Reasons for Cancellation of NBFC License in India

Reasons for Cancellation of NBFC License in India. Non-Banking Financial Companies (NBFCs) play an important role in India’s financial sector by offering credit and loan facilities to individuals and businesses that may not have easy access to banks. While NBFCs are not full-fledged banks, they are governed by the Reserve Bank of India (RBI) and must follow a strict regulatory framework. With the rise in financial operations through NBFCs, the RBI has become more stringent in monitoring and regulating these institutions. One of the major regulatory actions the RBI can take is the cancellation of an NBFC license. This article explains the Reasons for Cancellation of NBFC License in detail and the related procedure.
Role of RBI in Regulating NBFCs
The Reserve Bank of India (RBI) governs the operations of NBFCs under the Reserve Bank of India Act, 1934. The RBI ensures that NBFCs operate in a sound financial environment and comply with the rules and regulations applicable to the sector. The RBI has the authority to issue, regulate, supervise, and cancel NBFC licenses. It monitors whether NBFCs operate in the interest of depositors and the financial system.
Eligibility Criteria to Register as an NBFC
To register as an NBFC, a company must meet specific conditions:

The company should be incorporated under the Companies Act, 1956 or 2013.

A minimum Net Owned Fund (NOF) of Rs. 10 crore is required.

At least one director must have experience in the financial sector.

The CIBIL score of directors should generally be above 700.

The company must prepare a detailed business plan for at least five years, covering financial and operational projections.

Reasons for Cancellation of NBFC License
The Reserve Bank of India has laid down various grounds for the cancellation of an NBFC license. Below are the key Reasons for Cancellation of NBFC License in India.
Non-Compliance with RBI Regulations
If an NBFC fails to adhere to the regulatory guidelines prescribed by the RBI, it risks license cancellation. These guidelines may relate to corporate governance, risk management, loan disbursement practices, and fair dealing with customers. Persistent non-compliance may lead to regulatory intervention and revocation of the license.
Non-Maintenance of Net Owned Fund
Every NBFC must maintain a minimum Net Owned Fund (NOF) as per RBI norms. This limit was revised to Rs. 10 crore effective from October 1, 2022. If an NBFC is unable to maintain this fund consistently, it may not be permitted to operate further and the RBI can cancel its registration.
Not Operating in Public Interest
NBFCs are expected to operate with integrity and fairness. They must publish key policies such as the Fair Practices Code, Grievance Redressal Policy, and Recovery Policy. These documents must be approved by the board and publicly available. Failure to act in public interest or to make such policies transparent can lead to cancellation.
Failure to Repay Deposits
If an NBFC defaults on repaying deposits to customers as agreed, it may invite legal action. In such cases, depositors can approach the Company Law Board or Consumer Forum. If issues persist even after intervention and redressal efforts, the RBI can cancel the license to protect public funds.
Engaging in Fraudulent or Unethical Activities
Any NBFC involved in activities like misrepresentation of financial data, unauthorised lending, or running schemes that deceive investors (such as Ponzi schemes) faces the risk of license cancellation. The RBI does not tolerate unethical or illegal financial activities.
Disregard of RBI's Prohibitory Orders
If the RBI issues a prohibitory order related to the NBFC, its directors, or promoters, and the NBFC fails to comply with the directive, it can be considered a serious offence. Continued violation of such orders can lead to license cancellation.
Non-Carrying of NBFC Activities
An NBFC must engage primarily in financial activities. This is assessed using the 50-50 test, where at least 50% of the company’s total assets and income should be from financial activities. If this condition is not met, the company may lose its NBFC status.
Non-Filing of Mandatory Returns
NBFCs are required to file various statutory returns. For example, NBS-1, NBS-2, NBS-3, NBS-4, and NBS-6 for deposit-taking NBFCs and NBS-7 and ALM returns for NBFCs-ND-SI. Failure to file these returns on time is considered non-compliance and may lead to cancellation.
Directors Not Fit and Proper
RBI mandates that all directors must be "fit and proper." If a director has a criminal background, ongoing legal proceedings, has been convicted under any economic laws, or fails to comply with income tax or other revenue laws, the company may lose its license. Also, if the number of directorships exceeds the allowed limit under the Companies Act, the director is deemed unfit.
Violation of Corporate Governance Guidelines
RBI expects NBFCs to follow strong corporate governance practices. These include having an independent board, audit committees, risk management systems, and disclosures. Failure to meet these standards can trigger cancellation of the NBFC license.
Failure to Maintain Proper Books of Accounts
NBFCs must maintain proper accounting records and submit them during inspections. If the financial books are not up-to-date, missing, or falsified, the RBI may cancel the license. Maintaining financial transparency is a critical compliance measure.
Inadequate Capital Adequacy Ratio (CAR)
NBFCs are required to maintain a minimum capital adequacy ratio (generally 15%) to protect themselves against credit risk. If the NBFC fails to meet this threshold, the company becomes financially unstable and the RBI may cancel its license.
Involvement in Money Laundering
If an NBFC is caught in money laundering or related unlawful financial practices, it may be penalised under the Prevention of Money Laundering Act (PMLA). A proven involvement can lead to the immediate revocation of the license.
Deteriorating Financial Health
If the NBFC suffers consistent losses, has high levels of NPAs, or cannot meet its financial obligations, it reflects poor management. In such cases, the RBI may intervene and cancel the license to safeguard the interest of stakeholders.
Failure to Implement KYC and AML Norms
NBFCs must implement KYC (Know Your Customer) and AML (Anti-Money Laundering) norms diligently. Failure to follow these norms can expose the financial system to risk and lead to cancellation of the NBFC license.
Procedure Followed by RBI to Cancel NBFC License
The cancellation of an NBFC license is not arbitrary. The RBI follows a structured process:

