A.

Definitions
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. What does conducting financial activity as “principal business”
mean?
Financial activity as principal business is when a company’s financial assets
constitute more than 50 per cent of the total assets and income from financial
assets constitute more than 50 per cent of the gross income. A company which
fulfils both these criteria will be registered as NBFC by RBI. The term 'principal
business' is not defined by the Reserve Bank of India Act. The Reserve Bank has
defined it so as to ensure that only companies predominantly engaged in
financial activity get registered with it and are regulated and supervised by it.
Hence if there are companies engaged in agricultural operations, industrial
activity, purchase and sale of goods, providing services or purchase, sale or
construction of immovable property as their principal business and are doing
some financial business in a small way, they will not be regulated by the Reserve
Bank. Interestingly, this test is popularly known as 50-50 test and is applied to
determine whether or not a company is into financial business.
3. NBFCs are doing functions similar to banks. What is 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.
4. Is it necessary that every NBFC should be registered with RBI?
In terms of Section 45-IA 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 ₹ 25 lakhs (₹ 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 Certificate of Registration issued by 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, Stock Exchange or a Mutual
Benefit company.
5. What are the 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 comply with the following:
i. it should be a company registered under Section 3 of the companies Act, 1956
ii. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net
owned fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors,
CICs is indicated separately in the FAQs on specialized NBFCs)
6. What is the procedure for application to the Reserve Bank for
Registration?
The applicant company is required to apply online and submit a physical copy of
the application along with the necessary documents to the Regional Office of the
Reserve Bank of India. The application can be submitted online by accessing
RBI’s secured website https://cosmos.rbi.org.in . At this stage, the applicant
company will not need to log on to the COSMOS application and hence user ids
are not required. The company can click on “CLICK” for Company Registration on
the login page of the COSMOS Application. A window showing the Excel
application form available for download would be displayed. The company can
then download suitable application form (i.e. NBFC or SC/RC) from the above
website, key in the data and upload the application form. The company may note
to indicate the correct name of the Regional Office in the field “C-8” of the
“Annex-I dentification Particulars” in the Excel application form. The company
would then get a Company Application Reference Number for the CoR application
filed on-line. Thereafter, the company has to submit the hard copy of the
application form (indicating the online Company Application Reference Number,
along with the supporting documents, to the concerned Regional Office. The
company can then check the status of the application from the above mentioned
secure address, by keying in the acknowledgement number.
7. What are the essential documents required to be submitted along
with the application form to the Regional Office of the Reserve Bank?
The application form and an indicative checklist of the documents required to be
submitted along with the application is available at www.rbi.org.in → Site Map
→ NBFC List → Forms/ Returns.
8. What are systemically important NBFCs?
NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet
are considered as systemically important NBFCs. The rationale for such
classification is that the activities of such NBFCs will have a bearing on the
financial stability of the overall economy.
B. Entities Regulated by RBI and applicable regulations
9. Does the Reserve Bank regulate all financial companies?
No. Housing Finance Companies, Merchant Banking Companies, Stock
Exchanges, Companies engaged in the business of stock-broking/sub-broking,
Venture Capital Fund Companies, Nidhi Companies, Insurance companies and
Chit Fund Companies are NBFCs but they have been exempted from the
requirement of registration under Section 45-IA of the RBI Act, 1934 subject to
certain conditions.
Housing Finance Companies are regulated by National Housing Bank, Merchant
Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-
brokers are regulated by Securities and Exchange Board of India, and Insurance
companies are regulated by Insurance Regulatory and Development Authority.
Similarly, Chit Fund Companies are regulated by the respective State
Governments and Nidhi Companies are regulated by Ministry of Corporate
Affairs, Government of India. Companies that do financial business but are
regulated by other regulators are given specific exemption by the Reserve Bank
from its regulatory requirements for avoiding duality of regulation.
It may also be mentioned that Mortgage Guarantee Companies have been
notified as Non-Banking Financial Companies under Section 45 I(f)(iii) of the RBI
Act, 1934. Core Investment Companies with asset size of less than ₹ 100 crore,
and those with asset size of ₹ 100 crore and above but not accessing public
funds are exempted from registration with the RBI.
10. 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 (NBFC-NDSI
and NBFC-ND) 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 therefrom 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.
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 ₹ 300 crore, c) has a minimum credit rating
of ‘A ‘or equivalent d) and a CRAR 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 which
satisfies the following conditions:-
(a) it holds not less than 90% of its Total Assets in the form of investment in
equity shares, preference shares, debt or loans in group companies;
(b) 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 Total
Assets;
(c) it does not trade in its investments in shares, debt or loans in group
companies except through block sale for the purpose of dilution or
disinvestment;
(d) it does not carry on any other financial activity referred to in Section 45I(c)
and 45I(f) of the RBI act, 1934 except investment in bank deposits, money
market instruments, government securities, loans to and investments in debt
issuances of group companies or guarantees issued on behalf of group
companies.
(e) Its asset size is ₹ 100 crore or above and
(f) It accepts public funds
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. IDF-NBFC raise resources through issue of Rupee or
Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure
Finance Companies (IFC) can sponsor IDF-NBFCs.
VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-
MFI is a non-deposit taking NBFC having not less than 85% of its assets in the
nature of qualifying assets which satisfy the following criteria:
a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual
income not exceeding ₹ 1,00,000 or urban and semi-urban household income not
exceeding ₹ 1,60,000;
b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in
subsequent cycles;
c. total indebtedness of the borrower does not exceed ₹ 1,00,000;
d. tenure of the loan not to be less than 24 months for loan amount in excess of
₹ 15,000 with prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not less than 50
per cent of the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments at the choice
of the borrower
VIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a
non-deposit taking NBFC engaged in the principal business of factoring. The
financial assets in the factoring business should constitute at least 50 percent of
its total assets and its income derived from factoring business should not be less
than 50 percent of its gross income.
IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for
which at least 90% of the business turnover is mortgage guarantee business or
at least 90% of the gross income is from mortgage guarantee business and net
owned fund is ₹ 100 crore.
X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial
institution through which promoter / promoter groups will be permitted to set up
a new bank .It’s a wholly-owned Non-Operative Financial Holding Company
(NOFHC) which will hold the bank as well as all other financial services
companies regulated by RBI or other financial sector regulators, to the extent
permissible under the applicable regulatory prescriptions.
11. What are the powers of the Reserve Bank with regard to 'Non-Bank
Financial Companies’, that is, companies that meet the 50-50 Principal
Business Criteria?
The Reserve Bank has been given the powers under the RBI Act 1934 to register,
lay down policy, issue directions, inspect, regulate, supervise and exercise
surveillance over NBFCs that meet the 50-50 criteria of principal business. The
Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or
the directions or orders issued by RBI under RBI Act. The penal action can also
result in RBI cancelling the Certificate of Registration issued to the NBFC, or
prohibiting them from accepting deposits and alienating their assets or filing a
winding up petition.
12. What action can be taken against persons/financial companies
making false claim of being regulated by the Reserve Bank?
It is illegal for any financial entity or unincorporated body to make a false claim
of being regulated by the Reserve Bank to mislead the public to collect deposits
and is liable for penal action under the Indian Penal Code. Information in this
regard may be forwarded to the nearest office of the Reserve Bank and the
Police.
13. What action is taken if financial companies which are lending or
making investments as their principal business do not obtain a
Certificate of Registration from the Reserve Bank?
If companies that are required to be registered with the Reserve Bank as NBFCs,
are found to be conducting non-banking financial activity, such as, lending,
investment or deposit acceptance as their principal business, without seeking
registration, the Reserve Bank can impose penalty or fine on them or can even
prosecute them in a court of law. If members of public come across any entity
which does non-banking financial activity but does not figure in the list of
authorized NBFC on RBI website, they should inform the nearest Regional Office
of the Reserve Bank, for appropriate action to be taken for contravention of the
provisions of the RBI Act, 1934.
14. Where can one find list of Registered NBFCs and instructions issued
to NBFCs?
The list of registered NBFCs is available on the web site of Reserve Bank of India
and can be viewed at www.rbi.org.in → Sitemap → NBFC List. The instructions
issued to NBFCs from time to time are also hosted at www.rbi.org.in →
Notifications → Master Circulars → Non-banking, besides, being issued through
Official Gazette notifications and press releases.
15. What are the regulations applicable on non-deposit accepting
NBFCs with asset size of less than ₹ 500 crore?
The regulation on non-deposit accepting NBFCs with asset size of less than ₹ 500
crore would be as under:
(i) They shall not be subjected to any regulation either prudential or conduct of
business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not
accessed any public funds and do not have a customer interface.
(ii) Those having customer interface will be subjected only to conduct of business
regulations including FPC, KYC etc., if they are not accessing public funds.
(iii) Those accepting public funds will be subjected to limited prudential
regulations but not conduct of business regulations if they have no customer
interface.
(iv) Where both public funds are accepted and customer interface exist, such
companies will be subjected both to limited prudential regulations and conduct of
business regulations.
16. What does the term public funds include? Is it the same as public
deposits?
Public funds are not the same as public deposits. Public funds include public
deposits, inter-corporate deposits, bank finance and all funds received whether
directly or indirectly from outside sources such as funds raised by issue of
Commercial Papers, debentures etc. However, even though public funds include
public deposits in the general course, it may be noted that CICs/CICs-ND-SI
cannot accept public deposits.
Further, indirect receipt of public funds means funds received not directly but
through associates and group entities which have access to public funds.
17. What are the various prudential regulations applicable to NBFCs?
The Bank has issued detailed directions on prudential norms, vide Non-Banking
Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve
Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-
Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank)
Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit
Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions,
2015. Applicable regulations vary based on the deposit acceptance or systemic
importance of the NBFC.
The directions inter alia, prescribe guidelines on income recognition, asset
classification and provisioning requirements applicable to NBFCs, exposure
norms, disclosures in the balance sheet, requirement of capital adequacy,
restrictions on investments in land and building and unquoted shares, loan to
value (LTV) ratio for NBFCs predominantly engaged in business of lending against
gold jewellery, besides others. Deposit accepting NBFCs have also to comply with
the statutory liquidity requirements. Details of the prudential regulations
applicable to NBFCs holding deposits and those not holding deposits is available
in the section ‘Regulation – Non-Banking – Notifications - Master Circulars’ in
the RBI website.
18. Please explain the terms ‘owned fund’ and ‘net owned fund’ in
relation to NBFCs?
‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares
which are compulsorily convertible into equity, free reserves, balance in share
premium account and capital reserves representing surplus arising out of sale
proceeds of asset, excluding reserves created by revaluation of asset, after
deducting therefrom accumulated balance of loss, deferred revenue expenditure
and other intangible assets. 'Net Owned Fund' is the amount as arrived at above,
minus the amount of investments of such company in shares of its subsidiaries,
companies in the same group and all other NBFCs and the book value of
debentures, bonds, outstanding loans and advances including hire purchase and
lease finance made to and deposits with subsidiaries and companies in the same
group, to the extent it exceeds 10% of the owned fund.
19. What are the responsibilities of the NBFCs registered with Reserve
Bank, with regard to submission on compliances and other information?
A. Returns to be submitted by deposit taking NBFCs
1. NBS-1 Quarterly Returns on deposits in First Schedule.
2. NBS-2 Quarterly return on Prudential Norms is required to be submitted
by NBFC accepting public deposits.
3. NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
4. NBS-4 Annual return of critical parameters by a rejected company holding
public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been
made quarterly.)
5. NBS-6 Monthly return on exposure to capital market by deposit taking
NBFC with total assets of ₹ 100 crore and above.
6. Half-yearly ALM return by NBFC holding public deposits of more than ₹
20 crore or asset size of more than ₹ 100 crore
7. Audited Balance sheet and Auditor’s Report by NBFC accepting public
deposits.
 8. Branch Info Return.
B. Returns to be submitted by NBFCs-ND-SI
9. NBS-7 A Quarterly statement of capital funds, risk weighted assets, risk
asset ratio etc., for NBFC-ND-SI.
10. Monthly Return on Important Financial Parameters of
NBFCs-ND-SI.
11.ALM returns:
(i) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -
Monthly,
(ii) Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,
(iii) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half
yearly
12. Branch Info return
C. Quarterly return on important financial parameters of non deposit
taking NBFCs having assets of more than ₹ 50 crore and above but less
than ₹ 100 crore
Basic information like name of the company, address, NOF, profit / loss during
the last three years has to be submitted quarterly by non-deposit taking NBFCs
with asset size between ₹ 50 crore and ₹ 100 crore.
There are other generic reports to be submitted by all NBFCs as elaborated in
Master Circular on Returns to be submitted by NBFCs as available
on www.rbi.org.in → Notifications → Master Circulars → Non-
banking and Circular DNBS (IT) CC.No.02/24.01.191/2015-16 dated July
9, 2015 as available on www.rbi.org.in → Notifications.
20. Whether the circular on Lending against shares dated August 21,
2014 is applicable to existing loans also?
The Circular is applicable from the date of the circular and therefore the Circular
shall not apply on those transactions which have been entered into prior to the
date of the Circular. However, the guidelines will be applicable in case of roll-
over/ renewal of loans. Guidelines will not apply to transactions where
documents have been executed prior to the date of the circular and
disbursement is pending.
21. Will the circular on Lending against shares be applicable on
restructured accounts?
No. the Circular will not be applicable on restructured accounts
22. Will the Circular on Lending against shares be applicable on those
loans where the primary security is not shares/ units of mutual funds?
Loans which are against the collateral of multiple securities and it is specifically
agreed to in the agreement that primary security would be something other than
shares/ units of mutual funds, LTV would not be applicable. However, reporting
requirements shall remain. In cases where such differentiation is not made
(thereby NBFCs can off-load shares at the instance of a default), LTV would be
applicable.
23. Whether LTV for loans issued against the collateral of shares is to
be computed at scrip level or at portfolio level?
LTV would be computed at portfolio level.
24. Whether PoA/ Non-Disposal undertaking structure by whatever
name called is covered under the Circular on Lending against shares?
Yes, the Circular would be applicable and the type of encumbrance created is
immaterial.
25. Does the definition of “companies in a group” as given in
Systemically Important Non-Banking Financial (non-deposit accepting
or holding) companies Prudential Norms Directions, 2015 apply in
respect of concentration of credit/ investment norms.
No, the definition of “companies is a group” is only for the purpose of
determining the applicability of prudential norms on multiple NBFCs in a group.
26. Whether acquisition/ transfer of shareholding of 26 per cent or more
of the paid up equity capital of an NBFC within the same group i.e. intra
group transfers require prior approval of the Bank?
Yes, prior approval would be required in all cases of acquisition/ transfer of
shareholding of 26 per cent or more of the paid up equity capital of an NBFC. In
case of intra-group transfers, NBFCs shall submit an application, on the company
letter head, for obtaining prior approval of the Bank. Based on the application of
the NBFC, it would be decided, on a case to case basis, whether the NBFC
requires to submit the documents as prescribed at para 3 of DNBR (PD) CC.No.
065/03.10.001/2015-16 dated July 9, 2015 for processing the application of the
company. In cases where approval is granted without the documents, the NBFC
would be required to submit the same after the process of transfer is complete.
27. NBFCs are charging high interest rates from their borrowers. Is
there any ceiling on interest rate charged by the NBFCs to their
borrowers?
Reserve Bank of India has deregulated interest rates to be charged to borrowers
by financial institutions (other than NBFC- Micro Finance Institution). The rate of
interest to be charged by the company is governed by the terms and conditions
of the loan agreement entered into between the borrower and the NBFCs.
However, the NBFCs have to be transparent and the rate of interest and manner
of arriving at the rate of interest to different categories of borrowers should be
disclosed to the borrower or customer in the application form and communicated
explicitly in the sanction letter etc.
28. RBI permits NBFCs to hedge their exposure through dealing in IRFs.
Currently, IRFs are on single stock 10 yr 8.40% 2024 security. The
Composition of Balance Sheet is mix of fixed/ floating interest rate and
different credit profile. Whether 10 yr single security can be used for
hedging 2-3 yr liability and asset (Duration adjusted) or can be used for
investment in other long tenor securities or corporate bonds.
Alternatively, whether IRFs can be used holistically for hedging assets
and liabilities in dynamic interest rate scenarios within total Balance
Sheet amount and within hedging definition?
IRF may be used to hedge interest rate risk associated with single asset/ liability
or a group of assets/ liabilities. Hence, NBFCs are permitted to use duration
based hedging for managing interest rate risk.
29. Whether NBFCs as trading member can participate in the IRF
market only for hedging or can also take trading position?
As per extant guidelines NBFCs with asset size of ₹ 1,000 cr and above are
permitted to participate in IRF as trading members. While, trading members of
stock exchanges are permitted to execute trades on their own account as well as
on account of their clients, banks and PDs have been allowed to deal in IRF for
both hedging and trading on own account and not on client’s account. Similarly,
NBFCs as trading members are permitted to execute their proprietary trades and
not to undertake transactions on behalf of clients.
C. Residuary Non-Banking Companies (RNBCs)
30. What is a Residuary Non-Banking Company (RNBC)? In what way it
is different from other NBFCs?
Residuary Non-Banking Company is a class of NBFC which is a company and has
as its principal business the receiving of deposits, under any scheme or
arrangement or in any other manner and not being Investment, Asset Financing,
Loan Company. These companies are required to maintain investments as per
directions of RBI, in addition to liquid assets. The functioning of these companies
is different from those of NBFCs in terms of method of mobilization of deposits
and requirement of deployment of depositors' funds as per Directions. Besides,
Prudential Norms Directions are applicable to these companies also.
31. We understand that there is no ceiling on raising of deposits by
RNBCs, then how safe is deposit with them?
It is true that there is no ceiling on raising of deposits by RNBCs. However, every
RNBC has to ensure that the amounts deposited with it are fully invested in
approved investments. In other words, in order to secure the interests of
depositor, such companies are required to invest 100 per cent of their deposit
liability into highly liquid and secure instruments, namely, Central/State
Government securities, fixed deposits with scheduled commercial banks (SCB),
Certificate of Deposits of SCB/FIs, units of Mutual Funds, etc.
32. Can RNBC forfeit deposit if deposit instalments are not paid
regularly or discontinued?
No. Residuary Non-Banking Company cannot forfeit any amount deposited by the
depositor, or any interest, premium, bonus or other advantage accrued thereon.
33. What is the rate of interest that an RNBC must pay on deposits and
what should be maturity period of deposits taken by them?
The minimum interest an RNBC should pay on deposits should be 5% (to be
compounded annually) on the amount deposited in lump sum or at monthly or
longer intervals; and 3.5% (to be compounded annually) on the amount
deposited under daily deposit scheme. Interest here includes premium, bonus or
any other advantage, that an RNBC promises to the depositor by way of return.
An RNBC can accept deposits for a minimum period of 12 months and maximum
period of 84 months from the date of receipt of such deposit. They cannot accept
deposits repayable on demand. However, at present, the only RNBCs in existence
(Peerless) has been directed by the Reserve Bank to stop collecting deposits,
repay the deposits to the depositor and wind up their RNBC business as their
business model is inherently unviable.
D. Definition of deposits, Eligible / Ineligible Institutions to accept
deposits and Related Matters
34. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?
The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934.
‘Deposit’ includes and shall be deemed always to have included any receipt of
money by way of deposit or loan or in any other form but does not include:
i. amount raised by way of share capital, or contributed as capital by partners of
a firm;
ii. amount received from a scheduled bank, a co-operative bank, a banking
company, Development bank, State Financial Corporation, IDBI or any other
institution specified by RBI;
iii. amount received in ordinary course of business by way of security deposit,
dealership deposit, earnest money, advance against orders for goods, properties
or services;
iv. amount received by a registered money lender other than a body corporate;
v. amount received by way of subscriptions in respect of a ‘Chit’.
Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public
Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a
‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further
excludes the following:
a. amount received from the Central/ State Government or any other source
where repayment is guaranteed by Central/ State Government or any amount
received from local authority or foreign government or any foreign citizen/
authority/ person;
b. any amount received from financial institutions specified by RBI for this
purpose;
c. any amount received by a company from any other company;
d. amount received by way of subscriptions to shares, stock, bonds or
debentures pending allotment or by way of calls in advance if such amount is not
repayable to the members under the articles of association of the company;
e. amount received from directors of a company or from its shareholders by
private company or by a private company which has become a public company;
f. amount raised by issue of bonds or debentures secured by mortgage of any
immovable property or other asset of the company subject to conditions;
fa. any amount raised by issuance of non-convertible debentures with a maturity
more than one year and having the minimum subscription per investor at ₹ 1
crore and above, provided it is in accordance with the guidelines issued by the
Bank.
g. the amount brought in by the promoters by way of unsecured loan;
h. amount received from a mutual fund;
i. any amount received as hybrid debt or subordinated debt;
j. amount received from a relative of the director of an NBFC;
k. any amount received by issuance of Commercial Paper.
l. any amount received by a systemically important non-deposit taking non-
banking financial company by issuance of ‘perpetual debt instruments’
m. any amount raised by the issue of infrastructure bonds by an Infrastructure
Finance Company
Thus, the directions exclude from the definition of public deposit, amount raised
from certain set of informed lenders who can make independent decision.
35. Which entities can legally accept deposits from public?
Banks, including co-operative banks, can accept deposits. Non-bank finance
companies, which have been issued Certificate of Registration by RBI with a
specific licence to accept deposits, are entitled to accept public deposit. In other
words, not all NBFCs registered with the Reserve Bank are entitled to accept
deposits but only those that hold a deposit accepting Certificate of Registration
can accept deposits. They can, however, accept deposits, only to the extent
permissible. Housing Finance Companies, which are again specifically authorized
to collect deposits and companies authorized by Ministry of Corporate Affairs
