DNBS (PD) C.C. No. 44 / 02.01 / 2004-05

October 5, 2004

To,

All Non-Banking Financial Companies (NBFCs), Miscellaneous Non-Banking Companies (MNBCs) and Residuary Non-Banking Companies (RNBCs)

Dear Sirs,

The provisions relating to premature repayment (after the minimum lock-in period) of public deposits or deposits, are contained in -

(i) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 in the case of NBFCs;

(ii) Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 in the case of MNBCs; and

(iii) Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 in the case of RNBCs.

As stipulated therein, in terms of (i) and (ii) above, a NBFC or MNBC is not permitted to repay any public deposit or deposits as the case may be, within a period of three months from the date of acceptance of the same. Similarly, under (iii) above, a RNBC is not permitted to repay any deposit within a period of twelve months from the date of its acceptance. However, after the above lock-in period, the public deposits or deposits can be pre-paid subject to certain conditions.

2. It has been brought to the notice of the Bank that certain companies have offered to the depositors the right to premature repayment. Such repayments may vitiate the ALM discipline of companies and in case of a company whose assets may be insufficient to meet all its outside liabilities, such repayments may result in preferential treatment to those depositors who exit early. As such, the said provisions need a review, for the purpose of safeguarding the ALM discipline among the companies and to restrict preferential prepayment. Further, the provisions relating to repayment of deposits and the applicable interest rate in the event of unforeseen death of a depositor, also need a review.

(1) The above issues have been reviewed in consultation with Informal Advisory Group on NBFCs. It has been decided to stratify the NBFCs, MNBCs and RNBCs for the purpose of permission to prepay the deposits into two categories viz.

(2) It has been decided to retain the minimum lock-in period within which a NBFC, RNBC or MNBC shall not repay a public deposit (in case of NBFC) or deposit (in case of RNBC and MNBC) or grant any loan against such deposits.

(3) The problem companies are prohibited from making premature repayment of any deposits (public deposits in case of NBFCs) or granting any loan against public deposits / deposits, as the case may be. However, the existing contracts conferring the right for premature withdrawal on the depositor would remain unchanged, but where the depositor, in case of a problem company does not have such a right or where the problem company has reserved the right to agree to the depositor’s request for prepayment, such company shall not effect any premature repayment. The prohibition shall not, however, apply in the following cases:

(4) The facility of premature repayment, after the lock-in period, of public deposits by normally run NBFCs (deposits in case of RNBCs / MNBCs) would, henceforth, be at the sole discretion of the company and cannot be claimed as a matter of right by the depositors. The existing contracts conferring the right for premature withdrawal on the depositor, would, however, remain unchanged. Further in the event of death of a depositor, the company may, even within the lock - in period, repay the deposit at the request of the joint holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the satisfaction of the company.

(5) All deposit accounts standing to the credit of sole/first named depositor in the same capacity shall be clubbed and treated as one deposit account for the purpose of premature repayment.

3. Rate of interest if the company agrees to the request for premature withdrawal

Where a company, at the request of the depositor or at its sole discretion, as the case may be, repays, subject to the aforesaid conditions, a deposit/public deposit before its maturity (including in the case of death of the depositor), it shall pay interest at the following rates:

The companies shall intimate their depositors at least 2 months before maturity of their respective deposits/ public deposits, the details of such maturity, so as to ensure that matured deposits do not remain with the company due to such deposits not claimed by the depositor.

5. The amended provisions shall apply to the public deposits accepted or renewed by the NBFCs (including problem NBFCs) from the date of Notification by Reserve Bank. These shall also apply to the existing deposit contracts whereunder the depositor does not have a right to premature withdrawal of the deposit.

6. The amending Notifications Nos. 179, 180, 181 of date as also the Notifications Nos.

7. Please acknowledge receipt to the Regional Office of the Department of Non-Banking Supervision, Reserve Bank of India under whose jurisdiction the Registered Office of your company is situated.

Yours faithfully,

Sd/-

( O. P. Aggarwal )

Chief General Manager-in-Charge