Decoding RBI’s clarification on disbursal of loan in cash

RBI vide Circular no DNBR (PD) CC.No.086/03.10.001/2016-17 (Notification), in a bid to align the extant directions with the provisions of Section 269SS and 269T of the Income Tax Act, 1961 has issued Notification which states the following:

  1. The present Directions require high value gold loans of Rs. 1 lakh and above to be disbursed by cheque only.
  2. To align with the requirements of Income Tax Act, 1961, Section 269SS and 269T of the Income Tax Act, 1961, as amended from time to time, would be applicable to all NBFCs with immediate effect.

The Notification says very little and hence this article is an attempt to decode the taciturn Notification which has been imbibed into the extant Master Directions.

What does insertion mean?

The insertion seems to indicate that as per the RBI regulations, for high value gold loans there was a need for making disbursements by cheque and for other type of loans, the disbursement could have been by way of cash even in high value transactions. However, to align with the requirements of Income Tax Act, 1961, now with effect from the issuance of this Notification, all sorts of loans will have to comply with the provisions of Section 269 SS and Section 269T of the Income Tax Act, 1961.

What are the provisions of Section 269SS and 269T of the Income Tax Act, 1961?

Section 269SS

Section 269SS deals with the provisions relating to mode of acceptance of loans. It states that no person shall take or accept from any person any loan or deposit otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if any of the following amount exceeds Rs 20,000

  • The amount of such loan or deposit or aggregate amount of such loan or deposit, or
  • The outstanding amount of loan or deposits taken on date of taking such loan, whether such outstanding amount has fallen due or not or aggregate of such outstanding amount, or
  • Aggregate of a) and b) above.

However the provisions of this section do not apply to following persons namely,

  • the Government;
  • any banking company, post office savings bank or co-operative bank;
  • any corporation established by a Central, State or Provincial Act;
  • any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);
  • such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette:

Section 269T

No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it] otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or by use of electronic clearing system through a bank account if the following amount exceeds Rs. 20,000 or more

  • the amount of the loan or deposit together with the interest, if any, payable thereon, or
  • the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, or
  • the aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances.

Were borrowers required to comply with the provisions of Section 269 SS and 269T, before the issuance of the Notification?

Let us understand that the provisions of the sections are applicable for the borrower. The mode of acceptance of a loan or deposit by a person cannot be other than cheque in case the quantum is higher than Rs. 20,000.

Compliance with the provisions of sections 269SS and 269T were always mandatory. The Notification from the RBI does not suggest the fact that the compliance with the provisions of these sections was not required prior to this Notification. This conclusion can also be derived from the fact that both these section do not provide any specific exemption to NBFC as is available to banks. Therefore issuance of the Notification does not make much difference because the stand was quite clear prior to the Notification as well.

Obligation is on the recipient, does that mean lender does not have to comply?

Section 269SS and 269T imposes obligation on the persons receiving and repaying loans/deposits. Nowhere has it placed any restriction on the lender. However, RBI vide the Notification has amended Directions applicable on SI and Non-SI and accordingly it has been mandated by the Direction to ensure that lending NBFC complies with the requirements given in section 269SS and 269T. Let us understand the intention of the notification.

The RBI’s jurisdiction extends to entities covered by its regulatory ambit, which, in the present case, is NBFCs. NBFCs may be lenders as well as borrowers; however, the present notification by insertion of Para 117 concerns about disbursements of loan amounts in cash – therefore, the notification is clearly related to the role of NBFCs as lenders. The notification obviously comes against the backdrop of a concerted move, by various regulators, to discourage the use of cash in the economy pursuant to the PM’s demonetisation move. The RBI expects NBFCs to “ensure” compliance with sections 269SS and 269T of the Income-tax Act. The said sections of the Income-tax Act, as discussed before, contain a negative mandate for the borrower, and the adverse implications of non-compliance attract penalty for the borrower. The Income-tax Act sections have been there for years now – and certainly, the enforceability of the said sections is no way connected with the RBI’s directives. The loans in cash need not necessarily be taken from, repaid to NBFCs – the section is applicable to all loans, irrespective of who they are taken from.

Since the RBI’s regulatory ambit extends to NBFCs, the RBI is addressing the Prudential Regulations to NBFCs. Sections 269SS and 269T pertain to the borrowers, whereas the NBFC is understandably a lender in the given situation. Hence, what could be the intent of Para 117 of the Master Directions?

The only meaningful way of interpretation of Para 117 is that the RBI is wanting to extend the ambit of the sections, otherwise applicable to the borrower (with attached penal consequence for the borrower under the IT Act), to NBFCs as lenders, and therefore, the RBI intends to ensure that the NBFC shall ensure compliance with sections 269SS and 269T. Such an interpretation seems to be fitting into the scheme of things from several perspectives:

  1. IT Act is a mandate to the borrowers; there was no corresponding mandate in respect of the lenders. The RBI, as the financial regulator, extends the mandate to the lenders as well. So, if the borrower breaches the section, the borrower is liable to penalty as provided in the Income-tax Act. If the lender does not ensure compliance with the section, the lender faces regulatory disapproval, including any penalties, under the RBI Act.
  2. The amendment to the Master Directions came at a time when there was a drive from multiple regulators against use of cash. Therefore, the obvious intent of the RBI might have been to move borrowers away from using cash and use banking channels, by using its regulatory powers against NBFCs.

