The RBI Act supersedes other laws when it comes to regulating NBFCs. The Courts Have ruled that state laws governing the practice of charging interest do not apply to non-banking finance firms (NBFCs) that are established with and controlled by the Reserve Bank of India (RBI).
In the case of Nedumpilli Financial Institution versus the State of Kerala and many other civil appeals, the Supreme Court decided in its ultimate ruling that Chapter III-B of the RBI Act (which deals with NBFCs) is a full code in and of itself in terms of NBFC supervision. Furthermore, the RBI Act has clauses that supersede state legislation.
According to experts, this means that NBFC regulations are governed only by the RBI Act and that only the Monetary Authority has the authority to control NBFCs affiliated with it. This is even though the Central Bank’s regulatory structure does not directly address interest rate regulation.
RBI: Effect That Dominates
The Supreme Court ruled because Section 45-Q of the RBI Act gives Chapter III-B precedence over other statutes. As a result, the governments of Gujarat & Kerala could indeed claim that their laws are supplementary to Chapter III requirements.
“We believe that perhaps the Kerala & Gujarat Acts will not apply to NBFCs established under the Reserve Bank of India act and supervised by RBI.” As a result, all NBFC challenges against the Kerala High Court’s decision are granted. Similarly, the Government of Gujarat’s petitions against the Gujarat High Court’s judgement are rejected,” the order released on Tuesday stated.
Dual Regulation Avoided
“This subject had been a lengthy issue for years,” Raman Aggarwal, President and Spokesperson of the Finance Industry Development Council (FIDC), informed BusinessLine in response to the ruling. It was a very terrible situation. If this had ruled against NBFCs, then that would have resulted in parallel supervision by the RBI & state and local governments, potentially causing chaos.”
The SC ruling makes it crystal clear that only the RBI has power over NBFC supervision, and also that the RBI Act transcends state legislation, according to Aggarwal. As a result, state governments are unable to pass legislation that applies to NBFCs. Previously, states thought that even NBFCs should qualify as money-lenders within the state charged by the lender regulations.