NBFCs or Non Banking Financial Companies are those companies which provide banking services without meeting the legal definition of a bank. A NBFC is 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.
The NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government. They also deal in other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.
However, the companies cannot be NBFCs if their primary business is related to agriculture activity, industrial activity, sale/purchase/construction of immovable property.
Usually, the 50-50 test is used as an anchor to register an NBFC with RBI. 50-50 Test means that the companies at least 50% assets are financial assets and its income from financial assets is more than 50% of the gross income.
Regulation of NBFCs
Non-Banking Financial Companies are regulated by different regulators in India such as RBI, Irda, SEBI, National Housing Bank and Department of Company Affairs. RBI regulates the companies which deal in lending, accepting deposits, financial leasing, hire purchase and acquisition of shares / stocks etc. The companies that take up activities like stock broking, merchant banking etc. are regulated by SEBI while the Nidhi and Chitfund companies are regulated by Department of Company Affairs. Housing finance companies are regulated by National Housing Bank.
NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI but they need to register with respective regulators. For example:
- Venture Capital Fund/Merchant Banking companies/Stock broking companies are registered with SEBI
- Insurance Company needs to hold a certificate of registration with 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.
Difference between NBFC and Banks
The major differences between NBFCs and Banks are as follows:
- NBFC cannot accept demand deposits (they can accept term deposits)
- NBFCs do not form part of the payment and settlement system