NBFCs Failing in India: RBI cancelled License of 2 NBFCs and 6 NBFCs surrendered their License

The RBI has cancelled the License of 2 NBFCs and 6 NBFCs have surrendered their License to RBI. The RBI has confirmed this in a press release dated 27 November 2024. Earlier also a lot of NBFCs have closed their operations in India.

The Reserve Bank of India (RBI) has exercised its powers under Section 45-IA(6) of the Reserve Bank of India Act, 1934, to cancel the Certificate of Registration (CoR) of the following companies:

Sr. No.	Name of the Company	Registered Office Address	CoR No.	CoR Issued On	Cancellation Order Date
1	Ulhas Securities Private Limited	Q-202, Coral, Parshwanath Atlantis Park, Near Balaji Agora Mall, S.P. Ring Road, Gandhinagar, Gujarat – 382424	N.01.00462	December 08, 2003	September 24, 2024
2	Sikar Investment Co Ltd	Shri Ramji Sadan, 30-B, New Civil Lines, Bharatpur City, Bharatpur, Rajasthan – 321001	10.00029	March 06, 1998	October 07, 2024

This cancellation is in accordance with RBI’s regulatory framework and the provisions under the RBI Act, 1934.

The Reserve Bank of India (RBI) has cancelled the Certificates of Registration (CoR) of the following six Non-Banking Financial Companies (NBFCs) after they surrendered their CoR. This action was taken under Section 45-IA(6) of the Reserve Bank of India Act, 1934.

I. Cancellation of CoR due to exit from Non-Banking Financial Institution (NBFI) business

Sr. No.	Name of the Company	Registered Office Address	CoR No.	CoR Issued On	Date of Cancellation
1	Bellona Dealcom Pvt Ltd	Plot No. 79, Ratan Lal Nagar, Kanpur, Uttar Pradesh – 208022	B-12.00471	December 26, 2018	October 08, 2024
2	Sonata Finance Private Limited	II Floor, CP-1, PG Towers, Kursi Road, Vikas Nagar, Lucknow, Uttar Pradesh – 226026	B-12.00445	December 03, 2013	October 08, 2024
3	Stanley Vyapaar Pvt. Ltd.	124, Chittaranjan Avenue, Kolkata, West Bengal – 700073	B.05.05106	May 30, 2003	October 29, 2024

II. Cancellation of CoR due to NBFC ceasing to be a legal entity (amalgamation/ merger/ dissolution/ voluntary strike-off, etc.)

Sr. No.	Name of the Company	Registered Office Address	CoR No.	CoR Issued On	Date of Cancellation
1	Mayur Barter Pvt Ltd	15/7 Jawarlal Nehru Rd, New Market, Kolkata, West Bengal – 700013	B-05.05003	April 01, 2003	October 22, 2024
2	Sakthi Consultants Pvt. Ltd.	17B & C Everest House, 46 C Chowringhee Road, Kolkata, West Bengal – 700071	05.01188	March 21, 1998	October 24, 2024
3	C L Developers Pvt Ltd	17B & C Everest House, 46 C Chowringhee Road, Kolkata, West Bengal – 700071	B-05.03959	January 02, 2001	October 24, 2024

What is NBFC?

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business.

Difference between NBFCs and Banks

• Banking License: NBFCs provide banking services without holding a bank license.
• Demand Deposits: NBFCs cannot accept demand deposits (i.e., deposits withdrawable on demand).
• Payment and Settlement System: NBFCs are not part of the payment and settlement system.
• Cheque Issuance: NBFCs cannot issue cheques drawn on themselves.
• Deposit Insurance: Deposit insurance by the Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available for NBFC depositors, unlike banks.
• Reserve Ratios: NBFCs are not required to maintain Reserve Ratios like CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio).
• Agriculture/Industrial Activities: NBFCs cannot primarily engage in agricultural, industrial activities, or the sale, purchase, or construction of immovable property.
• Foreign Investment: NBFCs allow foreign investment up to 100%.
• Financial Operations: NBFCs operate in financial and money-handling activities.
• Priority Sector Lending: Unlike banks, NBFCs are not required to lend loans to the priority sector.

Why NBFCs Failing in India?

The failure of Non-Banking Financial Companies (NBFCs) in India can be attributed to a combination of structural, operational, and external factors. Here are the key reasons:

1. Liquidity and Asset-Liability Mismatch (ALM)
   • Short-Term Borrowing, Long-Term Lending: Many NBFCs rely on short-term borrowings (like commercial papers) to finance long-term loans, such as infrastructure projects or real estate financing. This mismatch creates a liquidity crunch when they cannot roll over their short-term borrowings.
   • Lack of Cash Reserves: Unlike banks, NBFCs often lack sufficient reserves to manage liquidity stress.
2. High Dependence on Market Borrowings
   • NBFCs rely heavily on borrowing from banks, mutual funds, and the bond market. Any disruption in these funding sources, as seen during the IL&FS crisis, leads to severe liquidity problems.
   • Rising interest rates and tightening of credit availability further exacerbate the funding challenges.
3. Governance and Management Issues
   • Poor Corporate Governance: Weak oversight and governance failures lead to mismanagement of funds, unethical practices, and fraud.
   • Lack of Transparency: Non-disclosure or misrepresentation of financial conditions misleads stakeholders, further eroding trust.
4. Asset Quality Deterioration
   • High Non-Performing Assets (NPAs): NBFCs lend to sectors like real estate, small businesses, and infrastructure, which are inherently risky. Economic slowdowns or sector-specific crises increase loan defaults.
   • Over-Reliance on Risky Borrowers: Many NBFCs focus on subprime borrowers or customers with limited credit histories, leading to higher delinquency rates.
5. Regulatory Arbitrage
   • NBFCs are regulated less stringently than banks. Some exploit these gaps to engage in aggressive lending or risky practices, which can lead to financial instability.
   • With increased regulatory oversight post-2018, NBFCs have struggled to adapt to stricter compliance requirements.
6. Economic Slowdowns and Sectoral Challenges
   • Real Estate Sector: Many NBFCs are heavily exposed to real estate, which has faced prolonged slowdowns, leading to loan defaults.
   • COVID-19 Pandemic: The economic downturn during the pandemic significantly impacted NBFCs’ collections, cash flow, and repayment abilities.
7. Over-Leveraging
   • NBFCs often operate with high leverage (borrowed funds compared to equity), which magnifies their losses during downturns.
   • Over-borrowing without adequate risk management practices makes them vulnerable to systemic shocks.
8. Contagion Effect
   • The collapse of large NBFCs, such as IL&FS and Dewan Housing Finance Corporation Limited (DHFL), created a ripple effect, eroding trust in the sector and making fundraising difficult for other NBFCs.
9. Limited Access to Credit
   • Small and medium-sized NBFCs often struggle to secure funding at competitive rates, making it difficult to scale or sustain operations during periods of low liquidity.
10. Weak Risk Management
    • Inadequate systems to assess borrower creditworthiness or monitor portfolio risks lead to poor lending decisions and increased defaults.