Mentoassociates.com – Legal Articles

With many fly by night finance companies raking in moolah, at the cost of innocent investors offering them dream interest rates for their deposits, it is ideal to see what are the legal requirements for an NBFC.

NBFC stands for Non Banking Financial Company.

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

 An RNBC (Residuary Non-banking Company) is a non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner and not being an Investment, Asset Financing, Loan Company.

 An NBFC cannot operate without obtaining a certificate of registration from the Reserve bank Of India. The said company shall have a net owned fund of Rs 2,00,00,000/-. 

NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company  (LC).

All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept Public Deposits can accept/hold public deposits. Further there is a ceiling on acceptance of Public Deposits.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. The deposits with NBFCs are neither insured nor their repayment guaranteed by RBI.

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests.

If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. However there is no Ombudsman for hearing complaints against NBFCs

Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration with RBI.

Any person who is an individual or a firm or unincorporated association of individuals cannot accept deposits except by way of loan from relatives, if his/its business wholly or partly includes loan, investment, hire-purchase or leasing activity or principal business is that of receiving of deposits under any scheme or arrangement or in any manner or lending in any manner.

The Reserve Bank of India has issued guidelines dated 24-04-08 to Commercial banks with respect to the employment of recovery agents by them for the purpose of loan recovery. These include:

a. Banks should inform the borrower the details of recovery agency while forwarding default cases to the recovery agency.

b. The agent shall carry a copy of the notice and the authorization letter from the bank along with the identity card issued to him by the bank or the agency.

c. Banks should ensure that there is a tape recording of the calls made by recovery agents to the customers, and vice-versa. Banks shall intimate the customer that the conversation is being recorded.

d. The details of the recovery agency engaged by banks may also be posted on the bank’s website.

e. Where a complaint has been lodged by a borrower, banks should not forward cases to recovery agencies till they have finally disposed of the complaint.

f. In cases where the subject matter of the borrower’s dues is pending before courts, banks should exercise utmost caution, in referring the matter to the recovery agencies.

g. Each bank should have a mechanism whereby the borrowers’ grievances with regard to the recovery process can be addressed. The details of the mechanism should also be furnished to the borrower.

h. All recovery agents shall undergo a certificate course introduced by Indian Institute of Banking and Finance (IIBF).

i. In case of complaints against the Recovery agents, the Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area. Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its agents with regard to the recovery process.
 

From the initial days of Credit Card operations in India, there have been reports of tussle between Card issuing banks and credit card holders regarding the debt repayment. The reserve Bank of India has issued several guidelines to the card issuing institutions for the reddressal of grievances of the card holders. These include:

a.A time limit of 60 days needs to be given by the bank to the customers to prefer their complaints.

b.The card issuing bank shall constitute Grievance redressal machinery within the bank and the name and contact number of the designated officer shall be mentioned on the credit card bills.

c.The grievance redressal procedure of the bank/NBFC and the time frame for responding to the complaints shall be placed on the bank’s website. There should be a system of acknowledging customer’s complaints for follow up such as complaint number /docket number even if the complaints are received on phone.

d.If the customer does not get a satisfactory response from the bank, within 30 days period, then he has the right to approach the concerned banking ombudsman to redress his grievances. The bank shall be liable to compensate the customer for the loss of his time, expenses, financial loss etc.

Apart from the above RBI guidelines the customers have the right to file criminal complaints against the banks and the recovery agents if their acts amount to criminal offenses like intimidation, abuse, use of force assault etc. Also the customer can approach the consumer courts to redress his grievance.

With the introduction of SARFAESI Act 2002, it has become easy for banks and other financial institutions to recover loans advanced from defaulting borrowers. If a borrower has taken a loan by giving some collateral security and if he defaults in the repayment of the said loan, then the bank or the financial institution can take the possession of the collateral security, in most cases an immovable property and then manage or even sell the same to recover the debt after issuing a 60 days notice. The borrower is forbidden form approaching the civil court or other authorities against any such actions. However, after the said action by the bank, the aggrieved party can approach the Debt Recovery Tribunal against such an action.
Some of the defenses against the action of banks under the SARFAESI Act include:
a) Non-issuance of 60 days notice
b) Non-classification of the account as Non Performing Asset.
c) If the collateral security is an agricultural land, then   proceedings under SARFAESI Act is not permitted.
d) Action of the bank  barred by Limitation Act, 1963
e) Non delivery of Possession notice to the borrower.
f) Non publication of Possession notice in the news paper.
g) Non service of notice of 30 days, for sale of the secured assets after taking possession of the same.
h) If the amount due is less than 20 percent of the principal amount and interest thereon.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, was a remarkable peace of legislation with an objective to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected thereto.

As per Sec 13 of the said Act any security interest created in favour of a secured creditor may be enforced with out the intervention of the court or tribunal. Where any borrower makes any default in repayment of any secured debt or any installment thereof and his account is a non performing asset, then the secured creditor may require the borrower, by notice in writing to discharge in full, his liabilities to the secured creditor within 60 days from the date of the notice.

If on receipt of such a notice, the borrower raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor finds that such objection is not acceptable, he shall communicate within one week of such objection the reasons for non-acceptance of the objections.

In case the borrower fails to discharge his liability within 60 days period, the secured creditor may: –

a) take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale, for releasing the secured assets.

b) Take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale, for releasing the secured assets.

The secured creditor may, by notice in writing, require any person who has acquired any of the secured assets from the borrower and from whom any money is due to the borrower to pay the secured creditor so much of the money as is sufficient to pay the secured debt. All costs, charges and expenses incurred by the creditor for the purpose of taking possession of the secured assets shall be recoverable from the borrower.

If the dues are paid by the borrower, at any time before the date of sale, the secured assets shall not be sold or transferred by the secured creditor. If the dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the creditor may file an application to the DRT for recovery of the balance amount from the borrower.

The secured creditor, instead of acting under his Act can first proceed against the guarantors or sell the pledged assets. No borrower shall transfer his assets after the receipt of the notice, without written consent of the secured creditor. The secured creditor can seek the assistance of Chief Metropolitan Magistrate to take possession of the secured assets and documents relating thereto.