A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956/2013 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
Here it means all the Company which is registered under Companies Act, 1956/2013 and who deals in:-
1. business of loans and advances,
2. acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature
5. insurance business
6. chit business
PRINCIPLE BUSINESS as financial activity here means:
When a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 percent of the gross income.
A company which fulfils both these criteria will be registered as NBFC by RBI.
The term ‘principal business’ is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence, if there are companies 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 regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
1. NBFC cannot accept demand deposits;
2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
4. Provides Banking services to People without holding a Bank license,
5. Foreign Investment allowed up to 100%.
6. An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
7. An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-Purchase, Construction of Immovable Property
As per Section 45-IA of the RBI Act, 1934No Non-banking Financial company can commence or carry on business of a non-banking financial institution without
2. without having a Net Owned Funds of ₹ 2 crore.
However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.
Types of NBFC on the basis of deposit they hold:-
1. Deposit taking
NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.
Types of NBFC as per their activity
1. Assets Finance Company
2. Investment Company
3. Loan Company
4. Infrastructure Finance Company
5. Core Investment Company
6. Micro Finance Company
7. Housing Finance Company
8. Infrastructure Debt Fund
9. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
10. Non-Banking Financial Company – Factors (NBFC-Factors)
A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the following:
1. It should be a company registered under the companies Act, 1956/2013.
2. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net owned fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs as directed by RBI)