NBFCs deposits: RBI advises retail depositors to play safe

Before investing in schemes that promise high rates of return investors must ensure that the entity offering such returns is registered with one of the financial sector regulators and is authorised to accept funds,whether in the form of deposits or otherwise. Investors must generally be circumspect if the interest rates or rates of return on investments offered are high, the RBI advisory says.

Unless the entity accepting funds is able to earn more than what it promises,the entity will not be able to repay the investor as promised. For earning higher returns,the entity will have to take higher risks on the investments it makes. Higher the risk,the more speculative are its investments on which there can be no assured return. As such,the public should forewarn themselves that the likelihood of losing money in schemes that offer high rates of interest are more, it says.

The central bank says,A depositor wanting to place deposit with an NBFC must ensure that the NBFC is registered with the RBI and is specifically authorised to accept deposits. Currently,the maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5 per cent.

According to the central bank,the chit funds are governed by Chit Funds Act,1982 which is a Central Act administered by state governments. Those chit funds which are registered under this Act can legally carry on chit fund business.

The RBI,however,prohibited chit fund companies from accepting deposits from the public in 2009. In case any chit fund is accepting public deposits,the RBI can prosecute such chit funds. Similarly,acceptance of money under money circulation,multi-level marketing or pyramid structured schemes and Ponzi schemes is not allowed as its a cognisable offence under the Prize Chit and Money Circulation Banning Act 1978,it says. Contravention of the provisions of this Act,is monitored and dealt with by the State governments.

Only non-bank finance companies,which have been issued certificate of registration by the RBI with a specific licence to accept deposits,are entitled to accept public deposit. Housing finance companies,which are again specifically authorised to collect deposits and companies authorised by Ministry of Corporate Affairs under the Companies Act can also accept deposits also up to a certain limit, the advisory says.

The RBI advisory says the Protection of Interest of Depositors in Financial Establishments Act by the State governments help in nailing unincorporated entities and companies from unauthorisedly accepting deposits. Under the Act,the state governments have been given vast powers to attach the property of such entities,dispose them off under the orders of special courts and distribute the proceeds to the depositors.

The widespread state government and police machinery is best positioned to take quick action against the culprits. Sixteen states and one Union Territory have passed this legislation. State governments have used this Act effectively to safeguard the interests of the depositors.

What if NBFCs fail to return the money? The depositor can complain against the NBFC to the nearest Regional Office of the Reserve Bank. Depositors can also approach the Company Law Board constituted under the Companies Act 1956 or a civil court or Consumer Disputes Redressal Forums for recovery of their money. Affected persons can complain to the state police authorities/ Economic Offences Wing of the state police as well,the RBI says.

The RBI says public can contribute a great deal by being vigilant and lodging a complaint immediately if they come across any financial entity that contravenes the RBI Act.

For example,if they are accepting deposits unauthorisedly and/conducting NBFC activities without obtaining due permission from the RBI. More importantly,these entities will not be able to function if members of public start investing wisely, it says.

The CHECKLIST

The NBFC is registered with RBI and is specifically authorised to accept deposits. This can be checked from the list of deposit taking NBFCs published on the RBI website http://www.rbi.org.in.

The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits.

NBFCs have to prominently display the Certificate of Registration issued by the Reserve Bank on its site.

RBI does not guarantee the repayment of deposits accepted by NBFCs.

NBFCs cant use RBIs name in any manner while conducting their business.

Currently,the maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5. The Reserve Bank,however,keeps changing these interest rates depending on the macro-economic environment.

The depositor must insist on a proper receipt for every amount of deposit placed with the company with details of date of the deposit,the name of the depositor,the amount in words and figures,rate of interest payable,maturity date and amount.