under the Companies Acceptance of Deposits Rules framed by Central
Government under the Companies Act can also accept deposits also upto a
certain limit. Cooperative Credit Societies can accept deposits from their
members but not from the general public. The Reserve Bank regulates the
deposit acceptance only of banks, cooperative banks and NBFCs.
It is not legally permissible for other entities to accept public deposits.
Unincorporated bodies like individuals, partnership firms, and other association
of individuals are prohibited from carrying on the business of acceptance of
deposits as their principal business. Such unincorporated bodies are prohibited
from even accepting deposits if they are carrying on financial business.
36. Can all NBFCs accept deposits? Is there any ceiling on acceptance of
Public Deposits? What is the rate of interest and period of deposit
which NBFCs can accept?
All NBFCs are not entitled to accept public deposits. Only those NBFCs to which
the Bank had given a specific authorisation and have an investment grade rating
are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net
Owned Funds. All existing unrated AFCs that have been allowed to accept
deposits shall have to get themselves rated by March 31, 2016. Those AFCs that
do not get an investment grade rating by March 31, 2016, will not be allowed to
renew existing or accept fresh deposits thereafter. In the intervening period, i.e.
till March 31, 2016, unrated AFCs or those with a sub-investment grade rating
can only renew existing deposits on maturity, and not accept fresh deposits, till
they obtain an investment grade rating.
However, as a matter of public policy, Reserve Bank has decided that only banks
should be allowed to accept public deposits and as such has since 1997 not
issued any Certificate of Registration (CoR) to new NBFCs for acceptance of
public deposits.
Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest
may be paid or compounded at rests not shorter than monthly rests. 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.
37. In respect of companies which do not fulfill the 50-50 criteria but
are accepting deposits – do they come under RBI purview?
A company which does not have financial assets which is more than 50% of its
total assets and does not derive at least 50% of its gross income from such
assets is not an NBFC. Its principal business would be non-financial activity like
agricultural operations, industrial activity, purchase or sale of goods or
purchase/construction of immoveable property, and will be a non-banking non-
financial company. Acceptance of deposits by a Non-Banking Non-Financial
Company are governed by the rules and regulations issued by the Ministry of
Corporate Affairs.
38. Why is the RBI so restrictive in allowing NBFCs to raise public
deposits?
The Reserve Bank's overarching concern while supervising any financial entity is
protection of depositors' interest. Depositors place deposit with any entity on
trust unlike an investor who invests in the shares of a company with the intention
of sharing the risk as well as return with the promoters. Protection of depositors'
interest thus is supreme in financial regulation. Banks are the most regulated
financial entities. The Deposit Insurance and Credit Guarantee Corporation pays
insurance on deposits up to ₹ One lakh in case a bank failed.
39. Which are the NBFCs specifically authorized by RBI to accept
deposits?
The Reserve Bank publishes the list of NBFCs that hold a valid Certificate of
Registration for accepting deposits on its website: www.rbi.org.in → Sitemap →
NBFC List → List of NBFCs Permitted to Accept Deposits. At times, some
companies are temporarily prohibited from accepting public deposits. The
Reserve Bank publishes the list of NBFCs temporarily prohibited also on its
website. The Reserve Bank keeps both these lists updated. Members of the
public are advised to check both these lists before placing deposits with NBFCs.
40. Whether NBFCs can accept deposits from NRIs?
Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except
deposits by debit to NRO account of NRI provided such amount does not
represent inward remittance or transfer from NRE/FCNR (B) account. However,
the existing NRI deposits can be renewed.
41. Can a Co-operative Credit Society accept deposits from the public?
No. Co-operative Credit Societies cannot accept deposits from general public.
They can accept deposits only from their members within the limit specified in
their bye laws.
42. Can a Salary Earners’ Society accept deposits from the public?
No. These societies are formed for salaried employees and hence they can
accept deposit only from their own members and not from general public.
43. Is nomination facility available to the Depositors of NBFCs?
Yes, nomination facility is available to the depositors of NBFCs. The Rules for
nomination facility are provided for in section 45QB of the Reserve Bank of India
Act, 1934. Non-Banking Financial Companies have been advised to adopt the
Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the
Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to
nominate one person to whom the NBFC can return the deposit in the event of
the death of the depositor/s. NBFCs are advised to accept nominations made by
the depositors in the form similar to one specified under the said rules, viz Form
DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of
nomination and change of nomination respectively.
44. How does the Reserve Bank come to know about unauthorized
acceptance of deposits by companies not registered with it or of NBFCs
engaged in lending or investment activities without obtaining the
Certificate of Registration from it?
NBFCs that ought to have sought registration from RBI but are functioning
without doing so are committing a breach of law. Such companies are liable for
action as envisaged under the RBI Act, 1934. To identify such entities, RBI has
multiple sources of information. These include market intelligence, complaints
received from affected parties, industry sources, and exception reports
submitted by statutory auditors in terms of Non-Banking Financial Companies
Auditor’s Report (Reserve Bank) Directions, 2008. Further, the State Level Co-
ordination Committees (SLCC) is convened by RBI in all the States/UTs on
quarterly basis. The SLCC is now chaired by the Chief Secretary/ Administrator of
the concerned State/UT and has, as its members, apart from the Reserve Bank,
the Regional Directorate of the MCA/ ROC, local unit of SEBI, NHB, Registrar of
Chits, ICAI, Economic Intelligence Unit of the State Police and officials from Law
and Home Ministries of the State Government. As all the relevant financial sector
regulators and enforcement agencies participate in the SLCC, it is possible to
quickly share the information and agree on an effective course of action to be
taken against entities indulging in unauthorized and suspect businesses involving
funds mobilization from public.
45. Can Proprietorship/Partnership Concerns associated/not associated
with registered NBFCs accept public deposits?
No. Proprietorship and partnership concerns are un-incorporated bodies. Hence
they are prohibited under the RBI Act 1934 from accepting public deposits.
46. There are many jewellery shops taking money from the public in
instalments. Is this amounting to acceptance of deposits?
It depends on whether the money is received as advance for delivering jewellery
at a future date or whether the money is received with a promise to return the
same with interest. The money accepted by Jewellery shops in instalments for
the purpose of delivering jewellery at the end of the period of contract is not
deposit. It will amount to acceptance of deposits if in return for the money
received, the jewellery shop promises to return the principal amount along with
interest.
47. What action can be taken if such unincorporated entities accept
public deposits? What if NBFCs which have not been authorized to
accept public deposits use proprietorship/partnership firms floated by
their promoters to collect deposits?
Such unincorporated entities, if found accepting public deposits, are liable for
criminal action. Further NBFCs are prohibited by RBI from associating with any
unincorporated bodies. If NBFCs associate themselves with
proprietorship/partnership firms accepting deposits in contravention of RBI Act,
they are also liable to be prosecuted under criminal law or under the Protection
of Interest of Depositors (in Financial Establishments) Act, if passed by the State
Governments.
48. What is the difference between acceptance of money by Chit Funds
and acceptance of deposits?
Deposits are defined under the RBI Act 1934 as acceptance of money other than
that raised by way of share capital, money received from banks and other
financial institutions, money received as security deposit, earnest money and
advance against goods or services and subscriptions to chits. All other amounts,
received as loan or in any form are treated as deposits. Chit Funds activity
involves contributions by members in instalments by way of subscription to the
Chit and by rotation each member of the Chit receives the chit amount. The
subscriptions are specifically excluded from the definition of deposits and cannot
be termed as deposits. While Chit funds may collect subscriptions as above, they
are prohibited by RBI from accepting deposits with effect from August 2009.
E. Depositor Protection Issues
49. What are the salient features of NBFC 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 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.
50. What precautions should a depositor take before placing deposit
with an NBFC?
A depositor wanting to place deposit with an NBFC must take the following
precautions before placing deposits:
i. That the NBFC is registered with RBI and specifically authorized by the RBI
to accept deposits. A list of deposit taking NBFCs entitled to accept
deposits is available at www.rbi.org.in → Sitemap → NBFC List. The
depositor should check the list of NBFCs permitted to accept public
deposits and also check that it is not appearing in the list of companies
prohibited from accepting deposits, which is available
at www.rbi.org.in → Sitemap → NBFC List → NBFCs who have been
issued prohibitory orders, winding up petitions filed and legal cases under
Chapter IIIB, IIIC and others.
ii. NBFCs have to prominently display the Certificate of Registration (CoR)
issued by the Reserve Bank on its site. This certificate should also reflect
that the NBFC has been specifically authorized by RBI to accept deposits.
Depositors must scrutinize the certificate to ensure that the NBFC is
authorized to accept deposits.
iii. The maximum interest rate that an NBFC can pay to a depositor should
not exceed 12.5%. The Reserve Bank keeps altering the interest rates
depending on the macro-economic environment. The Reserve Bank
publishes the change in the interest rates on www.rbi.org.in → Sitemap
→ NBFC List → FAQs.
iv. The depositor must insist on a proper receipt for every amount of deposit
placed with the company. The receipt should be duly signed by an officer
authorized by the company and should state the date of the deposit, the
name of the depositor, the amount in words and figures, rate of interest
payable, maturity date and amount.
v. In the case of brokers/agents etc collecting public deposits on behalf of
NBFCs, the depositors should satisfy themselves that the brokers/agents
are duly authorized by the NBFC.
vi. The depositor must bear in mind that public deposits are unsecured and
Deposit Insurance facility is not available to depositors of NBFCs.
vii. The Reserve Bank of India does not accept any responsibility or guarantee
about the present position as to the financial soundness of the company or
for the correctness of any of the statements or representations made or
opinions expressed by the company and for repayment of
deposits/discharge of the liabilities by the company.
51. Does RBI guarantee the repayment of the deposits collected by
NBFCs?
No. The Reserve Bank does not guarantee repayment of deposits by NBFCs even
though they may be authorized to collect deposits. As such, investors and
depositors should take informed decisions while placing deposit with an NBFC.
52. In case an NBFC defaults in repayment of deposit what course of
action can be taken by depositors?
If an NBFC defaults in repayment of deposit, the depositor can approach
Company Law Board or Consumer Forum or file a civil suit in a court of law to
recover the deposits. NBFCs are also advised to follow a grievance redress
procedure as indicated in reply to question 57 below. Further, at the level of the
State Government, the State Legislations on Protection of Interest of Depositors
(in Financial Establishments) empowers the State Governments to take action
even before the default takes place or complaints are received from depositors. If
there is perpetration of an offence and if the intention is to defraud, the State
Government can even attach properties.
53. What is the role of Company Law Board in protecting the interest of
depositors? How can one approach it?
When an NBFC fails to repay any deposit or part thereof in accordance with the
terms and conditions of such deposit, the Company Law Board (CLB) either on its
own motion or on an application from the depositor, directs by order the Non-
Banking Financial Company to make repayment of such deposit or part thereof
forthwith or within such time and subject to such conditions as may be specified
in the order. After making the payment, the company will need to file the
compliance with the local office of the Reserve Bank of India.
As explained above, the depositor can approach CLB by mailing an application in
prescribed form to the appropriate bench of the Company Law Board according
to its territorial jurisdiction along with the prescribed fee.
54. Can you give the addresses of the various benches of the Company
Law Board (CLB) indicating their respective jurisdiction?
The details of addresses and territorial jurisdiction of the bench officers of CLB
are as under:

