1.

Introduction about Industry

Non-Bank Financial Companies (NBFCs) are largely involved in serving those classes of
borrowers who are generally excluded from the formal banking sector. However,
progressively over the years, the exclusiveness between the banks and NBFCs has somewhat
blurred. More recently, NBFCs are competing with banks in providing financial services such
as infrastructure finance and housing finance among others.

A Non-Banking Financial Company (NBFC) is a company registered under the Companies

Act, 1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by Government or local authority or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit business
but does not include any institution whose principal business is that of agriculture activity,
industrial activity, sale/purchase/construction of immovable property. A non-banking
institution which is a company and which has its principal business of receiving deposits
under any scheme or arrangement or any other manner, or lending in any manner is also a
non-banking financial company (Residuary non-banking company).

NBFCs, historically are involved in providing financial services such as offering of small
ticket personal loans, financing of two/three wheelers, truck financing, farm equipment
financing, loans for purchase of used commercial vehicles/machinery, secured/unsecured
working capital financing, etc.

Further, NBFCs also often take lead role in providing

innovative financial services to Micro, Small, and Medium Enterprises (MSME) most
suitable to their business requirements.

NBFCs are doing functions akin to that of banks; however there are a few differences:

(i)

NBFC cannot accept demand deposits;

(ii)

NBFC is not a part of the payment and settlement system and as such an NBFC
cannot issue cheques drawn on it; and

(iii)

Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation

is not available for NBFC depositors unlike in case of banks.
A Study on Non Banking Financial Companies in India

1.1 Profile of NBFC Sector

Legal Definition of NBFC

A company is considered as an NBFC if it carries on as its business or part of its

business, any of the activities listed in Section 45 I (c ) of the RBI Act, 1934, viz.,
business of making loans/advances or acquisition of shares / securities, etc. or hire
purchase finance or insurance business or chit fund activities or lending in any manner
provided the principal business of such a company does not constitute any of the
following non-financial activities viz.

(a) agricultural operations

(b) industrial activity
(c) trading in goods (other than securities)
(d) providing services
(e) purchase, construction or sale of immovable property. Further in terms of section 45I
(f) of the RBI Act, a company would also be an NBFC, if its principal business is that of
receiving deposits under any scheme or arrangement.

Thus a company whose principal business is agricultural operations, industrial activity,

trading or real estate business is not a financial institution.

1.2 Reclassification of NBFCs w.e.f. 6th December, 2006

However in terms of the NBFC Acceptance of Public Deposits (Reserve Bank) Directions,
1988 with effect from December 6, 2006 the above NBFCs registered with RBI have been
reclassified as:

1.

Loan Company (LC)

Loan company 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.
A Study on Non Banking Financial Companies in India

2.

Investment Company(IC)

Investment Company is a company which is a financial institution carrying on as its

principal business the acquisition of securities.

1.3 Investment Companies are further divided into following subcategories

Core Investment Companies
The

Reserve

Bank

of

India

vide

its

Notification

No.

DNBS(PD)CC.No.

197/03.10.001/2010-11 dated August 12, 2010, a new class of NBFCs by the name of
Core Investment Companies (CIC) was added

Core Investment Companies in terms of RBIs Notification means

A non-banking financial company carrying on the business of acquisition of shares and

securities and which satisfies the following conditions as on the date of the last audited
balance sheet:-

(i) it holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;

(ii) its investments in the equity shares (including instruments compulsorily convertible
into equity shares within a period not exceeding 10 years from the date of issue) in group
companies constitutes not less than 60% of its net assets

Net assets, for the purpose of this proviso, would mean total assets excluding

1. Cash And Bank Balances;

2. Investment In Money Market Instruments And Money Market Mutual Funds
3. Advance Payments Of Taxes; And
4. Deferred Tax Payment

A Study on Non Banking Financial Companies in India

(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in
group companies except through block sale for the purpose of dilution or
disinvestment;

(iv) it does not carry on any other financial activity referred to in Section 45 I (c) and
45 I (f) of the Reserve Bank of India Act, 1934 except:

a) investment in
i. bank deposits,
ii. money market instruments, including money market mutual funds,
iii. government securities, and iv. bonds or debentures issued by group companies;
b) granting of loans to group companies; and
c) issuing guarantees on behalf of group companies.

1.4 Other Companies

(i)

Asset Finance Company (AFC)

AFC would be defined as any 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. Financing of physical assets may be by way of loans, lease or hire purchase
transactions.
Principal business for this purpose is defined as aggregate of financing real/physical
assets supporting economic activity and income arising therefrom is not less than 60% of
its total assets and total income respectively.

(ii)

Mutual Benefit Financial Company (MBFC)

Mutual Benefit Financial Company means a company which is a financial institution

notified by The Central Government under section 620A of The Companies Act 1956.
A Study on Non Banking Financial Companies in India

The above-mentioned types of NBFCs may be further classified into:

NBFCs accepting public deposit (NBFCs-D) and

NBFCs not accepting/holding public deposit (NBFCs-ND)

1.5 Operating leasing entities

Operating leasing companies do not come under the RBI definition of NBFCs since operating
lease is not equipment leasing business as defined by the RBI. Only financial leasing is
included in the RBI definition of equipment leasing.