The RBI identifies violations or discrepancies during inspection or through complaints.

A show-cause notice is issued to the NBFC asking for a response.

The NBFC is given an opportunity to present its case and provide clarifications or supporting documents.

If the explanation is unsatisfactory or if immediate public risk is identified, the RBI may cancel the license.

The decision is formally communicated, and the NBFC must stop operations immediately.

Impact of NBFC License Cancellation Once the license is cancelled, the NBFC must:

Cease all lending, borrowing, or deposit-taking activities.

Inform all clients, investors, and regulators.

Settle liabilities as per RBI directives.

Face legal consequences in case of further violations.

Conclusion
The RBI has a duty to maintain financial stability and protect the interest of the public. NBFCs are expected to operate transparently, maintain financial discipline, and follow ethical business practices. The Reasons for Cancellation of NBFC License, as described above, emphasize the importance of strict regulatory compliance. NBFCs should ensure that their financials are in order, their directors meet the fit and proper criteria, and their operations are aligned with public interest and RBI norms. This will help them avoid regulatory penalties and secure their long-term sustainability in India’s financial ecosystem.
If you have any queries regarding or need any support in NBFC Registration or want to cancel your NBFC License, feel free to contact Compliance Calendar LLP experts through mail at info@ccoffice.in or Call/Whatsapp at +91 9988424211.
FAQs
Q1. What are the common reasons for cancellation of NBFC license by the RBI?
Ans. The Reserve Bank of India (RBI) may cancel an NBFC license due to several reasons, including non-compliance with RBI regulations, failure to maintain the minimum Net Owned Fund (NOF), unethical business practices, inability to repay deposits, weak financial health, failure to file regulatory returns, non-compliance with KYC/AML norms, and involvement in money laundering or fraudulent activities. Any deviation from the core principles of transparency, accountability, and public interest can result in license cancellation.
Q2. What is the minimum Net Owned Fund (NOF) required for an NBFC to operate in India?
Ans. As per RBI guidelines, with effect from October 1, 2022, the minimum Net Owned Fund required to register and operate an NBFC is Rs. 10 crore. Failing to maintain this amount can lead to suspension or cancellation of the NBFC license.
Q3. Can the RBI cancel an NBFC license without giving any notice?
Ans. No, the RBI generally follows a fair procedure before canceling an NBFC license. It issues a show-cause notice to the NBFC, providing it an opportunity to explain the non-compliance or violations. However, if the RBI believes that continuing the NBFC’s operation could harm public interest or depositors, it may take immediate action without further delay.
Q4. What is the impact of NBFC license cancellation on the company?
Ans. Once an NBFC license is canceled, the company must immediately cease all its financial operations, including lending, borrowing, or accepting deposits. It must inform all its stakeholders, including clients and regulatory authorities, and settle all outstanding dues. Any continued operation without a valid license is a punishable offence and may lead to legal consequences.
Q5. What does the 'fit and proper' criteria mean for NBFC directors?
