Sathya was beaming and proud of his new investment - a deposit with a non-banking financial company offering 12 per cent interest. Done in the nature of a deposit, he was convinced it was risk-free (unlike equity). The fact that the company was registered under the Reserve bank of India was all the more comforting. What could go wrong?

Sathya is just one of many investors, who are still unclear on the implications of making deposits with companies which are not banks. In a note released last week, RBI clarified some finer points you need to watch out for, before making such deposits.

Regulatory purview

Before investing in schemes that promise high rates of return, you must first ensure that the company is registered with one of the financial sector regulators and authorized to accept funds.

RBI regulates all companies that are engaged in financial activities as their principal business.

But does that mean all financial companies come under the purview of RBI? No. Some financial businesses have specific regulators- IRDA for insurance companies, Securities Exchange Board of India for Merchant banking, venture capital, stock broking and mutual funds companies, National Housing Bank for housing finance companies, Ministry of corporate affairs for Nidhi companies and State governments for Chit fund companies. Thus these companies are exempted from the regulations of RBI . So before you invest, check.

Authorisation for collecting deposits

When Sathya deposited his money with a registered NBFC, he assumed that it was automatically authorised by RBI to raise public deposit. However, this is not so. While banks (including co-operative banks) can accept deposits, only certain (not all) registered NBFCs are authorised to take deposits from public.

RBI needs to specifically authorize an NBFC to accept deposits. The certificate of registration should explicitly permit the NBFC to raise deposits from public. Interestingly, RBI as such has not issued any certificate of registration for new NBFCs for accepting public deposits since 1997.

As of now only 257 NBFCs registered with RBI are permitted to collect deposits. To cross check which NBFCs are so authorized, you can look at the updated list put up in the RBI site, along with names of companies that are temporarily prohibited from accepting public deposits. ( >www.rbi.org.in/Sitemap/NBFC List/ List of NBFCs permitted to accept deposits ).

Housing finance companies (specifically authorized to collect deposits) and companies authorized by Ministry of Corporate Affairs can also accept deposits up to a certain limit. Cooperative Credit Societies can accept deposits from their members but not from the general public.

It is illegal for other entities to accept public deposits. Unincorporated bodies like individuals, partnership firms, and other association of individuals are not allowed to accept deposits even if they are carrying on financial business.

Recourse to depositors

Sathya was relieved. Fortunately, his company was a registered NBFC as well as authorised to accept deposits. But does RBI guarantee this deposit? Sadly,no. RBI does not guarantee repayment of deposits by NBFCs even though they are authorised to collect deposits. Of course, a depositor has recourse in case the NBFC fails to return the principal, or interest. He can complain against the NBFC to the nearest regional office of the RBI. He can also approach the Company Law Board or a civil court or consumer dispute redressal forums for recovery of his money. Alternatively he can make a police complaint or write to their economic offences wing.

Some states have passed the Protection of Interest of Depositors Act, which empowers the States to attach the assets of such entities and distribute the proceeds to the depositors.

Onus is on you

Investing with a regulated entity alone is by no means a guarantee that your deposit will be safe. The onus is on you to take an informed decision. Before investing in schemes, be a wee bit circumspect of very high interest rates.

In fact, the maximum permitted interest rate that an NBFC can pay to a depositor cannot exceed 12.5 per cent currently.

The RBI keeps altering this interest rate and publishes the same on its site. So this can be used as a filter. Also ensure your paperwork is in order- proper receipt signed by an officer authorised by the company. The receipt should state the date of the deposit, your name, the amount in words and figures, interest payable, and maturity date.

The onus is on you

Investing with a regulated entity alone is by no means a guarantee that your deposit will be safe. The onus is on you to take an informed decision. Before investing in schemes, be a wee bit cautious of very high interest rates. In fact, the maximum permitted interest rate that an NBFC can pay to a depositor cannot exceed 12.5 per cent currently. RBI keeps altering this interest rate and publishes the same on its site. So this can be used as a filter. Also ensure your paperwork is in order — proper receipt signed by an officer authorised by the company. The receipt should state the date of the deposit, your name, the amount in words and figures, interest payable, and maturity date.

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