As your trusted tax consultant in Chennai residents and businesses, I understand that terms like ‘NBFC’ can often feel complex or overwhelming. I aim to simplify these regulations for you in clear, practical language, highlight the rules that matter most today, and provide Chennai-specific insights so you can make confident, well-informed financial decisions.

What exactly is an NBFC? (Simple definition)

An NBFC—Non-Banking Financial Company—is a company that carries on the business of financial services (like loans, hire-purchase, and investment activity) but is not a bank. NBFCs lend money, take certain kinds of public deposits (in some categories), and provide services such as asset finance, microfinance, and infrastructure financing. They operate under rules set mainly by the Reserve Bank of India (RBI).

  • Think of NBFCs as lending houses that fill gaps where banks don’t always reach—small business loans, vehicle finance, buy-now-pay-later, microloans, etc.
  • NBFCs cannot perform all bank activities (for example, they can’t accept demand deposits like savings accounts).
    (For official definitions and the RBI’s master directions, see RBI resources.)

Why should a Chennai taxpayer care about NBFC rules?

Because NBFCs touch everyday money matters—you might borrow from one, invest via one, or receive communication from an NBFC about loans or collections. Knowing the rules helps you:

  • Spot legitimate businesses vs. risky lenders.
  • Understand your rights on interest, repossession, and grievance redressal.
  • Ensure tax compliance when you’re a borrower, an investor, or a small business dealing with an NBFC.

Local context: Chennai has many microfinance branches, vehicle financiers, and fintech lenders. Being informed prevents costly mistakes—and if you run a small lending business, it tells you when RBI permissions are required.

Types of NBFCs—a quick map

NBFCs are classified by what they do. Important types you will commonly hear about:

  • NBFC-ND (Non-Deposit-taking) and NBFC-D (Deposit-taking)—whether they accept public deposits.
  • NBFC-MFI—microfinance institutions focusing on small loans to low-income borrowers.
  • NBFC-IFC / NBFC-IDF—infrastructure finance, long-term project lending.
  • Core Investment Company (CIC)—holding/investment in group companies.
    Each type comes with different compliance and capital rules. If a company accepts deposits from the public in Tamil Nadu or Chennai, treat it with extra caution—deposit-taking NBFCs face stricter oversight.

Do you need to register as an NBFC? (Who needs RBI permission)

If a company’s “principal business” is financial activity (measured by asset/income tests defined by the RBI) and it meets minimum thresholds, it must obtain a Certificate of Registration (CoR) from the RBI before starting business as an NBFC.

  • Minimum Net Owned Fund (NOF) criteria and other entry conditions apply—these are set by RBI and periodically updated.
  • The application is submitted on the RBI’s COSMOS portal and requires detailed documents (business plan, KYC policies, governance framework).
    If you’re thinking of starting an NBFC or taking over one in Chennai, check the RBI’s CoR procedure and consult a CA or company secretary—this is not a casual step

Key regulatory obligations (what NBFCs must do)

NBFCs must follow a set of important rules—here are the practical ones taxpayers and customers should know:

  1. Prudential norms (capital, provisioning, leverage)
    • NBFCs must maintain capital adequacy and make provisions for bad loans (similar idea to banks). This affects how safe their lending is.
  2. KYC / AML compliance (know your customer & anti-money laundering)
    • NBFCs must follow KYC checks and report suspicious transactions under PMLA rules. This protects you — insist on seeing proper documentation.
  3. Fair Practices Code & grievance redressal
    • NBFCs should publish loan terms clearly, disclose interest/fees, and have grievance mechanisms.
  4. Corporate Governance & disclosure
    • Larger/systemic NBFCs have stricter governance (independent directors, audit committees).
  5. Periodic reporting to RBI
    • Regular returns and disclosures keep the regulator informed and protect depositors/investors.

Tax matters: what taxpayers in Chennai should know

From a tax consultant’s lens — three things matter: income tax, GST, and TDS.

  • Income Tax: Interest income received from NBFC deposits/loans is taxable like other interest. If you are an NBFC, your business profits are taxed under corporate tax rules (with usual deductions and transfer pricing where applicable).
  • TDS: Banks and NBFCs may deduct TDS on certain payments; borrowers should check Form 16A/26AS for TDS credits.
  • GST: Financial services often have special GST treatments — many lending activities are exempt or have specific rules for reverse charge. If an NBFC provides advisory/processing services (fee-based), GST could apply. Businesses operating across Tamil Nadu must ensure correct state registrations/filings. For GST treatment and registration nuances, consult a GST practitioner.

Practical checklist — for Chennai borrowers and small businesses

Before you deal with an NBFC, use this checklist:

  • Verify RBI registration: Ask for the Certificate of Registration number and confirm on RBI sources.
  • Read the loan agreement fully: Look for prepayment charges, repossession clauses, and late fees.
  • Check KYC: Legit NBFCs will insist on proper ID/address and record-keeping.
  • Compare rates: NBFCs sometimes charge higher rates than banks; compare effective interest rates and processing fees.
  • Grievance details: Get the grievance officer’s contact and escalate to the RBI Ombudsman if unresolved.
  • Local presence: Prefer NBFCs with a physical branch or credible local representation in Chennai—it helps with dispute resolution.

If anything looks rushed or pressure-selling techniques are used (urgent sign-now offers), step back and consult your CA or the RBI helpline.

When an NBFC might be risky

Watch out for these warning signs:

  • No clear CoR/RBI registration number or refusal to share it.
  • High upfront “processing” fees paid in cash.
  • Lack of transparency in interest calculations or repossession procedures.
  • Agents collecting deposits without visible office/records.
  • Aggressive recovery tactics and the refusal to provide written receipts are concerning practices.

If you see these, report to local authorities and inform the RBI or consumer forum. In Tamil Nadu, local consumer helplines and legal aid clinics can help with initial complaints.

Recent changes to watch (short, important updates)

Regulation evolves. A few recent themes to note:

  • RBI periodically updates master directions and prudential norms—always check RBI notifications for the most recent rules.
  • Industry self-regulation: In 2025 the RBI recognized certain industry bodies as self-regulatory organizations (SROs) to enhance compliance in the NBFC sector—this is intended to improve standards and early-warning practices.

If you’re a Chennai resident:

  1. Be skeptical of offers that sound too good—higher returns usually mean higher risk.
  2. Keep paperwork: loan agreement, receipts, and KYC copies; they’re your legal proof.
  3. If you’re starting an NBFC or investing in one, get professional help (a CA and a company secretary experienced in RBI filings).
  4. Use the RBI website and credible tax/GST practitioners for compliance—regulations change, and small differences matter.

If you’d like, I can prepare a short local checklist tailored to your situation (borrower, investor, or business owner) and review a loan agreement or an NBFC’s registration documents for you—just share the documents (or redacted copies), and I’ll point out issues you should watch.