Ans. The RBI mandates that directors of an NBFC must meet the 'fit and proper' criteria. This includes having relevant financial experience, no criminal or economic offence records, compliance with tax and regulatory obligations, and no disqualification under Section 164 of the Companies Act, 2013. Directors involved in fraud, economic violations, or too many directorships can lead to cancellation of the NBFC license.
Q6. Is failure to submit statutory returns also a ground for cancellation of NBFC license?
Ans. Yes, non-submission or delayed filing of mandatory returns such as NBS-1, NBS-2, NBS-3, NBS-4, NBS-6, NBS-7, ALM statements, and audited financials is a serious compliance issue. Repeated failure to file these returns can prompt the RBI to view the NBFC as non-compliant and may result in license cancellation.
Q7. What is the 50-50 test and how does it affect NBFC classification?
Ans. The 50-50 test is used by the RBI to determine whether a company qualifies as an NBFC. A company passes the test if more than 50% of its total assets and more than 50% of its gross income are derived from financial activities. Failing this test means the company is not primarily engaged in financial services and can lose its NBFC status and license.
Q8. Can an NBFC re-apply for a license after it has been cancelled?
Ans. Yes, an NBFC can re-apply for a license after rectifying the reasons that led to its cancellation. However, it must meet all the eligibility criteria afresh, including maintaining the required NOF, complying with RBI regulations, and submitting all necessary documentation. The RBI will re-evaluate the application based on current guidelines.

Non-Banking Financial Companies (NBFCs) play an important role in India’s financial sector by offering credit and loan facilities to individuals and businesses that may not have easy access to banks. While NBFCs are not full-fledged banks, they are governed by the Reserve Bank of India (RBI) and must follow a strict regulatory framework. With the rise in financial operations through NBFCs, the RBI has become more stringent in monitoring and regulating these institutions. One of the major regulatory actions the RBI can take is the cancellation of an NBFC license. This article explains the Reasons for Cancellation of NBFC License in detail and the related procedure.

Role of RBI in Regulating NBFCs

The Reserve Bank of India (RBI) governs the operations of NBFCs under the Reserve Bank of India Act, 1934. The RBI ensures that NBFCs operate in a sound financial environment and comply with the rules and regulations applicable to the sector. The RBI has the authority to issue, regulate, supervise, and cancel NBFC licenses. It monitors whether NBFCs operate in the interest of depositors and the financial system.

Eligibility Criteria to Register as an NBFC

To register as an NBFC, a company must meet specific conditions:

The company should be incorporated under the Companies Act, 1956 or 2013.
A minimum Net Owned Fund (NOF) of Rs. 10 crore is required.
At least one director must have experience in the financial sector.
The CIBIL score of directors should generally be above 700.
The company must prepare a detailed business plan for at least five years, covering financial and operational projections.

Reasons for Cancellation of NBFC License

The Reserve Bank of India has laid down various grounds for the cancellation of an NBFC license. Below are the key Reasons for Cancellation of NBFC License in India.

Non-Compliance with RBI Regulations

If an NBFC fails to adhere to the regulatory guidelines prescribed by the RBI, it risks license cancellation. These guidelines may relate to corporate governance, risk management, loan disbursement practices, and fair dealing with customers. Persistent non-compliance may lead to regulatory intervention and revocation of the license.

