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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 / local authority / other securities of like marketable nature,

leasing,

hire-purchase,

insurance business,

chit business

stock broking companies

merchant banking companies

RNBCs

NBFC does not include any institution whose principal business is that of :

agriculture activity,

industrial activity,

sale / purchase / construction of immovable property.

Features of NBFCs

Registration with RBI is mandatory

All the NBFC are not entitled to accept public deposits

NBFC can accept public deposit for a minimum period of 12 months and maximum of 60
months

They cannot accept deposits repayable on demand

NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI
from time to time

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NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors

NBFCs (except certain AFCs) should have minimum investment grade credit rating.

The deposits with NBFCs are not insured

The repayment of deposits by NBFCs is not guaranteed by RBI

There are certain mandatory disclosures about the company in the Application Form
issued by the company soliciting deposits

If a NBFC defaults in repayment of deposit, the depositor can approach

a. Company Law Board or
b. Consumer Forum or
c. file a civil suit to recover the deposits.

NBFIs VERSUS BANKs

BANKS /NBFIS
Definition
Banking is acceptance of deposits withdraw able by cheque or demand;
NBFI cannot accept demand deposits
NBFI are companies carrying financial business
Scope of business
Scope of business of the bank is limited.
There is a various types of business regarding financial activities.
function
They generate multiple expansion of credit
Only mobilise savings for investment.
Need for a license

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License norms are tightly controlled and generally it is perceived to be quite difficult to get
a license for a bank
It is comparatively much easier to get a registration as an NBFI.
Types of group
Banks form homogeneous group doing banking business
NBFC form a heterogeneous group
Difference between Banks & NBFCs
NBFCs are doing functions akin to that of banks, however there are a few differences:
i. NBFC cannot accept demand deposits;
ii. it is not a part of the payment and settlement system and as such cannot issue cheques to
its customers ; and
iii. deposit insurance facility is not available for NBFC depositors unlike in case of banks.
Registration of NBFCs
In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should
be registered with RBI to commence or carry on any business of non-banking financial
institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
However, to obviate dual regulation, certain category of NBFCs which are regulated by
other regulators are exempted from the requirement of registration with RBI :

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 620 A 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

Working of NBFC

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Filing of application in prescribed form

Submit it in regional office of RBI

Processing by RBI

RBI issue certificate

Requirements for Registration with RBI

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 have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh wef
April 21, 1999).

The company is required to submit its application for registration in the prescribed
format along with necessary documents for Banks consideration.

The Bank issues Certificate of Registration after satisfying itself that the conditions
as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

NBFCs and Public Deposits

All NBFCs are not entitled to accept public deposits.

Only those NBFCs holding a valid Certificate of Registration with authorization to

accept Public Deposits can accept / hold public deposits.

The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund
and comply with the Directions issued by the Bank.

Ceiling on Acceptance of Public Deposits

A NBFC maintaining required NOF and complying with the prudential norms can accept
public deposits as follows:
Category of NBFC
Ceiling on Public deposits
EL / HP Companies maintaining CRAR of 15% without credit rating

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EL / HP Companies with CRAR of 12% and having minimum investment grade credit
rating
1.5 times of NOF or Rs 10 crores whichever is less
4 times of NOF
LC / IC with CRAR of 15% and having minimum investment grade credit rating
1.5 times of NOF

Presently, the maximum rate of interest a NBFC can offer is 11%. The interest
may be paid or compounded.
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.

Important Regulations relating to Acceptance of Deposits by NBFCs

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 11 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 equipment leasing / hire-purchase finance companies) 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. There are certain mandatory disclosures about the company in the Application Form
issued by the company soliciting deposits.
Submission of Returns to RBI

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The NBFCs accepting public deposits should furnish to RBI

i)Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the 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;
ii.

Statutory Annual Return on Deposits

iii. Certificate from the Auditors that the company is in a position to repay the
deposits as and when the claims arise;
iv. Quarterly Return on liquid assets;
v. Half-yearly Return on prudential norms;
vi. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crores and above
or with assets of Rs. 100 crores and above irrespective of the size of deposits ;
vii. Monthly return on exposure to capital market by companies having public deposits of Rs.
50 crores and above; and
viii. 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.
Types of NBFC
Different types of NBFCs registered with RBI
i. equipment leasing company;
ii. hire-purchase company;
iii. loan company;
iv. investment company;
v. Mutual benefit finance company
vi. Residuary non banking company

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INVESTMENT COMPANY
Investment Company is any financial intermediary whose principal business is that of buying
and selling of securities.

It is a company whose main business is holding securities of other companies purely

for investment purposes.

The investment company invests money on behalf of its shareholders who in turn
share in the profits and losses.

Example : Mutual Fund Companies

MUTUAL BENEFIT FINANCIAL COMPANY (MBFC)

Nidhis or Mutual Benefit Finance Companies are one of the oldest forms of nonfinancial companies. It is a company structure in which the company's owners are also
its clients.

That is, the mutual company's profits are distributed to its participating customers
each year in proportion to their individual exposures to the company.

Many insurance companies are structured as mutual companies.

Some of the important objectives of Nidhis are to enable the members to save money,
to invest their savings and to secure loans at favorable rates of interest.

They work on the principles of complete mutuality of interest and are generally wellmanaged.

The Government has granted certain concessions under Section 620A of the
Companies Act, 1956.

Primarily regulated by Department of Company Affairs (DCA) under the directions /

guidelines issued by them under Section 637 A of the Companies Act, 1956.

The Government of India constituted an Expert Committee in March 2000 (Chairman:

Shri P.Sabanayagam)

LOAN COMPANY

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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).

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of
financial assets over time, between the lender and the borrower.

RESIDUARY NON-BANKING COMPANIES (RNBCS)

Company which receives deposits under any scheme or arrangement, by whatever name
called, in one lump-sum or in instalments by way of contributions or subscriptions or by
sale of units or certificates or other instruments, or in any manner are called RNBCs.

RNBCs are a class of NBFCs which cannot be classified as equipment leasing, hire
purchase, loan, investment, nidhi or chit fund companies, but which tap public savings
by operating various deposit schemes.

The deposit acceptance activities of these companies are governed by the provisions
of Residuary Non Banking Companies (Reserve Bank) Directions, 1987

HIRE-PURCHASE COMPANY

Any financial intermediary whose principal business relates to hire purchase

transactions or financing of such transactions.

A method of buying goods through making installment payments over time.

Under a hire purchase contract, the buyer is leasing the goods and does not obtain
ownership until the full amount of the contract is paid.

Hire purchase combines elements of both a loan and a lease. You reach an agreement
with the dealer to pay an initial deposit, typically anything between 10% and 50%, and
then pay off the balance in monthly installments over an agreed period of time. At the
end of this period, the product is yours.

EQUIPMENT LEASING COMPANY

Equipment leasing company is any financial institution whose principal business is that of
leasing equipments or financing of such an activity.

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Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for
which it must pay a series of contractual, periodic, tax deductible payments.

The lessee is the receiver of the services or the assets under the lease contract and
the lessor is the owner of the assets. The relationship between the tenant and the
landlord is called a tenancy, and can be for a fixed or an indefinite period of time
(called the term of the lease). The consideration for the lease is called rent.

IMPORTANCE

Non banking financial institutions have the following importance in Indian economy.

Greater reach.

Flexibility in tapping resources.

Retail services to small and medium business.

Important component of financial market.