this purpose.
Memory
45MB = Stop deposits/assets
45MBA = Resolve
45MC = Wind up
Section 45N — Inspection
🔥🔥 Very important for regulatory examination.
RBI can inspect:
- Non-banking institution
- Financial institution
Purpose:
- Verify returns/information.
- Obtain information not furnished.
- Examine institution where necessary.
Directors/officers must:
- Produce books/accounts/documents.
- Furnish information.
- Answer questions under oath.
Exam Hook
45N = RBI inspection power over NBFCs.
Section 45NA — Unauthorized solicitation of deposits
Nobody can solicit public deposits on behalf of NBFC unless:
- Authorised in writing by NBFC.
- Clearly identifies the institution.
- Advertisement complies with RBI/law.
Section 45NAA — Group companies
RBI can inspect/audit group companies of NBFCs.
Group relationship includes:
- Parent/subsidiary
- Joint venture
- Associate
- Promoter/promotee
- Related party
- Common brand
- ≥20% equity investment relationship.
Exam Hook
RBI can look beyond the NBFC’s four walls.
Section 45NB — Confidentiality
Information obtained by RBI regarding NBFCs through:
- Returns
- Audit
- Inspection
- Other supervisory means
is confidential.
But disclosure can occur in specified circumstances, including:
- Public interest
- Consolidated publication without identifying NBFC/borrowers
- Lawful information-sharing.
Section 45NC — RBI exemption power
RBI can exempt:
- An NBFC
- Class of NBFCs
- Non-banking institution
- Class of institutions
from provisions of Chapter III-B, subject to:
- Conditions
- Limitations
- Restrictions
- Time period.
Sections 45O & 45P
Status
Repealed.
Section 45Q — Chapter IIIB overrides other laws
🔥 Important principle.
If another law is inconsistent with Chapter IIIB:
Chapter IIIB prevails.
Memory
45Q = overriding clause.
Section 45QA — Repayment of deposits
Historically empowers the Company Law Board to direct NBFC to repay deposits where necessary to protect:
- Company
- Depositors
- Public interest.
Section 45QB — Nomination by depositors
Depositor can nominate person to receive deposit on death.
If sole depositor/all depositors die:
- Nominee gets right to receive deposit subject to statutory framework.
If nominee is minor:
- Depositor can appoint another person to receive amount during minority.
Exam Hook
NBFC deposits also have statutory nomination mechanism.