Non-Maintenance of Net Owned Fund

Every NBFC must maintain a minimum Net Owned Fund (NOF) as per RBI norms. This limit was revised to Rs. 10 crore effective from October 1, 2022. If an NBFC is unable to maintain this fund consistently, it may not be permitted to operate further and the RBI can cancel its registration.

Not Operating in Public Interest

NBFCs are expected to operate with integrity and fairness. They must publish key policies such as the Fair Practices Code, Grievance Redressal Policy, and Recovery Policy. These documents must be approved by the board and publicly available. Failure to act in public interest or to make such policies transparent can lead to cancellation.

Failure to Repay Deposits

If an NBFC defaults on repaying deposits to customers as agreed, it may invite legal action. In such cases, depositors can approach the Company Law Board or Consumer Forum. If issues persist even after intervention and redressal efforts, the RBI can cancel the license to protect public funds.

Engaging in Fraudulent or Unethical Activities

Any NBFC involved in activities like misrepresentation of financial data, unauthorised lending, or running schemes that deceive investors (such as Ponzi schemes) faces the risk of license cancellation. The RBI does not tolerate unethical or illegal financial activities.

Disregard of RBI's Prohibitory Orders

If the RBI issues a prohibitory order related to the NBFC, its directors, or promoters, and the NBFC fails to comply with the directive, it can be considered a serious offence. Continued violation of such orders can lead to license cancellation.

Non-Carrying of NBFC Activities

An NBFC must engage primarily in financial activities. This is assessed using the 50-50 test, where at least 50% of the company’s total assets and income should be from financial activities. If this condition is not met, the company may lose its NBFC status.

Non-Filing of Mandatory Returns

NBFCs are required to file various statutory returns. For example, NBS-1, NBS-2, NBS-3, NBS-4, and NBS-6 for deposit-taking NBFCs and NBS-7 and ALM returns for NBFCs-ND-SI. Failure to file these returns on time is considered non-compliance and may lead to cancellation.

Directors Not Fit and Proper

RBI mandates that all directors must be "fit and proper." If a director has a criminal background, ongoing legal proceedings, has been convicted under any economic laws, or fails to comply with income tax or other revenue laws, the company may lose its license. Also, if the number of directorships exceeds the allowed limit under the Companies Act, the director is deemed unfit.

Violation of Corporate Governance Guidelines

RBI expects NBFCs to follow strong corporate governance practices. These include having an independent board, audit committees, risk management systems, and disclosures. Failure to meet these standards can trigger cancellation of the NBFC license.

Failure to Maintain Proper Books of Accounts

NBFCs must maintain proper accounting records and submit them during inspections. If the financial books are not up-to-date, missing, or falsified, the RBI may cancel the license. Maintaining financial transparency is a critical compliance measure.

Inadequate Capital Adequacy Ratio (CAR)

NBFCs are required to maintain a minimum capital adequacy ratio (generally 15%) to protect themselves against credit risk. If the NBFC fails to meet this threshold, the company becomes financially unstable and the RBI may cancel its license.

Involvement in Money Laundering

If an NBFC is caught in money laundering or related unlawful financial practices, it may be penalised under the Prevention of Money Laundering Act (PMLA). A proven involvement can lead to the immediate revocation of the license.

Deteriorating Financial Health

If the NBFC suffers consistent losses, has high levels of NPAs, or cannot meet its financial obligations, it reflects poor management. In such cases, the RBI may intervene and cancel the license to safeguard the interest of stakeholders.

Failure to Implement KYC and AML Norms

NBFCs must implement KYC (Know Your Customer) and AML (Anti-Money Laundering) norms diligently. Failure to follow these norms can expose the financial system to risk and lead to cancellation of the NBFC license.

Procedure Followed by RBI to Cancel NBFC License

The cancellation of an NBFC license is not arbitrary. The RBI follows a structured process:

The RBI identifies violations or discrepancies during inspection or through complaints.
A show-cause notice is issued to the NBFC asking for a response.
The NBFC is given an opportunity to present its case and provide clarifications or supporting documents.
If the explanation is unsatisfactory or if immediate public risk is identified, the RBI may cancel the license.
The decision is formally communicated, and the NBFC must stop operations immediately.

