NBFC Retains Financial Service Provider Status Despite Lending Ban, Insolvency Only On RBI's Plea: NCLAT

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that a non-banking financial company does not lose its status as a financial service provider merely because the Reserve Bank of India has barred it from fresh lending. As a result, such an entity continues to remain outside creditor-initiated insolvency proceedings under the Insolvency and Bankruptcy Code.A bench headed by Chairman Justice Ashok Bhushan and Technical Member Barun Mitra dismissed an appeal filed by Equitas Small Finance Bank against Jumbo Finvest (India) Ltd, an RBI-registered NBFC. The tribunal observed, “The legislative scheme of the Code as noticed above clearly indicate that in definition of Corporate Persons financial service provider is not included. The legislative scheme of the Code indicate the mechanism for initiating CIRP against the financial service provider. We are not persuaded to the accept the submission that in view of the order of prohibition issued by RBI the Respondent shall loose its character and nature of the financial service provider.” The case arose from a term loan sanctioned by Equitas to Jumbo Finvest on July 9, 2018. The account turned non-performing on January 5, 2019. After an RBI inspection found net NPAs of 13.04%, the regulator, on January 16, 2020, barred Jumbo Finvest from fresh lending, raising public funds, and expanding its balance sheet. Equitas then filed an insolvency application before the NCLT Jaipur. It sought initiation of proceedings under Section 7 of the IBC. The NCLT rejected the plea on August 22, 2025, holding that insolvency proceedings could not be initiated against an NBFC by a financial creditor. Challenging this order, Equitas argued before the NCLAT that once the RBI stopped Jumbo Finvest from carrying on fresh lending, it was no longer providing financial services. On this basis, it claimed that the company lost the protection available to financial service providers under the Code. The NCLAT rejected this argument. It held that restrictions on future business operations do not change the legal status of an entity registered as a financial service provider. The tribunal noted that the RBI's January 2020 order only imposed operational curbs and did not cancel Jumbo Finvest's registration. The tribunal further noted that the NBFC's registration remained valid until October 14, 2025, when it was cancelled by the RBI through a public notice. Until then, Jumbo Finvest continued to be a financial service provider in law. The NCLAT reiterated that insolvency proceedings against a financial service provider can be initiated only by the appropriate regulator under Section 227 of the IBC and the 2019 rules. In this case, the regulator was the RBI, not Equitas. Accordingly, the appeal was dismissed. Case Title: Equitas Small Finance Bank Ltd. v. Jumbo Finvest(India) Ltd. Case Number: Comp. App. (AT) (Ins) No. 1771 of 2025 and I.A. No. 6926 of 2025. For Appellant: Advocates Bharat Gupta and Hemant Kothari. Click Here To Read/Download Order

NBFC Retains Financial Service Provider Status Despite Lending Ban, Insolvency Only On RBI's Plea: NCLAT

Shivangi Bhardwaj

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