- Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system.
- It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc.
- They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector.
- Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc.
Regulated by? Governing bodies?
The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act.
As per the RBI Act, a ‘non-banking financial company’ is defined as:-
- a financial institution which is a company;
- a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
- such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.
- Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. This registration authorises it to conduct its business as an NBFC.
- For the registration with the RBI, a company incorporated under theCompanies Act, 1956 and desirous of commencing business of non-banking financial institution, should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999).
- The term ‘NOF’ means, owned funds (paid-up capital and free reserves minus accumulated losses, deferred revenue expenditure and other intangible assets) less, (i) investments in shares of subsidiaries/companies in the same group/ all other NBFCs; and (ii) the book value of debentures/bonds/ outstanding loans and advances, including hire-purchase and lease finance made to, and deposits with, subsidiaries/ companies in the same group, in excess of 10% of the owned funds.
- The registration process involves submission of an application by the company in the prescribed format along with the necessary documents for RBI’s consideration. If the bank is satisfied that the conditions enumerated in the RBI Act, 1934 are fulfilled, it issues a ‘Certificate of Registration’ to the company.
- Only those NBFCs holding a valid Certificate of Registration can accept/hold public deposits.
The NBFCs accepting public deposits should comply with the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998, as issued by the bank. Some of the important regulations relating to acceptance of deposits by the NBFCs are:-
- They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.
- They cannot accept deposits repayable on demand.
- They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time.
- They cannot offer gifts/incentives or any other additional benefit to the depositors.
- They should have minimum investment grade credit rating.
- Their deposits are not insured.
- The repayment of deposits by NBFCs is not guaranteed by RBI.
- Equipment leasing company:- is any financial institution whose principal business is that of leasing equipments or financing of such an activity.
- Hire-purchase company:- is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions.
- Loan company:- means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity).
- Investment company:- is any financial intermediary whose principal business is that of buying and selling of securities.
In depth re-classification
- Asset Finance Company (AFC)
- Investment Company (IC) and
- Loan Company (LC). Under this classification, ‘AFC’ is defined as a financial institution whose principal business is that of financing the physical assets which support various productive/economic activities in the country.
(Author Ankita Chopra is Partner at White Collar Legal LLP and can be contacted at firstname.lastname@example.org)