Caution first

West Bengal chit-fund scam has brought the functioning of NBFCs into spotlight. Before you invest in them,here’s what you should look out for

Published: June 4, 2013 2:03 am

The series of chit-fund scams in Bengal where scores lost their lifetime savings should come as a wake-up call for investors,especially those investing in non-banking financial companies. In fact,the RBI had prohibited chit-fund companies from accepting deposits from the public as early as 2009. The central bank can prosecute any company flouting this rule.

The RBI has put in place an advisory that explains in detail various kinds of financial entities and regulations governing them. In case any NBFC is conducting business unauthorisedly or does not repay deposits,investors can lodge a complaint at the nearest office of the central bank. NBFCs whose asset size is over R100 crore,as per the latest audited balance sheet,are considered as systemically important NBFCs.

The RBI has clarified that it does not regulate all financial companies. Some financial businesses have specific regulators established by law to regulate and supervise them,such as,Insurance Regulatory and Development Authority (Irda) for insurance companies,Securities Exchange Board of India (Sebi) for merchant banking companies,venture capital companies,stockbroking companies and mutual funds,National Housing Bank (NHB) for housing finance companies,Department of Companies Affairs for nidhi companies and state governments for chit-fund companies.

Investors must note that Residuary Non-Banking Company (RNBC) is a class of NBFCs whose principal business is to receive deposits,under any scheme or arrangement,or in any other manner. These companies are not into investment,asset financing or lending. The functioning of these companies is different from that of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors’ funds. However,RBI has directed these companies not to accept any deposits and to wind up their businesses as RNBCs.

The central bank’s FAQs say that though that there is no ceiling on raising of deposits by RNBCs,each of them has to ensure that the amounts deposited with them are fully invested in approved investments. To secure the interests of depositor,such companies are required to invest 100% of their deposit liability into highly liquid and secure instruments,namely,Central/state government securities,fixed deposits with scheduled commercial banks,certificate of deposits of SCB/FIs or units of mutual funds.

Investors should also note that RNBCs cannot forfeit any amount deposited by the depositor,or any interest,premium or bonus. The minimum interest an RNBC will pay on deposits is 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; and 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme. Interest includes premium,bonus or any other advantage that an RNBC promises to the depositor by way of return.

Also,an RNBC can accept deposits for a minimum period of 12 months and maximum of 84 months from the date of receipt of such a deposit. They cannot accept deposits repayable on demand. However,at present,the two RNBCs in existence — Peerless and Sahara India Financial Corporation — have been directed by RBI to stop collecting deposits,repay the deposits and wind up their RNBC business as their business model is unviable,the central bank’s advisory says.

Financial entities that can legally accept deposits from public are banks,including cooperative banks. Non-bank finance companies,which have been issued a Certificate of Registration by RBI with a specific licence to accept deposits,are entitled to accept public deposit. In other words,not all NBFCs registered with RBI are entitled to accept deposits but only those that hold a deposit accepting Certificate of Registration can accept deposits.

However,they can accept deposits only to the extent permissible. Cooperative credit societies can accept deposits from their members but not the general public. The RBI regulates the deposit acceptance only of banks,cooperative banks and NBFCs.

Banks are the most regulated financial entities as the Deposit Insurance and Credit Guarantee Corporation pays insurance on deposits up to R1 lakh in case a bank fails. RBI does not guarantee repayment of deposits by NBFCs even though they may be authorised to collect deposits.

So,before investing in NBFC one must ensure that it is registered with RBI and specifically authorised by the central bank to accept deposits. Also,NBFCs have to prominently display the Certificate of Registration issued by RBI. The certificate should also reflect that the NBFC has been specifically authorised by RBI to accept deposits. Depositors must scrutinise the certificate to ensure that the NBFC is authorised to accept deposits.

The maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%. The RBI keeps altering the interest rates,depending on the macro-economic environment,which can be tracked in its website. The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorised by the company and should state the date of the deposit,the name of the depositor,the amount in words and figures,rate of interest payable,maturity date and amount.

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