How should the NBFCs comply with the provisions of the Notification practically?

There are severe difficulties that will arise if the intent of Para 117 is to taken to extend sections 269SS and 269T to NBFCs as lenders. The difficulties arise from a business perspective as well as a legal perspective.

Business perspective first. Technically, section 269T bars repayment of a loan, if the amount lent is exceeding Rs. 20,000/-, Most of the NBFC loans, excepting in case of microfinance companies, will be exceeding Rs. 20,000/- in terms of principal outstanding. Technically, this would mean even one EMI, albeit as low as Rs. 1,000/-, cannot be accepted in cash. Most commonly, it is practice with small borrowers such as truckers, bus operators etc. to pay EMIs in cash. In case of sticky loans, a recovery officer may visit a borrower to collect missing instalments. If the borrower has cash at his disposal, it makes no intuitive sense for the collection agent to not take cash, and expect the borrower to put the money in bank and then pay by cheque or remittance.

From a legal perspective, sections 269SS and 269T come with an inbuilt mechanism for cases where there is a reasonable cause. The sections lead to a penalty proceeding, which by itself, is a quasi-judicial proceeding complete with show-cause, opportunity of hearing, and a reasoned order levying penalty. In any case, section 273B comes with an escape clause. Hence, if a tax officer was to levy the penalty for non-compliance of sections 269SS and 269T, the tax officer has to go through the process of natural justice, allow the assesse to produce evidence as to existence of a reasonable cause, etc.

If the intent of the RBI to extend the mandate of the Income-tax Act to NBFCs is taken to its literal sweep, then the NBFC must pass through the same rigour of examining whether, under the circumstances, the acceptance of cash loan by a borrower or its repayment in cash, had the escape of a reasonable cause, etc.

However it might not be practically possible for the NBFCs to take the place of a tax officer and examine the nature of the transactions at the time of recovery. Therefore, a practical view has to be taken in this regard while taking actions. However, some checks and balances that the NBFCs may adopt while carrying on their business have been provided below:

  • NBFCs must refrain from lending, where the aggregate amount of the loan, along with amount already lent, to the borrower, is Rs. 20,000 or more.
  • As regards collections of the loan, wholly or partly, in cash, we would suggest the following course of action:
    • Obtain a declaration from the borrower, stating that the payment that the borrower is making to the NBFC is from out of the borrower’s lawful cash holding, and there exists a reasonable cause which prevented the borrower from depositing the cash in the bank and making payment from banking channels; the cause, as given by the borrower, may be stated in the said declaration.
    • If the borrower has a PAN, then the PAN must also be stated in the declaration.
    • In our view, it will NOT be necessary for the NBFC to sit in judgement to adjudge whether the reasoning given by the borrower is befitting or not.

Can a NBFC receive security deposit of Rs. 20,000 or more in cash?

The security deposit amounts to deposits and therefore in light of section 269T read with Notification, it is fairly clear that the NBFC will not be allowed to take security deposits of Rs. 20,000 or more in cash.

Whether the disbursals can be broken into tranches of 20,000 or multiples of 20,000?

Section 269SS and 269T states that no persons shall receive/repay from/to any other person any loan/deposit in cash, either in single tranche or in aggregate, if the loan amount is Rs. 20,000 or more. Therefore loan in aggregate received/ repaid by a single person is required to be seen for applicability of the above sections.  So, whether the loans are in tranches or multiples of Rs. 20,000 does not make any difference.

Is it applicable to single loan, single person or single disbursal?

The provisions of sections are applicable to a single person receiving/repaying single or multiple loans.

Can the borrower have loans of Rs. 20000 and above from multiple lenders?

Yes, a single person can receive cash loans from multiple lenders provided the loan/deposit amount does not exceed Rs 20,000 or more.

Does the threshold limit include outstanding amounts as well?

Section 269SS clearly includes all such cases also where the outstanding amount of loan or deposits taken on date of taking a loan happens to be Rs 20,000 or more. The table below clearly shows the applicability of the provisions:

Outstanding amount New loan 269SS
Case 1 20,000 13000 Will apply
Case 2 13,000 12,000 Will apply
Case 3 22,000 10,000 Will apply
Case 4 9000 10,000 Will not apply

 

Implication of Non Compliances?
Section 271D and 271E of Income Tax Act 1961 provides that if a loan or deposit is received /repaid in contravention of the provisions of section 269SS/269T, then a penalty equivalent to the amount of such loan or deposit repaid may be levied by the Joint commissioner.

Will the NBFC’s face the same penalties as applicable to the borrower if they fail to comply with Sec 269SS and 269T?

