Basics of Non-Banking Financial Companies (NBFCs)

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
  • NBFCs cannot issue cheques drawn on themselves
  • Deposits with NBFCs are not covered by Deposit Insurance.

Different Categories of NBFCs

All NBFCs are either deposit taking or Non-deposit taking. If they are non-deposit taking, ND is suffixed to their name (NBFC-ND). The NBFCs which have asset size of Rs.100 Crore or more are known as Systematically Important NBFC. They have been classified so because they can have bearing on financial stability of the country.  The Non-deposit taking NBFCs are denoted as NBFC-NDSI. Under these two broad categories, the different NBFCs are as follows:

Asset Finance Company(AFC)

The main business of these companies is to finance the assets such as machines, automobiles, generators, material equipments, industrial machines etc.

Investment Company (IC)

The main business of these companies is to deal in securities.

Loan Companies (LC)

The main business of such companies is to make loans and advances (not for assets but for other purposes such as working capital finance etc. )

Infrastructure Finance Company (IFC)

A company which has net owned funds of at least Rs. 300 Crore and has deployed 75% of its total assets in Infrastructure loans is called IFC provided it has credit rating of A or above and has a CRAR of 15%.

Systemically Important Core Investment Company (CIC-ND-SI)

A systematically important NBFC (assets Rs. 100 crore and above)  which has deployed at least 90% of its assets in the form of investment in shares or debt instruments or loans in group companies is called CIC-ND-SI. Out of the 90%, 60% should be invested in equity shares or those instruments which can be compulsorily converted into equity shares. Such companies do accept public funds.

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