Control of RBI over Non-Banking Financial Companies

Control of RBI Over Non-Banking Financial Companies

The RBI can function effectively and implement its fiscal and monetary policies only when the NBFCs are brought under its control. Thus, the RBI is taking various measures to control NBFCs. Of them, the important ones are listed below:

Non-Banking financial companies and RBI
Non-Banking financial companies and RBI

1. Control Over Deposits

The RBI regulates the activities of non-banking financial companies under the Companies (Acceptance of Deposits) Rules, 1975. Further, the RBI exercises control over the deposit acceptance activities of NBFCs by issuing various directives.

Examples of such directives are-

1. NBFCs (Reserve Bank) Directions, 1977.

2. The miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977.

3. The residuary Non-Banking Companies (Reserve Bank) Directions, 1987.

4. The Housing Finance Companies (National Housing Bank) Directions, 1989.

2. Ceiling Limits on Deposits

The Reserve Bank of India restricts the deposits by fixing certain ceiling limits for the acceptance of deposits by these non-banking financial companies. Normally, these companies are allowed to accept deposits up to 10 times of their net owned fund.

However, for certain NBFCs relaxation is also allowed. For example, for mutual benefit company, no restriction as to the quantum of deposits as they accept deposits only from its members.

3. Regulation of Brokerage

The RBI has prescribed certain limits on the payment of brokerage to middlemen.

4. Cash Reserves

The RBI has issued directions insisting certain NBFCs like Leasing Companies and Hire Purchase Companies to maintain 10% of their deposits in liquid assets. This is to maintain liquidity.

5. Compulsory Registration with the RBI

All non-banking financial intermediaries with net owned funds of Rs.50 lakh and above are now required by the RBI to register themselves compulsorily with it. This registration would be a prerequisite for a company to expand its business further.

6. Submission of Periodical Returns to the RBI

All the Non-Banking financial companies are required to submit periodical returns to the RBI on various matters relating to their operations.

Functions of RBI’s Departments of Financial Companies in controlling NBFCs

The Reserve Bank of India has a separate Department known as Department of Financial Companies to deal with the NBFCs. The main objective of this Department is to exercise some control over the NBFCs. Its central office is situated at Kolkatta. It has four regional offices.

The main functions of the Department of Financial Companies are as follows:

1. Identification of financial companies and classify them.

2. Reviewing the classification of such companies.

3. Attending to legislative matters; issuing directions to NBFCs on various matters.

4. Advising Central and State Governments on matters relating to NBFCs.

5. To receive and scrutinize the balance sheets, returns, accounts and statements of NBFCs.

6. Inspecting the NBFCs

7. Taking follow-up action.

8. Handling those companies, which contravene any of the directions of the RBI rigidly.

9. Taking into account requests for grants of exemptions.

10. Conducting studies on the working of NBFCs.

11. Handling the complaints received from the public.

12. Doing any other work, which is incidental to the above functions.