S. Benches Jurisdiction Telephone

No. No.

1. Company Law All States & Union 011 –

Board Territories 24366126
Principal Bench
Paryavaran
Bhawan
 B-Block, 3rd Floor
C.G.O. Complex
Lodhi Road,New
Delhi – 110 003

2. Company Law States of Delhi, Haryana, 011 –

Board Himachal Pradesh, Jammu 24363671,
New Delhi Bench & Kashmir, Punjab, 011 –
Paryavaran Rajasthan, Uttar Pradesh, 24362324
Bhawan Uttarakhand and Union
B-Block, 3rd Floor Territories of Chandigarh.
C.G.O. Complex
Lodhi Road,New
Delhi – 110 003

3. Company Law States of Arunachal 033 –

Board Pradesh, Assam, Bihar, 22486330
Kolkata Bench Manipur, Meghalaya,
5, Esplande Nagaland, Orissa, Sikkim,
Row(West) Tripura, West Bengal,
Kolkata – 700 001 Jharkhand and Union
Territories of Andaman and
Nicobar Island and
Mizoram.

4. Company Law States of Goa, Gujarat, 022 –

Board Madhya Pradesh, 22619636
Mumbai Bench Maharashtra, Chhattisgarh
N.T.C. House, and (Union Territories of
2ND Floor, Dadra and Nagar Haveli
15 Narottam and Damman and Diu)
Morarjee Marg,
Ballard Estate,
Mumbai – 400
038

5. Company Law States of Andhra Pradesh, 044 –

Board, Karnataka, Kerala, Tamil 25262791
Chennai Bench Nadu and Union Territories
Corporate of Pondicherry and
Bhawan (UTI Lakshadweep Island.
Building),
3rd Floor, No. 29
Rajaji Salari,
Chennai –
600001.

55. We hear that in a number of cases Official Liquidators have been

appointed on the defaulting NBFCs. What is the procedure adopted by
the Official Liquidator?
An Official Liquidator is appointed by the court after giving the company
reasonable opportunity of being heard in a winding up petition. The liquidator
performs the duties of winding up of the company and such duties in reference
thereto as the court may impose. Where the court has appointed an official
liquidator or provisional liquidator, he becomes custodian of the property of the
company and runs day-to-day affairs of the company. He has to draw up a
statement of affairs of the company in prescribed form containing particulars of
assets of the company, its debts and liabilities, names/residences/occupations of
its creditors, the debts due to the company and such other information as may
be prescribed. The scheme is drawn up by the liquidator and same is put up to
the court for approval. The liquidator realizes the assets of the company and
arranges to repay the creditors according to the scheme approved by the court.
The liquidator generally inserts advertisement in the newspaper inviting claims
from depositors/investors in compliance with court orders. Therefore, the
investors/depositors should file the claims within due time as per such notices of
the liquidator. The Reserve Bank also provides assistance to the depositors in
furnishing addresses of the official liquidator.
56. The Consumer Court plays useful role in attending to depositors
problems. Can one approach Consumer Forum, Civil Court, CLB
simultaneously?
Yes, a depositor can approach any or all of the redressal authorities i.e consumer
forum, court or CLB.
57. Is there an Ombudsman for hearing complaints against NBFCs or
Does RBI have any grievance redressal mechanism in place for NBFCs?
No, there is no Ombudsman for hearing complaints against NBFCs. However, in
respect of credit card operations of an NBFC, which is a subsidiary of a bank, if a
complainant does not get satisfactory response from the NBFC within a
maximum period of thirty (30) days from the date of lodging the complaint, the
customer will have the option to approach the Office of the concerned Banking
Ombudsman for redressal of his grievance/s.
If complaints or grievances against the NBFCs are submitted to the nearest office
of the Reserve Bank of India, the same are taken up with the NBFC concerned to
facilitate resolution of the grievance/complaint. Further, all NBFCs have in place a
Grievance Redressal Officer, whose name and contact details have to be
mandatorily displayed in the premises of the NBFCs. The grievance can be taken
up with the Grievance Redressal Officer. In case the complainant is not satisfied
with the settlement of the complaint by the Grievance Redressal Officer of the
NBFC, he/she may approach the nearest office of the Reserve Bank of India with
the complaint. The details of the Office of the Reserve Bank has also to be
mandatorily displayed in the premises of the NBFC.
58. Companies registered with MCA but not registered with RBI as
NBFCs also sometimes default in repayment of deposit/ amounts
invested with them? What is the recourse available to the investors in
such an event? Does RBI have any role to play in such cases?
Companies registered with MCA but not required to be registered with RBI as
NBFC are not under the regulatory domain of RBI. Whenever RBI receives any
such complaints about the companies registered with MCA but not registered
with RBI as NBFCs, it forwards the complaints to the Registrar of Companies
(ROC) of the respective state for any action. The complainants are advised that
the complaints relating to irregularities of such companies should be promptly
lodged with ROC concerned for initiating corrective action. However, in case it
comes to the knowledge of RBI those companies were required to be registered
with the RBI, but have not done so and have accepted deposits as defined under
RBI Act, such action as is deemed necessary under the provisions of the RBI Act
will be taken.
59. The NBFCs have been made liable to pay interest on the overdue
matured deposits if the company has not been able to repay the
matured public deposits on receipt of a claim from the depositor. Please
elaborate the provisions.
As per Reserve Bank’s Directions, overdue interest is payable to the depositors in
case the company has delayed the repayment of matured deposits, and such
interest is payable from the date of receipt of such claim by the company or the
date of maturity of the deposit whichever is later, till the date of actual payment.
If the depositor has lodged his claim after the date of maturity, the company
would be liable to pay interest for the period from the date of claim till the date
of repayment. For the period between the date of maturity and the date of claim
it is the discretion of the company to pay interest. In cases where NBFCs are
required to freeze the term deposits of customer based on the orders of the
enforcement authorities or the deposit receipts are seized by the enforcement
authorities, they shall follow the procedure as given below:
i. request letter may be obtained from the customer on maturity. While
obtaining the request letter from the depositor for renewal, NBFCs should
also advise him to indicate the term for which the deposit is to be
renewed. In case the depositor does not exercise his option of choosing
the term for renewal, NBFCs may renew the same for a term equal to the
original term.
ii. No new receipt is required to be issued. However, suitable note may be
made regarding renewal in the deposit ledger.
iii. Renewal of deposit may be advised by registered letter / speed post /
courier service to the concerned Government department under advice to
the depositor. In the advice to the depositor, the rate of interest at which
the deposit is renewed should also be mentioned.
iv. If overdue period does not exceed 14 days on the date of receipt of the
request letter, renewal may be done from the date of maturity. If it
exceeds 14 days, NBFCs may pay interest for the overdue period as per
the policy adopted by them, and keep it in a separate interest free sub-
account which should be released when the original fixed deposit is
released.
However the final repayment of the principal and the interest so accrued should
be done only after the clearance regarding the same is obtained by the NBFCs
from the respective Government agencies.
60. Can a company pre-pay its public deposits?
An NBFC accepts deposits under a mutual contract with its depositors. In case a
depositor requests for pre-mature payment, Reserve Bank of India has prescribed
Regulations for such an eventuality in the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 1998 wherein it is
specified that NBFCs cannot grant any loan against a public deposit or make
premature repayment of a public deposit within a period of three months (lock-in
period) from the date of its acceptance. However, in the event of death of a
depositor, the company may, even within the lock-in period, repay the deposit at
the request of the joint holders with survivor clause / nominee / legal heir only
against submission of relevant proof, to the satisfaction of the company
An NBFC, (which is not a problem company) subject to above provisions, may
permit after the lock–in period, premature repayment of a public deposit at its
sole discretion, at the rate of interest prescribed by the Bank
A problem NBFC is prohibited from making premature repayment of any deposits
or granting any loan against public deposit/deposits, as the case may be. The
prohibition shall not, however, apply in the case of death of depositor or
repayment of tiny deposits i.e. up to ₹ 10000/- subject to lock in period of 3
months in the latter case.
61. What is the liquid assets requirement for the deposit taking
companies? Where are these assets kept? Do depositors have any
claims on them?
In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid assets
to be maintained by NBFCs is 15 per cent of public deposits outstanding as on
the last working day of the second preceding quarter. Of the 15%, NBFCs are
required to invest not less than ten percent in approved securities and the
remaining 5% can be in unencumbered term deposits with any scheduled
commercial bank. Thus, the liquid assets may consist of Government securities,
Government guaranteed bonds and term deposits with any scheduled
commercial bank.
The investment in Government securities should be in dematerialised form which
can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account
with a scheduled commercial bank (SCB) / Stock Holding Corporation of India
Limited (SHICL). In case of Government guaranteed bonds the same may be kept
in dematerialised form with SCB/SHCIL or in a dematerialised account with
depositories [National Securities Depository Ltd. (NSDL)/Central Depository
Services (India) Ltd. (CDSL)] through a depository participant registered with
Securities & Exchange Board of India (SEBI). However in case there are
Government bonds which are in physical form the same may be kept in safe
custody of SCB/SHCIL.
NBFCs have been directed to maintain the mandated liquid asset securities in a
dematerialised form with the entities stated above at a place where the
registered office of the company is situated. However, if an NBFC intends to
entrust the securities at a place other than the place at which its registered
office is located, it may do so after obtaining the permission of RBI in writing. It
may be noted that liquid assets in approved securities will have to be maintained
in dematerialised form only. The liquid assets maintained as above are to be
utilised for payment of claims of depositors. However, deposits being unsecured
in nature, depositors do not have direct claim on liquid assets.
62. What does RBI do to protect the interest of NBFC depositors?
RBI has issued detailed regulations on deposit acceptance, including the
quantum of deposits that can be collected, mandatory credit rating, mandatory
maintenance of liquid assets for repayment to depositors, manner of
maintenance of its deposit books, prudential regulations including maintenance
of adequate capital, limitations on exposures, and inspection of the NBFCs,
besides others, to ensure that the NBFCs function on sound lines. If the Bank
observes through its inspection or audit of any NBFC or through complaints or
through market intelligence, that a certain NBFC is not complying with RBI
directions, it may prohibit the NBFC from accepting further deposits and prohibit
it from selling its assets. In addition, if the depositor has complained to the
Company Law Board (CLB) which has ordered repayment and the NBFC has not
complied with the CLB order, RBI can initiate prosecution of the NBFC, including
criminal action and winding up of the company.
More importantly, RBI initiates prompt action, including imposing penalties and
taking legal action against companies which are found to be violating RBI's
instructions/norms on basis of Market Intelligence reports, complaints, exception
reports from statutory auditors of the companies, information received through
SLCC meetings, etc. The Reserve Bank immediately shares such information with
all the financial sector regulators and enforcement agencies in the State Level
Coordination Committee Meetings.
As a premier public policy institution, as part of its public policy measure, the
Reserve Bank of India has been in the forefront in taking several initiatives to
create awareness among the general public on the need to be careful while
investing their hard earned money. The initiatives include issue of cautionary
notices in print media and distribution of informative and educative
brochures/pamphlets and close interaction with the public during
awareness/outreach programs, Townhall events, participation in State
Government sponsored trade fairs and exhibitions. At times, it even requests
newspapers with large circulation (English and vernacular) to desist from
accepting advertisements from unincorporated entities seeking deposits.
63. Who rates deposit taking NBFCs for acceptance of deposit?
NBFCs may get itself rated by any of the six rating agencies namely, CRISIL,
CARE, ICRA, FITCH Ratings India Pvt. Ltd, Brickwork Ratings India Pvt. Ltd. and
SMERA.
64. What are the symbols of minimum investment grade rating of
different companies? When a company’s rating is downgraded, does it
have to bring down its level of public deposits immediately or over a
period of time?
The symbols of minimum investment grade rating of the Credit rating agencies
are:

