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:
- The present Directions require high value gold loans of Rs. 1 lakh and above to be disbursed by cheque only.
- 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. By the language “lending NBFC complies with”, we mean that the lending NBFC needs to make it sure that while dealing to the borrower, there is no contravention on the part of the borrower for compliance with provisions of the Section 269SS and 269T. Consequently lending NBFCs cannot disburse loans of 20,000 or more in cash.
However, the amendment when read with section 269T of the Income Tax Act, 1961 creates impossibility that a NBFC cannot receive any EMI in cash, where the loan amount exceeds Rs 20,000. Therefore, suppose a NBFC has given a loan to a person by way of cheque for an amount of Rs. 1,00,000 and the person has to repay back loan, as per the provisions the NBFC cannot receive even Rs. 5000 in cash towards EMI.
- If the answer to the above question 4 is yes, then what is the new compliance under RBI’s Notification?
The amendments have been made into Para 104 of Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Para 117 of the Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016. Accordingly every NBFC is required to ensure compliance with the requirements under section 269SS and 269T. That is to say a NBFC cannot disburse a loan of Rs 20,000 or more in cash.
- 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 readwith 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.
- Proposed section 269ST and its implication?
With the mission to reduce generation and circulation and of black money it has been proposed to insert section 269ST to provide that no person shall receive an amount of three lakh rupees or more, (a) in aggregate from a person in a day; (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.
Looking at the provision as it stands, even a withdrawal of more than 3 lacs in a day from a bank account may attract penalty.