Non-Banking Financial Company
1. What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956 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).
2. NBFCs perform functions similar to banks. What is the difference between banks &
NBFCs ?
NBFCs lend and make investments and hence their activities are akin to that of banks; however
there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques
drawn on itself;
iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not
available to depositors of NBFCs, unlike in case of banks.
3. Is it necessary that every NBFC should be registered with RBI?
In terms of of the RBI Act, 1934, no Non-banking Financial company can commence or carry
on business of a non-banking financial institution without a) obtaining a certificate of
registration from the Bank and without having a Net Owned Funds of Rs. 25 lakhs (Rs two
crore since April 1999). 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
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Certificate of Registration issued by IRDA, Nidhi companies, Chit companies, Housing Finance
Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit
company.
Category of Companies Regulator
Chit Funds Respective State Governments
Insurance companies IRDA
Housing Finance Companies NHB
Venture Capital Fund SEBI
Merchant Banking companies SEBI
Stock broking companies SEBI
Nidhi Companies Ministry of corporate affairs, Government of
India
4. What are the different types/categories of NBFCs registered with RBI?
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 and c) by the kind of activity they conduct. Within this
broad categorization the different types of NBFCs are as follows:
i. Asset Finance Company(AFC) : An AFC is a company which is a financial institution
carrying on as its principal business the financing of physical assets supporting
productive/economic activity, such as automobiles, tractors, lathe machines, generator
sets, earth moving and material handling equipments, moving on own power and
general purpose industrial machines. Principal business for this purpose is defined as
aggregate of financing real/physical assets supporting economic activity and income
arising wherefrom is not less than 60% of its total assets and total income respectively.
ii. Investment Company (IC): IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities.
iii. Loan Company (LC): LC means any company which is a financial institution carrying
on as its principal business the providing of finance whether by making loans or
advances or otherwise for any activity other than its own but does not include an Asset
Finance Company.
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iv. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a)
which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a
minimum Net Owned Funds of Rs. 300 crore, c) has a minimum credit rating of ‘A ‘or
equivalent d) and a CRAR1 of 15%.
v. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an
NBFC carrying on the business of acquisition of shares and securities.
vi. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-
NBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects.
vii. Non-Banking Financial Company - Micro Finance Institution (NBFC-
MFI): NBFC-MFI is a non-deposit taking NBFC giving micro loans to target groups as
identified by the Regulatory Body.
viii. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a
non-deposit taking NBFC engaged in the principal business of factoring.
5. What are the salient features of NBFCs regulations which the depositor may note at
the time of investment?
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
i. The NBFCs 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.
ii. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from
time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid
or compounded at rests not shorter than monthly rests.
iii. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
iv. NBFCs (except certain AFCs) should have minimum investment grade credit rating.
v. The deposits with NBFCs are not insured.
vi. The repayment of deposits by NBFCs is not guaranteed by RBI.
vii. Certain mandatory disclosures are to be made about the company in the Application
Form issued by the company soliciting deposits.
1 Capital to Risk Assets Ratio (CRAR)
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