Name of rating Nomenclature of

agencies minimum
 investment
grade credit rating
(MIGR)

CRISIL FA- (FA MINUS)

ICRA MA- (MA MINUS)

CARE CARE BBB (FD)

FITCH Ratings India tA-(ind)(FD)

Pvt. Ltd. SMERA A
SMERA

Brickwork Ratings India BWR FBBB

Pvt. Ltd.

It may be added that A- is not equivalent to A, AA- is not equivalent to AA and

AAA- is not equivalent to AAA.
However, if rating of an NBFC is downgraded to below minimum investment
grade rating, it has to stop accepting public deposits, report the position within
fifteen working days to the RBI and bring within three years from the date of
such downgrading of credit rating, the amount of public deposit to nil. With the
introduction of revised regulatory framework in November 2014 deposit taking
NBFCs have to mandatorily get investment grade credit rating for being eligible
to accept public deposits.
65. What is the purpose of enacting Protection of Interest of Depositors
in Financial Establishments Act by the State Governments?
The purpose of enacting this law is to protect the interests of the depositors. The
provisions of RBI Act are directed towards enabling RBI to issue prudential
regulations that make the financial entities function on sound lines. RBI is a civil
body and the RBI act is a civil Act. Both do not have specific provisions to effect
recovery by attachment and sale of assets of the defaulting companies, entities
or their officials. It is the State government machinery which can effectively do
this. The Protection of Interest of Depositors in Financial Establishments Acts,
confers adequate powers on the State Governments to attach and sell assets of
the defaulting companies, entities and their officials.
66. Will the passage of the Protection of Interest of Depositors in
Financial Establishments by the State Governments help in nailing
unincorporated entities and companies from unauthorisedly accepting
deposits?
Yes, to a large extent. The Act makes offences, such as, unauthorized acceptance
of deposits by any entity, firm or company a cognizable offence, that is entities
that are indulging in unauthorized deposit acceptance or unlawful financial
activities can be immediately imprisoned and prosecuted. Under the Act, the
State Governments have been given vast powers to attach the property of such
entities, dispose them off under the orders of special courts and distribute the
proceeds to the depositors. The widespread State Government / State Police
machinery is best positioned to take quick action against the culprits. The
Reserve Bank has, therefore, been urging all the State Governments to pass the
legislation on Protection of Interest of Depositors in Financial Establishment Act.
67. Still there are cases of unscrupulous financial entities cheating
public time and again. How does RBI plan to strengthen its surveillance
on unauthorized acceptance of deposits/unauthorized conduct of NBFI
business by companies?
The Reserve Bank is strengthening its market intelligence function in various
Regional Offices and is constantly examining the financials of companies,
references for which have been received through market intelligence or
complaints to the Reserve Bank. In this, context, members of public can
contribute a great deal by being vigilant and lodging a complaint immediately if
they come across any financial entity that contravenes the RBI Act. For example,
if they are accepting deposits unauthorisedly and/conducting NBFC activities
without obtaining due permission from the RBI. More importantly, these entities
will not be able to function if members of public start investing wisely. Members
of the public must know that high returns on investments will also have high
risks. And there can be no assured return for speculative activities. Before
investing the public must ensure that the entity they are investing in is a
regulated entity with one of the financial sector regulators.
F. Collective Investment Schemes (CIS) and Chit Funds
68. Are Collective Investment Schemes (CIS) regulated by the Reserve
Bank of India?
No. CIS are schemes where money is exchanged for units, be it time share in
resorts, profit from sale of wood or profits from the developed commercial plots
and buildings and so on. Collective Investment Schemes (CIS) do not fall under
the regulatory purview of the Reserve Bank.
69. Which is the authority that regulates Collective Investment
Schemes (CIS)?
SEBI is the regulator of CIS. Information on such schemes and grievances against
the promoters may be immediately forwarded to SEBI as well as to the
EOW/Police Department of the State Government.
70. Is the conducting of Chit Fund business permissible under law?
The chit funds are governed by Chit Funds Act, 1982 which is a Central Act
administered by state governments. Those chit funds which are registered under
this Act can legally carry on chit fund business.
71. If Chit Fund companies are financial entities, why are they not
regulated by RBI?
Chit Fund companies are regulated under the Chit Fund Act, 1982, which is a
Central Act, and is implemented by the State Governments. RBI has prohibited
chit fund companies from accepting deposits from the public in 2009. In case any
Chit Fund is accepting public deposits, RBI can prosecute such chit funds.
G. Money Circulation/Multi-Level Marketing (MLM)/ Ponzi Schemes/
Unincorporated Bodies (UIBs)
72. There are some companies like Multi-Level Marketing companies,
Direct Selling Companies, Online Selling Companies. Do they come
under the purview of RBI?
No, Multi-Level Marketing companies, Direct Selling Companies, Online Selling
Companies do not fall under the purview of RBI. Activities of these companies fall
under the regulatory/administrative domain of respective state government. The
list of regulators and the entities regulated by them are as provided in Annex I.
73. What are money circulation/Ponzi/multi-level marketing schemes?
Money circulation, multi level marketing / Chain Marketing or Ponzi schemes are
schemes promising easy or quick money upon enrollment of members. Income
under Multi level marketing or pyramid structured schemes do not come from
the sale of products they offer as much as from enrolling more and more
members from whom hefty subscription fees are taken. It is incumbent upon all
members to enroll more members, as a portion of the subscription amounts so
collected are distributed among the members at the top of the pyramid. Any
break in the chain leads to the collapse of the pyramid, and the members lower
in the pyramid are the ones that are affected the most. Ponzi schemes are those
schemes that collect money from the public on promises of high returns. As there
is no asset creation, money collected from one depositor is paid as returns to the
other. Since there is no other activity generating returns, the scheme becomes
unviable and impossible for the people running the scheme to meet the
promised return or even return the principal amounts collected. The scheme
inevitably fails and the perpetrators disappear with the money.
74. Is acceptance of money under Money Circulation/Multi-level
Marketing/Pyramid structured schemes allowed? Does RBI regulates
such schemes?
No. Acceptance of money under Money Circulation/Multi-level Marketing/Pyramid
structured schemes and Ponzi schemes is not allowed as acceptance of money
under those schemes is a cognizable offence under the Prize Chit and Money
Circulation (Banning) Act 1978 and are hence banned. The Reserve Bank has no
role in implementation of this Act, except advising and assisting the Central
Government in framing the Rules under this Act.
75. Then who regulates entities that run such schemes?
Money Circulation/Multi-level Marketing /Pyramid structured schemes are an
offence under the Prize Chits and Money Circulation Schemes (Banning) Act,
1978. The Act prohibits any person or individual to promote or conduct any prize
chit or money circulation scheme or enrol as member to its schemes or anyone
to participate in it by either receiving or remitting any money in pursuance of
such chit or scheme. Contravention of the provisions of this Act, is monitored and
dealt with by the State Governments.
76. What if someone operates such a scheme?
Any information/grievance relating to such schemes should be given to the police
/ Economic Offence Wing (EOW) of the concerned State Government or the
Ministry of Corporate Affairs. If brought to RBI notice – we will inform the same to
the concerned State Government authorities.
77. What are Unincorporated Bodies (UIBs)? Has RBI any role to play in
curbing illegal deposit acceptance activities of UIBs? Who has the
power to take action against Unincorporated Bodies (UIBs) accepting
deposits?
Unincorporated bodies (UIBs) include an individual, a firm or an unincorporated
association of individuals. In terms of provision of section 45S of RBI act, these
entities are prohibited from accepting any deposit. The Act makes acceptance of
deposits by such UIBs punishable with imprisonment or fine or both. The State
government has to play a proactive role in arresting the illegal activities of such
entities to protect interests of depositors/investors.
UIBs do not come under the regulatory domain of RBI. Whenever RBI receives
any complaints against UIBs, it immediately forwards the same to the state
government police agencies (Economic Offences Wing (EOW)). The complainants
are advised to lodge the complaints directly with the State government police
authorities (EOW) so that appropriate action against the culprits is taken
immediately and the process is hastened.
As per Section 45T of RBI Act, both the RBI and State Governments have been
given concurrent powers. Nonetheless, in order to take immediate action against
the offender, the information should immediately be passed on to the State
Police or the Economic Offences Wing of the concerned State who can take
prompt and appropriate action. Since the State Government machinery is
widespread and the State Government is also empowered to take action under
the provisions of RBI Act, 1934, any information on such entities accepting
deposits may be provided immediately to the respective State Government’s
Police Department/EOW.
Many of the State Governments have enacted the State Protection of Interests of
Depositors in Financial Establishments Act, which empowers the State
Government to take appropriate and timely action.
RBI on its part has taken various steps to curb activities of UIBs which includes
spreading awareness through advertisements in leading newspapers to sensitise
public, organize various investors awareness programmes in various districts of
the country, keeps close liaison with the law enforcing agencies (Economic
Offences Wing).
78. There are some entities (not companies) which carry on activities
like that of NBFCs. Are they allowed to take deposits? Who regulates
them?
Any person who is an individual or a firm or unincorporated association of
individuals cannot accept deposits except by way of loan from relatives, if his/its
business wholly or partly includes loan, investment, hire-purchase or leasing
activity or principal business is that of receiving of deposits under any scheme or
arrangement or in any manner or lending in any manner.
79. What precautions have to be taken by the public to forewarn
themselves about the likelihood of losing money in schemes that offer
high rates of interest?
Before investing in schemes that promise high rates of return investors must
ensure that the entity offering such returns is registered with one of the financial
sector regulators and is authorized to accept funds, whether in the form of
deposits or otherwise. Investors must generally be circumspect if the interest
rates or rates of return on investments offered are high. Unless the entity
accepting funds is able to earn more than what it promises, the entity will not be
able to repay the investor as promised. For earning higher returns, the entity will
have to take higher risks on the investments it makes. Higher the risk, the more
speculative are its investments on which there can be no assured return. As
such, the public should forewarn themselves that the likelihood of losing money
in schemes that offer high rates of interest are more.
80. Who can the Depositor/Investor turn to in case of grievances?
The two Charts given at Annex I and II depict the activities and the regulators
overseeing the same. Complaints may hence be addressed to the concerned
regulator. If the activity is a banned activity, the aggrieved person can approach
the State Police/Economic Offences Wing of the State Police and lodge a suitable
complaint.
81. What constitutes Commercial Real Estate exposure?
An exposure to be classified as CRE, the essential feature would be that the
funding will result in the creation/ acquisition of real estate (such as, office
buildings to let, retail space, multifamily residential buildings, industrial or
warehouse space, and hotels) where the prospects for repayment would depends
primarily on the cash flows generated by the asset. Additionally, the prospect of
recovery in the event of default would also depend primarily on the cash flows
generated from such funded asset which is taken as security, as would generally
be the case. The primary source of cash flow (i.e. more than 50% of cash flows)
for repayment would generally be lease or rental payments or the sale of the
assets as also for recovery in the event of default where such asset is taken as
security.
These guidelines will also be applicable to certain cases where the exposure may
not be directly linked to the creation or acquisition of CRE but the repayment
would come from the cash flows generated by CRE. For example, exposures
taken against existing commercial real estate whose prospects of repayments
primarily depend on rental/ sale proceeds of the real estate should be classified
as CRE. Other such cases may include: extension of guarantees on behalf of
companies engaged in commercial real estate activities, exposures on account of
derivative transactions undertaken with real estate companies, corporate loans
extended to real estate companies and investment made in the equity and debt
instruments of real estate companies.
Q 82. In terms of para 7.1 of the revised regulatory framework issued
vide CC No. 002 dated November 10, 2014, total assets of NBFCs in a
group including deposit taking NBFCs, if any, will be aggregated to
determine if such consolidation falls within the asset sizes of the two
categories viz., NBFCs-ND (those with assets of less than ₹ 500 crore)
and NBFCs-ND-SI (those with assets of ₹ 500 crore and above).
Regulations as applicable to the two categories will be applicable to
each of the NBFC-ND within the group. Will this aggregation of assets
apply to exempted category of CICs in the group?
No, the group requires to aggregate total assets of only those NBFCs which have
been granted Certificate of Registration by the Bank. However, it must be
ensured that the capital of the exempted category of CIC has not come, directly
or indirectly, from an entity/ group company which has accessed public funds.
83. Whether LTV of 50% will also apply to lending against units of
mutual funds?
Loans against units of mutual funds (except units of exclusively debt oriented
mutual funds) would attract LTV requirements as are applicable to loans against
shares. Further, the LTV requirement for loans/ advances against units of
exclusively debt-oriented mutual funds may be decided by individual NBFCs in
accordance with their loan policy.
84. Is prior written approval required in cases of merger of an NBFC ‘A’,
with another NBFC/ entity ‘B’?
In this case prior written approval of the Reserve Bank is to be obtained by ‘A’.
Where ‘B’ is an NBFC, as a result of merger if there is change in shareholding
pattern of paid up equity capital of ‘B’ by 26% or more, prior written approval of
the Reserve Bank is required. If ‘B’ is not an NBFC but is likely to meet PBC post-
merger, it would also need to approach the Reserve Bank for prior written
approval as well as registration as an NBFC.
85. Is prior written approval required in cases of merger of an entity
(not an NBFC) with an NBFC?
Where a non-NBFC mergers with an NBFC, prior written approval of the Reserve
Bank would be required if such a merger satisfies any one or both the conditions
viz., (i) any change in the shareholding of the NBFC consequent on the merger
which would result change in shareholding pattern of 26 per cent or more of the
paid up equity capital of the NBFC (ii) any change in the management of the
NBFC which would result in change in more than 30 per cent of the directors,
excluding independent directors.
86. Is prior written approval required in cases of amalgamation of an
NBFC ‘A’, with another NBFC/ entity ‘B’?
The NBFC/s being amalgamated will require to obtain prior written approval of
the Reserve Bank.
87. Is prior written approval of the Reserve Bank required before
approaching any Court or Tribunal for seeking orders for merger/
amalgamation?
Yes, prior approval of the Reserve Bank would have to be obtained before
approaching any Court or Tribunal seeking orders for merger/ amalgamation in all
such cases which would ordinarily fall under the scenarios explained in FAQs 84,
85 or 86.
88. Is the benefit of the direction relating to waiver of foreclosure
charges/ prepayment penalty available to all categories of borrowers?
The benefit of the Directions contained in para 30(4) of Chapter VI of Master
Direction - Non-Banking Financial Company – Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016 and para 30(4) of Chapter V of Master Direction - Non-
Banking Financial Company – Non-Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016 on waiver of foreclosure charges/
prepayment penalty is available only in respect of floating rate term loan availed
by natural persons in their individual capacity, and not as proprietors or partners
of a firm. Where the loan is availed jointly with a co-obligant(s) all persons who
are party to the loan, whether as borrower(s) or co-obligant(s), shall be natural
persons within their individual capacity and not as a proprietor/ partner of a firm.