Further Classification of NBFCs-ND based on the Size of its Asset: NBFCs-ND may also be
classified into
Systematic Investment and

(ii)

Non- Systematic Investment NBFCs based on the size of its asset.

i.

(i)

Systemically Important NBFCs-ND

An NBFCND with an asset size of Rs.100 crore and more as per the last audited balance
Sheet is considered as systemically important NBFCsND (NBFC-ND-SI). However
NBFCsND SI are required to maintain a minimum CRAR of 10 per cent. No NBFC
NDSI is allowed to:

a) lend to any single borrower/group of borrowers exceeding 15 per cent / 25 per

cent of its owned fund;

b) invest in the shares of another company/ single group of companies exceeding 15

per cent /25 per cent of its owned fund;

A Study on Non Banking Financial Companies in India

ii.

Non-Systematically Important NBFCs-ND

A NBFCND whose asset size does not exceed Rs.100 crore as per the last audited
balance sheet may be considered as Non-systemically important NBFCsND (NBFCNDSI).

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund
companies etc. NBFCs can be classified into deposit accepting companies and non-deposit
accepting companies. NBFCs are small in size and are owned privately. The NBFCs have
grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as
service oriented companies. Their main companies are banks and financial institutions.
According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of
India.
The NBFCs in advanced countries have grown significantly and are now coming up in a very
large way in developing countries like Brazil, India, and Malaysia etc. The non-banking
companies when compared with commercial and co-operative banks are a heterogeneous
(varied) group of finance companies. NBFCs are heterogeneous group of finance companies
means all NBFCs provide different types of financial services.
Non-Banking Financial Companies constitute an important segment of the financial system.
NBFCs are the intermediaries engaged in the business of accepting deposits and delivering
credit. They play very crucial role in channelizing the scare financial resources to capital
formation.

1.6 Size of the Sector

The share of NBFCs assets in GDP (at current market prices) increased steadily from just 8.4
per cent as on March 31, 2006 to 12.5 per cent as on March 31, 2013; while the share of bank
assets increased from 75.4 per cent to 95.5 per cent during the same period (Table 1).In fact,
if the assets of all the NBFCs below Rs.100 crore are reckoned, the share of NBFCs assets to
GDP would go further.

A Study on Non Banking Financial Companies in India

Assets of NBFC and Banking (SCBs) Sectors

as a % to GDP Year

2006

2007

2008

2009

2010

2011

2012

2013

9.1

10.1

10.3

10.8

10.9

11.9

12.5

80.6

86.8

93.0

93.0

92.2

92.7

95.5

Ratio
NBFC Assets to GDP 8.4
(%)
Bank Assets to GDP (%)

75.4

Source: (i) Reports on Trend and Progress of Banking in India, 2006-2013; (ii) Hand Book of
Statistics on Indian Economy, 2012-13

In comparison to assets of the banking system (Scheduled Commercial Banks-SCBs), asset

size of NBFC sector was around 13 per cent; while deposits (including RNBCs) of the sector
were less than 0.15 per cent of bank deposits (SCBs) as on March 31, 2013 (Chart 2). Public
deposits held with the NBFC sector declined in line with RBI policy directions. The decline
in public deposits was largely on account of RNBCs. Due to concerted efforts of RBI, the
number of deposit taking NBFCs has come down from 428 in June 2006 to 254 in June 2013.

A Study on Non Banking Financial Companies in India

1.7 Industry Structure

Non-Banking Financial
Company

Registered with and

regulated by the RBI

Loan Company

Investment Company

Equipment Leasing
company

Not registered with the RBI,

but the RBI issues directions
relating to deposit acceptance
activity

Mutual Benefit
Finance Company
(Notified nidhis)

Mutual Benefit
Companies (Potential
nidhis)

Miscellaneous Non
Banking Companies
(Chit funds)

Exempted from the RBI

regulations including
requirement of
registration

Insurance
Companies

Stock Exchange,
Stock Brokers,
Merchant Banking
Companies

Housing Finance
Company

Hire Purchase
Finance Company

Micro Finance
Company

Residuary Non
Banking Company

A Study on Non Banking Financial Companies in India

1.8 Responsibilities

The NBFCs accepting public deposits should furnish to RBI

Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the annual general meeting together with a copy of
the report of the Board of Directors and a copy of the report and the notes on accounts
furnished by its Auditors;

Statutory Annual Return on deposits - NBS 1;

Certificate from the Auditors that the company is in a position to repay the deposits as
and when the claims arise;

Quarterly Return on liquid assets;

Half-yearly Return on prudential norms;

Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and
above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;

Monthly return on exposure to capital market by companies having public deposits of

Rs. 50 crore and above; and

A copy of the Credit Rating obtained once a year along with one of the Half-yearly
Returns on prudential norms as at (v) above.

https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp

A Study on Non Banking Financial Companies in India