It is common practice to invest in fixed deposits of non-banking finance companies (NBFCs), which more often than not offer interest rates higher than banks. But in the process of fishing for better rates, investors are sometimes caught unawares about the antecedents of NBFCs and are left in the lurch if things go wrong. Here’s a low-down on what you must understand before choosing an NBFC deposit, and what recourse you have in case of grievances.

Checklist

Usually, bank deposits are considered the safest. Even if something goes wrong with the bank, deposits of up to ₹1 lakh (principal plus interest) are covered by deposit insurance. Deposits with other entities, including NBFCs, don’t have a insurance backing. Moreover, while all banks can raise deposits, only NBFCs registered with the RBI and authorised to accept public deposits can do so.

Even then, the deposits remain unsecured as the RBI doesn’t guarantee repayment. NBFCs have to mandatorily have an investment grade credit rating to accept deposits.

Besides, there are also a set of rules laid out by the RBI as to the interest rates and tenure of the deposits. The maximum rate of interest an NBFC can offer is 12.5 per cent and it is to be paid or compounded at not shorter than monthly rests. NBFCs are allowed to accept/renew public deposits for a minimum of 12 months and a maximum of 60 months. They cannot offer gifts/incentives or any other additional benefit to the depositors.

Ombudsman

Until recently, if an NBFC defaulted in the repayment of a deposit, the depositor could only approach the Company Law Tribunal or a consumer forum or file a civil suit to recover the deposits. To make things more customer-friendly, the RBI, in February this year, appointed an ombudsman for grievance redresssal. The scheme has initially been introduced in New Delhi, Mumbai, Chennai and Kolkata, where the ombudsman will operate from the regional offices of the RBI.

Currently, NBFCs registered with the RBI and permitted to accept deposits fall under the ambit of the ombudsman scheme.

Complaints such as non-payment or inordinate delay in payment of interest or repayment of deposits can be escalated to the ombudsman. Complaints related to loans obtained from NBFCs can also be raised.

Any person who has a grievance can himself, or through an authorised representative (other than an advocate), make a complaint to the ombudsman.

The complaint should contain details such as the name and address of the complainant as well as the NBFC, the facts giving rise to the complaint, the nature and extent of the loss caused to the complainant and the relief sought.

The ombudsman can resolve the complaint through conciliation or by passing an award.

However, the award will be valid only when the investor/complainant furnishes a letter of acceptance of the award in full and final settlement of her claim, to the NBFC as well as the ombudsman concerned, within a period of 30 days from the date of receipt of copy of the award.

Besides, it is worth noting that the ombudsman does not have the power to pass an award directing payment of an amount which is more than the actual loss suffered by the complainant or ₹10 lakh, whichever is lower. Compensation awarded for harassment, mental anguish, expenses and loss of time cannot exceed ₹1 lakh.

Finally, remember that deposits with corporates and housing finance companies have separate regulators at the Ministry of Corporate Affairs and National Housing Bank respectively. Only NBFC deposits come under the purview of the RBI.

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