ANNEX-I

* NBFC is a financial Institution that is into Lending or Investment or collecting

monies under any scheme or arrangement but does not include any institutions
which carry on its principal business as agriculture activity, industrial activity,
trading and purchase or sale of immovable properties. A company that carries on
the business of accepting deposits as its principal business is also a NBFC.

ANNEX-II

Introduction to Non-Banking Financial Institutions (NBFIs)

Non-Banking Financial Institutions (NBFIs), also referred to as Non-Banking
Financial Companies (NBFCs) in India, are vital components of the financial
ecosystem. These institutions provide a wide range of financial services similar
to banks, but they do so without holding a banking license. They have carved a
unique space in the financial system by addressing gaps in the provision of
credit, investments, and other financial products to underserved sectors,
contributing significantly to economic growth and development.
The emergence of NBFIs can be traced back to the increasing demand for
specialized financial services and the need to address the limitations of
traditional banking systems. While banks primarily focus on deposit-taking and
credit creation, NBFIs diversify financial intermediation by catering to specific
niches such as small and medium enterprises (SMEs), infrastructure financing,
housing finance, and consumer loans. They have become instrumental in
ensuring that the benefits of financial inclusion reach the unbanked and
underbanked segments of the population.
Definition and Key Features of NBFIs
Non-Banking Financial Institutions are financial entities that operate under the
regulations of the Reserve Bank of India (RBI) but do not possess a banking
license. Unlike banks, they are not permitted to accept demand deposits such as
savings or current accounts. However, they can raise funds through instruments
like debentures, fixed deposits, and borrowings, which are then deployed into
various financial services.
Some of the key features of NBFIs include:
1. Limited Banking Functions: While NBFIs provide loans, credit, and
investment opportunities, they are restricted from participating in the
payment and settlement systems, differentiating them from banks.
2. Specialized Services: NBFIs focus on specific financial sectors, including
housing finance, vehicle loans, microfinance, and infrastructure
development.
3. Targeted Outreach: These institutions cater to niche markets, such as
rural populations, small entrepreneurs, and businesses that face
challenges in accessing traditional banking services.
Role and Importance of NBFIs in the Economy
NBFIs play a pivotal role in fostering economic growth and financial stability.
They act as a bridge, supplementing the banking sector's efforts in meeting the
diverse financial needs of individuals, businesses, and industries. Their
contributions to the economy can be understood through the following points:
1. Fostering Financial Inclusion: A significant portion of India’s
population, particularly in rural and semi-urban areas, lacks access to
formal banking services. NBFIs step in to fill this gap by offering credit and
other financial services to underserved communities, thus promoting
financial inclusion.
2. Catalyzing Sectoral Development: NBFIs focus on specific sectors such
as housing, infrastructure, microfinance, and consumer credit, which are
essential for economic growth. By channeling funds into these areas, they
stimulate job creation, urbanization, and industrial development.
 3. Supporting Small Businesses and Entrepreneurs: Small and Medium
Enterprises (SMEs) often struggle to secure loans from traditional banks
due to strict lending criteria. NBFIs provide tailored financing solutions to
these businesses, enabling them to grow and contribute to the economy.
4. Enhancing Liquidity in the Financial System: By mobilizing funds
through innovative financial instruments, NBFIs ensure the smooth flow of
credit in the economy. They complement banks by catering to market
segments with unique financing needs.
5. Driving Technological Innovation: Many NBFIs adopt advanced
technologies such as digital platforms, artificial intelligence (AI), and data
analytics to offer seamless and efficient financial services. This not only
improves customer experience but also expands their reach.
Examples of NBFIs in India
The Indian financial landscape hosts a variety of NBFIs that cater to different
needs:
 HDFC Ltd.: A leading player in housing finance, facilitating home loans
and real estate development.
 Muthoot Finance: Specializes in gold loans, offering quick and accessible
credit to individuals, especially in rural areas.
 Bajaj Finserv: Known for consumer financing, including personal loans,
home appliances, and electronics.
 Shriram Transport Finance: Focuses on financing commercial vehicles
and supporting small transport operators.
These institutions have gained trust and relevance by addressing diverse
financial needs and ensuring inclusive growth.
Regulatory Framework and Oversight
In India, NBFIs are regulated by the Reserve Bank of India (RBI) under the
Reserve Bank of India Act, 1934, and must adhere to specific guidelines and
norms. They are classified into categories such as asset finance companies, loan
companies, infrastructure finance companies, and microfinance institutions
based on their core operations. This regulatory framework ensures financial
stability, transparency, and accountability in their functioning.
Conclusion
Non-Banking Financial Institutions are indispensable to the economic framework,
providing innovative and customized financial solutions that bridge the gap
between formal banking systems and underserved markets. They promote
financial inclusion, support small businesses, and drive economic development
by focusing on niche markets and specialized financial services. With their
flexibility, adaptability, and customer-centric approach, NBFIs have emerged as
crucial players in fostering equitable growth and meeting the financial
aspirations of diverse segments of the population.
Historical Background of Non-Banking Financial Companies (NBFCs)
The evolution of Non-Banking Financial Companies (NBFCs) is rooted in the
broader development of financial systems globally, particularly in India. NBFCs
emerged as a response to the limitations of traditional banking systems and
have since played a pivotal role in the financial ecosystem, bridging gaps in
access to credit and financial services.

Origins and Global Context

Non-Banking Financial Institutions (NBFIs) have existed for centuries, particularly
in Europe and the United States, where they emerged to cater to specialized
financial needs not met by traditional banks. Examples include:
 Insurance Companies: Providing risk coverage as early as the 17th
century.
 Investment Funds: Emerging in the 18th and 19th centuries to pool
resources for infrastructure and industrial growth.
In developing countries, the role of NBFIs gained prominence during the mid-20th
century, especially as governments and central banks sought alternative
mechanisms to mobilize resources for economic development.

