What changed
RBI observed that some NBFCs obtained registration, parked funds in bank FDs, and did not start NBFI activities for years. The circular clarifies that FDs are not financial assets under Section 45I(c) of the RBI Act, and interest from them is not income from financial assets. It also reiterates that NBFCs must commence business within six months of receiving CoR, or the CoR stands withdrawn automatically.
What it means for you
NBFCs can no longer use bank FDs as a substitute for genuine lending or investment activities to justify holding a CoR. Auditors must not certify NBFI activity if the company only earns interest from FDs. This tightens the entry barrier and ensures that only active NBFCs retain registration, reducing regulatory arbitrage.
What you must do
- Review your NBFC's asset composition to ensure fixed deposits with banks are not classified as financial assets for regulatory purposes.
- If your NBFC has not commenced NBFI business within six months of CoR issuance, initiate business operations immediately or risk automatic withdrawal of registration.
- Instruct auditors to verify that the company is conducting actual NBFI activities, not just parking funds in FDs, before certifying compliance.
Who it affects
All Non-Banking Financial Companies (excluding Residuary Non-Banking Companies), Auditors of NBFCs, NBFCs that have obtained CoR but not yet commenced business
Can an NBFC treat fixed deposits with banks as financial assets?
No. RBI clarifies that bank FDs are not financial assets under Section 45I(c) of the RBI Act. Interest from such deposits cannot be treated as income from financial assets.
What happens if an NBFC does not start business within six months of getting CoR?
The CoR will stand withdrawn automatically. The NBFC must commence NBFI business within six months of the date of issue of the CoR.
Can there be a change in ownership of an NBFC before it starts business?
No. There can be no change in ownership prior to commencement of business and regularization of its CoR.