The Reserve Bank of India (RBI) on Wednesday (May 8) sent a letter to select non-banking financial companies (NBFCs). RBI asked them to strictly adhere to income tax norms on cash disbursements. This comes weeks after the regulator imposed restrictions on IIFL Finance’s gold loan business for violating this norm, among other things, CNBC-TV18 has learnt. CNBC-TV18 has seen a copy of the letter sent by the RBI to the NBFCs, which refers to Section 269 SS of the Income Tax Act, 1961, which states that no person can receive more than Rs 20,000 as a loan amount in cash. The regulator stated in the letter, “No NBFC should disburse the loan amount exceeding Rs 20,000 in cash, and that too in a clear form.”
The RBI asked NBFCs to “strictly comply” with these provisions of the Income Tax Act. The letter was sent from the RBI’s Division of Supervision in Thiruvananthapuram and is addressed to NBFCs in the state of Kerala, where gold loan NBFCs are prevalent, said a person directly in the know. The letter was sent to Manappuram Finance and Muthoot Finance, two of the largest gold loan providers, among others, said a source who did not wish to be quoted.
The scaled-up framework instructions for NBFCs clearly state that non-banks must comply with the requirements of sections 296SS and 269T of the Income Tax Act, 1981. Sections 269T and 269SS of the Income Tax Act are designed to ensure tax compliance for the acceptance and repayment of loans and deposits. While section 269SS deals with the acceptance of loans, section 269T deals with the repayment of loans.
“The RBI has received numerous queries from gold loan providers on whether they really have to adhere to the Rs 20,000 cap on cash disbursements after the IIFL Finance action,” said a person familiar with the matter, adding that the regulator has sent the letters to reinforce the framework directions on regulation at scale, which say that NBFCs must comply with the IT Act rules on cash disbursements and repayments.
While the regulator has not commented on whether immediate action will be taken against entities that do not comply with the directions, the letter is seen as a warning to lenders who may not follow these rules.
On March 4, the RBI imposed business restrictions on one of the largest gold loan NBFCs, IIFL Finance, for making significant disbursements and collecting loan amounts in cash way beyond the statutory limit, among other things.
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