Development of NBFCs in India

The history of NBFCs in India dates back to the early 20th century, but their
growth accelerated post-independence as the country sought to establish a
robust financial system to support economic development.
1. Early 20th Century: Emergence of Informal Financial Institutions
 NBFCs in their earliest form were informal financial entities, such as
moneylenders, chit funds, and indigenous bankers. These entities
provided credit to individuals and businesses, particularly in rural areas,
where traditional banks were absent.
2. Post-Independence Era (1947–1960s): Need for Specialized
Institutions
 After India gained independence in 1947, the focus shifted to
industrialization and infrastructure development. While banks supported
major sectors, smaller businesses and rural communities remained
underserved.
 The government recognized the need for specialized financial entities,
leading to the establishment of NBFCs to cater to these segments.
 Early NBFCs primarily focused on providing hire-purchase financing,
leasing, and trade credit.
3. 1960s–1980s: Regulatory Framework and Growth
  The 1960s marked the formal recognition of NBFCs. The Reserve Bank of
India (RBI) began regulating NBFCs through the Reserve Bank of India
Act, 1934 (amended in 1963).
 NBFCs emerged as a significant source of credit for small and medium-
sized enterprises (SMEs) and individuals.
 Popular NBFCs during this period included finance companies like
Sundaram Finance and Cholamandalam Finance, which offered
vehicle financing and leasing services.
4. 1990s: Liberalization and Expansion
 Economic liberalization in 1991 transformed India’s financial landscape.
With the banking sector diversifying, NBFCs also expanded their reach and
services.
 NBFCs diversified into areas such as housing finance, consumer loans,
microfinance, and infrastructure funding.
 Regulatory reforms by the RBI brought in stricter guidelines for NBFCs,
emphasizing prudential norms, capital adequacy, and transparency.
5. 2000s: Consolidation and Technology Integration
 The early 2000s saw significant consolidation in the NBFC sector. Smaller,
unregulated entities either merged with larger players or exited the
market.
 Leading NBFCs like HDFC Limited and Bajaj Finance leveraged
technology to offer efficient and customer-centric services, marking a shift
toward digital finance.
6. Post-2010: Strengthened Regulations and Sectoral Growth
 The global financial crisis of 2008 highlighted the vulnerabilities of
financial systems, leading to stricter regulations for NBFCs globally and in
India.
 The RBI introduced measures to ensure systemic stability, such as:
o Increased capital adequacy requirements.

o Classification of NBFCs into categories (e.g., Asset Finance

Companies, Infrastructure Finance Companies, and Microfinance
Institutions).
 NBFCs like Muthoot Finance (gold loans) and Shriram Transport
Finance (commercial vehicle loans) emerged as leaders in niche markets.

Contribution of NBFCs to India's Financial Ecosystem

Over the decades, NBFCs have evolved into a vital component of India's financial
architecture, addressing needs that traditional banks often overlook:
  Rural and Semi-Urban Outreach: NBFCs have a strong presence in
areas where banking infrastructure is limited.
 Specialized Services: They cater to sectors such as microfinance,
vehicle financing, housing finance, and infrastructure.
 Financial Inclusion: NBFCs like SKS Microfinance (now Bharat Financial
Inclusion) and Ujjivan Small Finance Bank have played a key role in
empowering marginalized communities through credit access.

Challenges Faced by NBFCs

Despite their significant contributions, NBFCs have encountered challenges:
1. Regulatory Arbitrage: Earlier, the lack of uniform regulation led to
concerns about their risk management practices.
2. Liquidity Issues: The IL&FS crisis in 2018 exposed vulnerabilities in
the NBFC sector, particularly around asset-liability mismatches.
3. Competition: NBFCs face intense competition from banks and fintech
companies.

Current Landscape and Future Prospects

Today, NBFCs in India operate under a robust regulatory framework and are
recognized as key players in driving financial inclusion and economic growth.
With advancements in technology and government support, NBFCs are well-
positioned to address emerging financial needs, particularly in areas like:
 Digital Lending: Leveraging fintech to expand access to credit.
 Affordable Housing: Supporting government initiatives like Pradhan
Mantri Awas Yojana (PMAY).
 Green Finance: Funding renewable energy projects and sustainable
development.

Conclusion
The historical evolution of NBFCs reflects their adaptability and significance in
addressing diverse financial needs. From informal financial entities to
sophisticated institutions, NBFCs have come a long way in supporting economic
development and promoting financial inclusion. With continued innovation and
regulatory support, they are set to remain a cornerstone of India’s financial
system.
Role of Non-Banking Financial Companies (NBFCs) in the Economy
Non-Banking Financial Companies (NBFCs) have become integral to the global
and Indian financial landscape, contributing significantly to economic growth and
financial inclusion. By providing specialized financial services to sectors and
individuals underserved by traditional banks, NBFCs ensure the flow of credit to
vital areas of the economy. They cater to diverse needs, including housing,
infrastructure, small businesses, and microfinance, promoting balanced
economic development.
In India, NBFCs are regulated by the Reserve Bank of India (RBI) and operate
under the Reserve Bank of India Act, 1934, alongside specific guidelines and
classifications. Their focus on flexibility, sector-specific financing, and
technological innovation makes them a cornerstone of the financial system.

Importance of NBFCs in the Economy

1. Financial Inclusion
o NBFCs play a crucial role in extending financial services to
unbanked and underbanked populations, particularly in rural and
semi-urban areas.
o They cater to small businesses, individuals with limited credit
histories, and low-income groups, promoting equitable economic
growth.
o Example: Ujjivan Small Finance Bank, which started as an
NBFC, has provided loans to over 4.7 million underserved
individuals.
2. Supplementing Banking Services
o NBFCs fill the gaps left by traditional banks by offering credit to
niche markets like microfinance, consumer loans, and infrastructure
projects.
o Their less rigid structure allows for quicker and more customer-
centric solutions.
o Example: Bajaj Finserv is a leader in consumer financing, offering
loans for household appliances, personal needs, and lifestyle
products.
3. Credit to Small and Medium Enterprises (SMEs)
o SMEs are often unable to meet the stringent credit requirements of
banks. NBFCs provide customized financial products to support their
growth.
o By financing working capital, machinery, and expansion needs,
NBFCs boost employment and innovation.
o Example: Sundaram Finance has supported SMEs by offering
flexible equipment and vehicle financing.
4. Infrastructure Financing
 o Infrastructure projects require substantial, long-term funding, which
traditional banks may find challenging due to asset-liability
mismatches.
o NBFCs specialize in providing infrastructure finance, which is crucial
for national development.
o Example: L&T Finance has funded large-scale infrastructure
projects, including roads, bridges, and power plants.
5. Promotion of Affordable Housing
o NBFCs have significantly contributed to housing finance, supporting
government initiatives like Pradhan Mantri Awas Yojana
(PMAY).
o They provide loans for home construction, purchase, and
renovation, targeting economically weaker sections (EWS) and low-
income groups (LIG).
o Example: HDFC Limited has been a pioneer in housing finance,
enabling millions of families to own homes.
6. Boosting Consumption through Retail Loans
o NBFCs drive consumer demand by offering retail loans for vehicles,
electronics, and personal needs, fueling economic growth.
o Their simplified loan procedures and flexible repayment options
attract a large customer base.
o Example: Hero FinCorp supports the two-wheeler industry by
offering vehicle loans to rural and urban customers.
7. Enhancing Liquidity in Financial Markets
o NBFCs actively participate in capital markets, providing liquidity and
ensuring the smooth functioning of the financial system.
o They channel funds from surplus sectors to deficit areas, optimizing
resource allocation.
o Example: Aditya Birla Capital offers investment management
and insurance, alongside credit facilities.
8. Support for Agriculture and Rural Development
o NBFCs finance agricultural activities, including farm equipment,
irrigation systems, and rural enterprises, enhancing rural
livelihoods.
o Example: Mahindra Finance specializes in loans for tractors and
agricultural machinery, empowering farmers.

Role of NBFCs During Economic Crises

 1. Post-Demonetization Recovery (2016)
o NBFCs played a key role in ensuring the availability of cash and
credit in rural and semi-urban areas, helping businesses recover
from liquidity challenges.
o Example: Gold loan companies like Muthoot Finance and
Manappuram Finance provided immediate credit to households
and small businesses.
2. COVID-19 Pandemic (2020–2021)
o NBFCs supported the economy by extending moratoriums,
restructuring loans, and offering digital lending solutions.
o They enabled MSMEs and individuals to manage financial stress
during the crisis.
o Example: Digital-first NBFCs like Capital Float provided quick,
online access to working capital for small businesses.

Sectoral Impact of NBFCs

1. Microfinance
NBFCs have pioneered microfinance initiatives, offering small-ticket loans to
underserved populations, particularly women entrepreneurs.
 Example: Bharat Financial Inclusion Ltd. (formerly SKS Microfinance)
has empowered millions of women in rural areas by providing microloans
for businesses.
2. Commercial Vehicle Financing
NBFCs finance commercial vehicles, boosting the logistics and transportation
industry, which is vital for trade and commerce.
 Example: Shriram Transport Finance supports small truck operators,
helping them expand their businesses.
3. Digital Lending
The advent of fintech has revolutionized NBFC operations, enabling them to
provide loans through digital platforms with minimal paperwork.
 Example: Lendingkart offers instant business loans using data analytics
to assess creditworthiness.
4. Education Loans
NBFCs offer education loans to students for higher studies, contributing to
human capital development.
 Example: Avanse Financial Services provides loans for studying in
India and abroad.
5. Renewable Energy
Some NBFCs focus on financing green projects, including solar energy and wind
power, supporting sustainable development.
 Example: Tata Cleantech Capital funds renewable energy and energy-
efficiency projects.

Advantages of NBFCs in the Economy

1. Flexibility and Innovation: NBFCs adapt quickly to changing market
dynamics and customer needs.
2. Customer-Centric Approach: They focus on delivering personalized
financial solutions, often faster than banks.
3. Technological Integration: Many NBFCs use advanced technologies like
artificial intelligence and blockchain to streamline processes and reduce
costs.
4. Specialized Expertise: NBFCs often focus on niche areas, enabling them
to serve specific markets more effectively.

Challenges Faced by NBFCs

1. Regulatory Scrutiny
o NBFCs are subject to stringent regulations by the RBI, which
sometimes limit their operational flexibility.
o Compliance with capital adequacy norms and risk management
guidelines can be challenging, especially for smaller NBFCs.
2. Liquidity Constraints
o NBFCs often face liquidity issues due to their reliance on market
borrowings.
o The IL&FS crisis in 2018 highlighted systemic risks, leading to
tightened regulations.
3. Competition from Banks and Fintech
o Increasing competition from fintech companies and banks entering
niche markets has put pressure on NBFCs to innovate.
4. Asset-Liability Mismatch
o Long-term loans financed by short-term borrowings create a
mismatch in asset and liability durations, leading to potential risks.