IT Act is a mandate to the borrowers; there was no corresponding mandate in respect of the lenders. So, if the borrower breaches the section, the borrower is liable to penalty as provided in the Income-tax Act. Therefore the penalties laid down in Sec 271D and 271E will not be imposed on NBFCs when they are acting as lenders. However RBI, as the financial regulator, while extending the mandate to the lenders as well have strictly conveyed that if the lender does not ensure compliance with the section, the lender faces regulatory disapproval, including any penalties, under the RBI Act.

Are there any exceptions to the applicability of the provisions?

On plain reading of the above provisions, it is inferred that no person can (a) accept any loan or deposit from another person in cash where such loan or deposit or the aggregate of such loan/deposit along with any existing unpaid loan/deposit exceeds Rs 20,000 or (b) repay loans or deposits, where the aggregate amount of loans or deposits, along with the interest charged thereon, amounts to Rs. 20,000 or more, other than through banking channels, except where the amount is being accepted by exempted classes of persons, expressly provided under the section.

However, the actual interpretation of the law has evolved over a period of time through several judgements; while some of the judgements have extended the scope of the aforesaid sections, some have created new carve-outs from the section. Eventually, the implication of the section leads to a penal proceeding. The penal sections themselves have a significant carve out in section 273B giving a “reasonable cause” defence. Therefore, the penal proceedings under the sections. The series of judgements have outstretched the orbit to include certain cash transactions in excess of Rs 20,000 if carried on “reasonable cause”.

Is there any way where NBFC’s could prevent them from the applicable provisions?

As stated above the penal sections themselves have profound carve out in Section 273B which could prevent the borrower from facing the wrath of the penalties if “reasonable cause” is proved while dealing in cash for such loans.

However there are series of judgements and case laws where people have actually taken the help of these carve outs and escaped the penalties. These judgements have ultimately extended the scope of these provisions and created new areas where cash transactions are allowed. But NBFC’s should not use this “reasonable cause” as a protection from every cash transactions and consider it to be the ultimate saviour. Sec 273B only allows genuine transactions which have been taken during the urgent need of the parties involved. The NBFC would have to pass through the same rigour of examining whether, under the circumstances, the acceptance of cash loan by a borrower or its repayment in cash, had the escape of a reasonable cause.


– by Nidhi Bothra (nidhi@vinodkothari.com) & Kanishka Jain (kanishka@vinodkothari.com)

3 replies
  1. UMA SHANKER SHARDA
    UMA SHANKER SHARDA says:

    Thanks for sharing and elaborating your useful views on RBI Circular no DNBR (PD) CC.No.086/03.10.001/2016-17 (Notification) regarding disbursal of loan and recovery of the same in cash.

    Although the article covers all aspects from the Income tax point of view. As section 269SS and 269T are applicable on borrower for borrowing in cash and its repayment in cash as per the provisions mentioned in this regard in Income Tax Act (as amended). Now by way of this circular, RBI has also put obligation of compliance by borrower on NBFCs also. But again as per Income Tax, non compliance of both these section makes liable to the borrower only. Now in case if there is any lapse on the part of NBFC, what penal provisions will attract under RBI/Income tax.

    Your opinion in this regard shall be helpful.

    Reply
  2. dinesh gupta
    dinesh gupta says:

    As can be interpreted from the circular, all the NBFCs are now required to Disburse the loans amounting to Rs.20,000 or more by Cheque/Demand Draft or through other Banking Channels.

    RBI has also directed NBFCs to ensure compliance with regard to Section 269T which provides for repayment of loan along with interest amounting to Rs.20,000 or more. The said amendment has come into effect w.e.f. March 9, 2017.

    As per the amendment, NBFCs are to ensure compliance of 269SS and 269T which strictly means that giving of loans in cash to borrowers and repayment of installments in cash by borrowers to NBFC, the penal provisions of 269SS and 269T will not attract to NBFCs. The position was same even before the amendment by RBI in Master Directions. However, the intention of amendment is that NBFCs should not disburse loans in cash amounting to Rs.20,000 or more in cash. If the same analogy is applied for 269T, NBFCs will not be able to take repayment of instalments of loans outstanding with interest amounting to Rs.20,000 or more. please give your comments as the amendment has come into force w.e.f. March 9, 2017

    Reply
  3. Dinesh Gupta
    Dinesh Gupta says:

    RBI has also directed NBFCs to ensure compliance with regard to Section 269T which provides for repayment of loan along with interest amounting to Rs.20,000 or more. The said amendment has come into effect w.e.f. March 9, 2017.
    As per the amendment, NBFCs are to ensure compliance of 269SS and 269T which strictly means that giving of loans in cash to borrowers and repayment of installments in cash by borrowers to NBFC, the penal provisions of 269SS and 269T will not attract to NBFCs. However, the intention of amendment is that NBFCs should not disburse loans in cash amounting to Rs.20,000 or more in cash. If the same analogy is applied for 269T, NBFCs will not be able to take repayment of instalments of loans outstanding with interest amounting to Rs.20,000 or more. please give your comments.

    Best Regards,

    Dinesh Gupta
    Chief Consultant I DSB LAW GROUP | Corporate Law Consultants I
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    Reply

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