Fintotal News Analysis | 5 Things to Check before Depositing with an NBFC
5 Things to Check before Depositing with an NBFC
Ruby Jacob, 01 Jun 2013

Keeping basic knowledge of financial regulations can save one from falling in many a fraudulent trap. Against the backdrop of scam deposit schemes by non-banking companies, like the recent Saradha scheme fallout, RBI has issued an advisory telling people to check the company's credibility before placing deposits with them.

Typically unregulated schemes that promise big returns, manage to get thousands of investors, many times who are low income earners and also not-so financially knowledgeable. Often these work well until (or unless) unfortunate days come, the company's promoters languish and investors realize to their horror that they have nowhere to take the matter up to.

As a depositor you have the responsibility to ensure you have done a preliminary check on whether the deposit taking company is authorized by any authority to do so, and if the interest, tenure and such crucial terms are in line with the regulation it is governed by.

The number 1 matter to check before entering a financial arrangement with any group is whether the company is registered with the regulator who is responsible for that area of business in India. Regulators functions as an umpire, and the company must follow rules laid down by its regulator. Now RBI is not the regulator for all companies taking deposits. Banks and NBFCs must register with RBI and are regulated by it.

Here are 5 things to bear in mind while depositing with an NBFC:

1. Verify if the NBFC registered with RBI and permitted to accept deposits

Not all NBFCs registered with RBI are allowed to take deposits from the public. You can view list of deposit taking NBFCs on this site. Presently 257 NBFCs are authorized to take deposits. RBI updates the list from time to time.

Besides, NBFCs have to prominently display the Certificate of Registration (CoR) issued by RBI on its site. This certificate reflects that the NBFC has been specifically authorized by RBI to accept deposits.

In general Chit Funds, Co-operative Credit Societies, Salary Earner's Societies etc cannot raise deposits from the public. They can accept deposits from their members only. Chit funds registered under Chit Funds Acts can carry on chit fund business only.

2. Beware of out-of-the-world interest rates

If the company has offered interest rate more than 12.5% then you should suspect foul play. 12.5% is the current maximum interest rate that RBI has allowed for deposits with NBFCs. This interest rate is altered by RBI depending on market environment. Taking deposit does not entitle you to profits in the company so don't expect rates out of sync with market rate on debt.

Also remember that in order for the company to pay such high returns it must first earn more than what is promised. For this the company or group will have to take higher risks on the investments it makes. Higher returns always means higher risks.

Moreover NBFCs cannot accept deposit for periods less than 12 months or more than 60 months.

3. Receipt for every amount of deposit

Insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, your name, the amount in words and figures, rate of interest payable, maturity date and amount.

4. Deposits with NBFCs are not guaranteed

The RBI does not guarantee deposits with NBFCs unlike bank deposits that are guaranteed up to Rs 1 lakh.

5. Lodge complaint if NBFC fails to return principal or pay interest

Regulators and authorities mostly come to know of unscrupulous activities and wrongful practices when affected persons approach with their grievance. If your deposit has not been returned or interest has not been paid you can complain against it to the nearest Regional Office of RBI.

Other forums that you can approach for recovering money include Company Law Board or a civil court or Consumer Disputes Redressal Forums.

You can register complaint with the State Police authorities/Economic Offences Wing of the State Police as well.  Some States have passed the Protection of Interest of Depositors (in Financial Establishments) Act, which empowers the State to attach the assets of such entities and distribute the proceeds to the depositors.

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