Impact of NBFC License Cancellation Once the license is cancelled, the NBFC must:

Cease all lending, borrowing, or deposit-taking activities.
Inform all clients, investors, and regulators.
Settle liabilities as per RBI directives.
Face legal consequences in case of further violations.

Conclusion

The RBI has a duty to maintain financial stability and protect the interest of the public. NBFCs are expected to operate transparently, maintain financial discipline, and follow ethical business practices. The Reasons for Cancellation of NBFC License, as described above, emphasize the importance of strict regulatory compliance. NBFCs should ensure that their financials are in order, their directors meet the fit and proper criteria, and their operations are aligned with public interest and RBI norms. This will help them avoid regulatory penalties and secure their long-term sustainability in India’s financial ecosystem.

If you have any queries regarding or need any support in NBFC Registration or want to cancel your NBFC License, feel free to contact Compliance Calendar LLP experts through mail at info@ccoffice.in or Call/Whatsapp at +91 9988424211.

FAQs

Q1. What are the common reasons for cancellation of NBFC license by the RBI?

Ans. The Reserve Bank of India (RBI) may cancel an NBFC license due to several reasons, including non-compliance with RBI regulations, failure to maintain the minimum Net Owned Fund (NOF), unethical business practices, inability to repay deposits, weak financial health, failure to file regulatory returns, non-compliance with KYC/AML norms, and involvement in money laundering or fraudulent activities. Any deviation from the core principles of transparency, accountability, and public interest can result in license cancellation.

Q2. What is the minimum Net Owned Fund (NOF) required for an NBFC to operate in India?

Ans. As per RBI guidelines, with effect from October 1, 2022, the minimum Net Owned Fund required to register and operate an NBFC is Rs. 10 crore. Failing to maintain this amount can lead to suspension or cancellation of the NBFC license.

Q3. Can the RBI cancel an NBFC license without giving any notice?

Ans. No, the RBI generally follows a fair procedure before canceling an NBFC license. It issues a show-cause notice to the NBFC, providing it an opportunity to explain the non-compliance or violations. However, if the RBI believes that continuing the NBFC’s operation could harm public interest or depositors, it may take immediate action without further delay.

Q4. What is the impact of NBFC license cancellation on the company?

Ans. Once an NBFC license is canceled, the company must immediately cease all its financial operations, including lending, borrowing, or accepting deposits. It must inform all its stakeholders, including clients and regulatory authorities, and settle all outstanding dues. Any continued operation without a valid license is a punishable offence and may lead to legal consequences.

Q5. What does the 'fit and proper' criteria mean for NBFC directors?

Ans. The RBI mandates that directors of an NBFC must meet the 'fit and proper' criteria. This includes having relevant financial experience, no criminal or economic offence records, compliance with tax and regulatory obligations, and no disqualification under Section 164 of the Companies Act, 2013. Directors involved in fraud, economic violations, or too many directorships can lead to cancellation of the NBFC license.

Q6. Is failure to submit statutory returns also a ground for cancellation of NBFC license?

Ans. Yes, non-submission or delayed filing of mandatory returns such as NBS-1, NBS-2, NBS-3, NBS-4, NBS-6, NBS-7, ALM statements, and audited financials is a serious compliance issue. Repeated failure to file these returns can prompt the RBI to view the NBFC as non-compliant and may result in license cancellation.

Q7. What is the 50-50 test and how does it affect NBFC classification?

Ans. The 50-50 test is used by the RBI to determine whether a company qualifies as an NBFC. A company passes the test if more than 50% of its total assets and more than 50% of its gross income are derived from financial activities. Failing this test means the company is not primarily engaged in financial services and can lose its NBFC status and license.

Q8. Can an NBFC re-apply for a license after it has been cancelled?

Ans. Yes, an NBFC can re-apply for a license after rectifying the reasons that led to its cancellation. However, it must meet all the eligibility criteria afresh, including maintaining the required NOF, complying with RBI regulations, and submitting all necessary documentation. The RBI will re-evaluate the application based on current guidelines.