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July 31, 2018

RBI cancels licenses of over 100 NBFCs

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The Reserve Bank of India (RBI) today announced that it has cancelled the licenses of as many as 35 Non Banking Financial Companies (NBFCs). The bank has cancelled the lincences of over 100 NBFCs in the month of July. From now onwards, these companies will not be able to do the business of a non-banking financial institution. 

What are NBFCs ?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956. NBFCs are financial institutions that offer various banking services, but do not have a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting and merger activities.

Difference between Banks & NBFCs

NBFCs lend and make investments and hence their activities are similar to that of banks; however there are 3 major differences between Banks and NBFCs. They are :
  1. NBFC cannot accept demand deposits.
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Why RBI Cancelled the licenses of NBFCs

Under the PMLA (Prevention of Money Laundering Act, 2002), the NBFCs are required to furnish details about the identity of their clients, maintain records and furnish the information to the Financial Intelligence Unit.  Several NBFCs are facing closure for violation of these rules. Over 1,200 NBFCs flagged as "high risk" prone for not complying with a provision of the anti-money laundering law and in April RBI asked them to submit their records to the government be identified as legally compliant. If they fail, RBI will cancel their licenses.

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