Non Banking Financial Company (NBFC)

Non- Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 or any previous company law; conducting financial activity as principal business-like loans and advances, acquisition of shares/stocks/bonds issued by Government or otherwise, leasing, hire-purchase, insurance business, etc. They are called as such because while they carry on the business of lending similar to a bank, they are not bank in themselves and are subject to lesser regulatory supervision as compared to a bank.

NBFCs are regulated by the Reserve Bank of India (RBI) and hence no NBFC can commence or carry-on business of a non-banking financial institution without obtaining a certificate of registration from RBI.

 Conducting financial activity as principal business denotes that it must be pre-dominantly engaged in such financial business. To determine this, following test can be employed:

  1. Whether the company’s financial assets constitute more than 50 per cent of the total assets AND
  1. Whether income from financial assets constitute more than 50 per cent of the gross income.

This test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

Hence if the company is engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be considered NBFC.

Difference between NBFCs and Banks

Although their activities are akin to that of banks; however, there are a few differences:

  • NBFC cannot accept demand deposits;
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Categories of Non- Banking Financial Company (NBFC)

NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct.

NBFCs can be registered in different categories such as Asset Finance Company (AFC), Investment Company (IC), Infrastructure Finance Company (IFC), Loan Company (LC), Core Investment Company (CIC), Infrastructure Debt Fund (IDF), Micro Finance Institution (MFI), NBFC-Factors, Peer-to-Peer Lending Platform NBFC (P2P).

If you are looking for registration of NBFC in India, following are the prerequisites stipulated by the Reserve Bank of India (RBI):

  • It should be a company registered under the Companies Act 2013.
  • It should have a minimum net owned fund of INR 20 million. This is the minimum requirement of net owned fund for one category of NBFC. For different types of NBFCs RBI has fixed different net owned fund requirements which can be accessed at FAQs on NBFC issued by RBI.

Exemption from certain provisions of the RBI Act, 1934

To enable the RBI to regulate the financial system of the country in the public interest and to its advantage, RBI has exempted certain categories of NBFC’s from certain provisions under the Reserve Bank of India Act, 1934. Companies that do financial business but are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements for avoiding duality of regulation.

Like Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Acceptance of Deposits

Only those NBFCs to which RBI had given a specific authorization and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds.

Also, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. Further, Reserve Bank of India does not guarantee repayment of deposits by NBFCs even though they may be authorized to collect deposits. As such, investors and depositors should take informed decisions while placing deposit with an NBFC. To bring clarity and transparency in dealings with NBFC’s, RBI has introduced Guidelines on Fair Practices Code for NBFCs – Grievance Redressal Mechanism, which all NBFC’s and investors may take note of.

Ombudsman for Hearing Complaints against NBFCs

The Reserve Bank of India has introduced an Ombudsman Scheme for customers of Non-Banking Financial Companies (NBFCs) with effect from February 23, 2018. The Ombudsman Scheme for Non-Banking Financial Companies, 2018 (the Scheme), is an expeditious and cost-free apex level mechanism for resolution of complaints of customers of NBFCs, relating to certain services rendered by NBFCs. For more details about the scheme, click here.