Top 10 Reasons Why NBFC Licenses Get Cancelled — And How to Avoid Them

Non-Banking Financial Companies (NBFCs) play a vital role in India's credit ecosystem. However, many NBFCs are at risk of losing their licenses due to regulatory non-compliance. The Reserve Bank of India (RBI) has been actively cancelling NBFC licenses for violations ranging from financial mismanagement to lack of operational transparency.

Key Takeaways:

• RBI has strict norms for NBFCs, including capital adequacy, governance, and mandatory filings.

• Non-compliance can lead to license revocation — resulting in business shutdown.

• Understanding common pitfalls helps NBFCs avoid regulatory trouble and sustain operations.

Let’s break down the top 10 reasons why NBFC licenses get cancelled and what you can do to safeguard your company. 1. Non-Compliance with RBI Regulations

NBFCs must strictly follow RBI’s rules regarding financial stability, governance, and risk practices. Even minor deviations can lead to scrutiny and potential action from the regulator.

2. Insufficient Net Owned Funds (NOF)

Every NBFC must maintain a minimum NOF of ₹10 crore. Falling short of this limit can instantly jeopardize your license.

3. Unethical or Fraudulent Activities

Misrepresentation of financial data, unauthorized lending, or any kind of fraud can result in immediate license cancellation and legal consequences.

4. Inactivity in Financial Business

NBFCs that cease financial operations for over a year without just cause are considered dormant — a direct trigger for license cancellation.

5. Non-Filing of Mandatory Returns

Annual returns and financial statements are mandatory. Failure to file them consistently puts an NBFC on RBI’s radar.

6. Violation of Corporate Governance Norms

Strong internal governance is non-negotiable. If an NBFC flouts RBI's governance frameworks, its license is at stake.

7. Improper Outsourcing Practices

Digital lending has increased reliance on third-party services. However, violating RBI’s outsourcing rules, especially in customer acquisition or recovery, can lead to action.

8. Failure to Maintain Adequate Capital in NBFC

Consistent capital shortfall or low earnings potential signals financial weakness — a major reason RBI may revoke an NBFC license.

9. Engaging in Prohibited Activities

Operating in areas outside the permitted scope of your NBFC license is a serious breach. Always ensure your business activities fall within regulatory limits.

10. Non-Disclosure of Critical Information

If an NBFC hides or misrepresents material facts to RBI — including ownership details, financial health, or customer practices — it risks losing its license immediately.

RBI's Process Before License Cancellation

The RBI doesn’t act arbitrarily. Here's the process followed before a cancellation:

• Detection of Non-Compliance: RBI flags violations.

• Show Cause Notice: NBFC is given a chance to explain or fix issues.

• Final Opportunity: Evidence can be presented by the NBFC.

• Immediate Action: If the public interest is at risk, RBI can cancel the license without delay.

S. No.	Reason	Description
1	Non-Compliance with RBI Regulations	Failure to follow RBI’s financial and risk guidelines
2	Insufficient Net Owned Funds (NOF)	NOF below the required ₹10 crore limit
3	Unethical or Fraudulent Activities	Fraud, data misrepresentation, or unauthorized lending
4	Inactivity in Financial Business	No financial activity for over a year without reason
5	Non-Filing of Mandatory Returns	Failing to submit required financial returns and statements
6	Violation of Corporate Governance Norms	Poor governance or misaligned organizational practices
7	Improper Outsourcing Practices	Non-compliance in outsourced digital lending or collection activities
8	Failure to Maintain Adequate Capital	Sustained shortage in capital and earnings capability
9	Engaging in Prohibited Activities	Operating outside the allowed scope of NBFC functions
10	Non-Disclosure of Critical Information	Hiding or misrepresenting facts from RBI

Conclusion: Stay Compliant, Stay Operational

NBFCs form the backbone of India’s informal and semi-formal lending system. But with that power comes responsibility. Ensuring compliance with RBI regulations isn’t just a legal obligation — it's a growth strategy. Regular audits, proper governance, and full transparency with the RBI can help protect your NBFC’s future.

Pro Tip: Don't wait for a notice. Partner with NBFC compliance experts to stay ahead of the curve and protect your license.