Government and Regulatory Support for NBFCs

1. Pradhan Mantri Mudra Yojana (PMMY): NBFCs partner with the
government to offer loans to micro and small enterprises.
 2. Partial Credit Guarantee Scheme: Introduced to provide liquidity to
NBFCs by encouraging banks to lend to them.
3. Pradhan Mantri Awas Yojana (PMAY): NBFCs are key players in
providing affordable housing loans under this scheme.
4. Digital Lending Guidelines: The RBI introduced norms to regulate
digital lending by NBFCs, ensuring transparency and consumer protection.

Conclusion
Non-Banking Financial Companies are critical to the financial and economic
development of a country. Their ability to provide credit to niche markets,
promote financial inclusion, and support key sectors such as infrastructure,
housing, and small businesses makes them indispensable to India's economic
framework. Despite challenges like regulatory scrutiny and liquidity constraints,
NBFCs continue to innovate and adapt to the changing financial landscape.
With the integration of technology and government support, NBFCs are poised to
play an even more significant role in fostering economic growth, reducing
poverty, and ensuring financial stability. Institutions like HDFC Limited, Bajaj
Finserv, and Muthoot Finance are prime examples of how NBFCs have
transformed the financial ecosystem, driving inclusive and sustainable
development.
Types of Non-Banking Financial Companies (NBFCs)
Non-Banking Financial Companies (NBFCs) are financial institutions that provide
a wide array of financial services, yet differ from traditional banks in that they do
not hold a banking license and cannot accept demand deposits (like savings or
checking accounts). NBFCs are critical players in financial systems, particularly in
countries like India, where they cater to underserved sections of the population
by providing financing options that traditional banks might not offer. NBFCs can
be classified into various categories based on their activities, services, and
business models.
In India, the Reserve Bank of India (RBI) has categorized NBFCs based on their
operations, size, and the type of financial products they offer. These
classifications are designed to ensure proper regulation and allow the entities to
provide financial services in line with their specialization. This classification helps
understand the role each type of NBFC plays in the economy, from microfinance
to housing finance and infrastructure development.
Classification of NBFCs in India
NBFCs in India are broadly categorized based on their functions and the nature of
their activities. According to the RBI, NBFCs can be divided into Deposit-
accepting NBFCs (D-NBFCs) and Non-Deposit accepting NBFCs (ND-
NBFCs). Further, these two categories are subdivided into several types based
on the activities they specialize in.
1. Asset Finance Companies (AFCs)
Asset Finance Companies (AFCs) are one of the most common types of NBFCs,
focused primarily on the financing of tangible assets, such as vehicles,
machinery, and equipment. They provide loans for the purchase of such assets,
making them crucial players in industries requiring capital for purchasing
equipment and vehicles. This type of NBFC caters to sectors such as
transportation, construction, and manufacturing, which are capital-intensive.
 Key Activities:
o Financing of motor vehicles (both commercial and private), plant
and machinery, and other tangible assets.
o Offering hire-purchase and leasing services.

 Example:
o Shriram Transport Finance: Specializes in the financing of
commercial vehicles. This NBFC offers loans to purchase trucks,
buses, and other commercial vehicles, which are crucial for small
truck operators and logistics businesses.
 Importance:
o AFCs play a significant role in supporting the transportation and
logistics sectors by offering affordable financing options for
vehicles. Their contribution also extends to infrastructure
development, where financing machinery and construction
equipment is crucial for progress.

2. Loan Companies (LCs)

Loan Companies (LCs) are NBFCs primarily engaged in providing loans and
advances. Unlike asset finance companies, loan companies do not necessarily
provide financing for specific assets. Instead, they focus on personal loans,
business loans, and other types of credit to individuals or corporations. These
loans can be unsecured or secured, depending on the type of borrower and the
amount of the loan.
 Key Activities:
o Providing personal loans, business loans, and corporate loans.

o Offering working capital finance and short-term credit.

 Example:
o Bajaj Finance: A leading player in the loan company space, Bajaj
Finance provides a wide range of loans including personal loans,
business loans, and loans for consumer products like electronics and
appliances.
 Importance:
o Loan companies are crucial for providing general-purpose financing
to individuals and small businesses. They help fill the credit gap for
 segments that may not have access to traditional banking services.
The flexibility of loan types offered by LCs allows them to meet
diverse financial needs, contributing to overall economic growth.

3. Investment Companies (ICs)

Investment Companies (ICs) are NBFCs that engage in the business of investing
in stocks, shares, bonds, debentures, and other securities. They act as
intermediaries between investors and financial markets, providing individuals
and businesses with an avenue to invest in various instruments to generate
returns. These companies are pivotal in creating liquidity in the capital markets
and helping people build wealth through investments.
 Key Activities:
o Investment in financial securities (equity, bonds, mutual funds, etc.)

o Portfolio management services.

o Providing investment advisory services.

 Example:
o Aditya Birla Capital: This investment company provides a wide
range of financial products such as asset management, wealth
management, insurance, and financing services. It also focuses on
investment products, including mutual funds and securities.
 Importance:
o Investment companies contribute to the development of capital
markets by making investment products more accessible to a wider
audience. They play a critical role in wealth creation, facilitating
savings and providing avenues for people to grow their financial
portfolios.

4. Infrastructure Finance Companies (IFCs)

Infrastructure Finance Companies (IFCs) are specialized NBFCs that focus on
providing funding for infrastructure projects. These projects can range from
large-scale developments in sectors like energy, transportation,
telecommunications, and urban infrastructure. IFCs provide long-term financing
for such projects, which typically require significant capital investment and are
crucial for national and regional development.
 Key Activities:
o Providing financing for large infrastructure projects such as
highways, power plants, and ports.
o Offering loans to government projects and private players in the
infrastructure sector.
  Example:
o L&T Finance: Focuses on infrastructure development, providing
financing for projects related to energy, roads, and construction.
L&T Finance plays a key role in funding the infrastructure projects
necessary for economic development.
 Importance:
o Infrastructure finance companies help bridge the gap in funding
large-scale projects that are vital for the development of an
economy. They help fund critical national infrastructure, which, in
turn, drives economic growth by improving transportation, energy
availability, and overall connectivity.

5. Housing Finance Companies (HFCs)

Housing Finance Companies (HFCs) are a subset of NBFCs that specialize in
providing loans for housing-related purposes. These loans can be used for
purchasing homes, building houses, or renovating existing properties. Housing
finance companies are instrumental in promoting homeownership, particularly
among lower-income groups, by offering affordable loans and longer repayment
terms.
 Key Activities:
o Providing loans for home purchases, construction, and renovation.

o Offering loan refinancing options.

o Providing loans under government schemes such as Pradhan Mantri

Awas Yojana (PMAY).
 Example:
o HDFC Ltd.: One of the largest and most well-known housing
finance companies in India, HDFC has been a leader in providing
affordable housing loans to individuals and families across the
country.
 Importance:
o HFCs contribute significantly to promoting homeownership and
urbanization. By providing financial assistance to individuals for
purchasing homes, HFCs help improve living standards and
contribute to the growth of the real estate sector.

6. Microfinance Institutions (MFIs)

Microfinance Institutions (MFIs) are NBFCs that provide small loans to low-income
individuals or groups, particularly those without access to traditional banking
services. MFIs often cater to marginalized communities, including women, small-
scale farmers, and entrepreneurs, empowering them by offering microloans for
business or personal needs. These loans are usually small, short-term, and
collateral-free, making them accessible to individuals with little to no credit
history.
 Key Activities:
o Offering small loans for business expansion, health, and education
purposes.
o Providing financial services such as savings, insurance, and
remittance facilities.
 Example:
o Bharat Financial Inclusion Ltd. (BFIL): Formerly known as SKS
Microfinance, BFIL provides microloans primarily to women in rural
India to help them start small businesses and improve their
livelihoods.
 Importance:
o MFIs play a critical role in promoting financial inclusion. By providing
microloans, they empower marginalized groups to create income-
generating activities, which contributes to poverty alleviation and
economic empowerment.

7. Venture Capital Companies (VCCs)

Venture Capital Companies (VCCs) are a category of NBFCs that invest in early-
stage companies with high growth potential. VCCs provide capital to start-ups
and small businesses that may not have access to traditional forms of financing
due to their risk profile. They typically invest in high-risk, high-reward businesses
with the potential for significant returns.
 Key Activities:
o Investing in early-stage and high-growth companies.

o Providing equity capital, debt financing, and advisory services to

startups.
 Example:
o Sequoia Capital India: While technically a venture capital firm,
Sequoia plays a vital role in financing technology-based start-ups
and expanding the Indian entrepreneurial ecosystem.
 Importance:
o VCCs play a vital role in fostering innovation and entrepreneurship
by providing necessary funding for start-ups, contributing to job
creation and technological advancements.

8. Non-Banking Financial Companies - Mutual Fund (NBFC-MF)

NBFCs that are also registered as mutual fund companies are known as NBFC-
MFs. These companies pool money from individual investors and invest in
securities such as stocks, bonds, and other financial instruments. They provide a
platform for retail investors to diversify their portfolios without needing to
directly manage investments.
 Key Activities:
o Managing mutual funds for investors.

o Offering a range of investment options like equity funds, debt funds,

and balanced funds.
 Example:
o ICICI Prudential Mutual Fund: A prominent mutual fund company
in India that offers a variety of investment options for retail
investors.
 Importance:
o NBFC-MFs help retail investors access capital markets, diversify
their investment portfolios, and earn returns based on their risk
preferences.

Conclusion
Non-Banking Financial Companies (NBFCs) form a diverse and dynamic part of
the financial sector, fulfilling multiple roles from microfinance to venture capital
and infrastructure financing. Their flexibility and ability to cater to niche markets
have made them an indispensable part of the global economy, especially in
emerging markets like India. The various types of NBFCs—ranging from asset
finance companies to microfinance institutions—serve distinct purposes but
together contribute to overall economic growth, financial inclusion, and
development.
As India continues to urbanize and its middle class grows, the demand for
specialized financial products and services will only increase. NBFCs, by catering
to these evolving needs, will continue to play a pivotal role in shaping the future
of the financial ecosystem.
.Incorporation of Non-Banking Financial Companies (NBFCs)
The incorporation of Non-Banking Financial Companies (NBFCs) is a structured
and regulated process that enables individuals or groups to form financial
entities that can offer a wide range of financial services, excluding the
acceptance of demand deposits (like savings or current accounts). These
companies typically provide services like loans, asset management, and
investment advice. NBFCs contribute significantly to the financial sector by filling
gaps that traditional banks might not address and by offering specialized
financial products to various sectors.
Incorporating an NBFC involves multiple steps, from meeting regulatory
requirements to obtaining the necessary approvals. The process is supervised by
regulatory bodies such as the Reserve Bank of India (RBI) in India, or similar
authorities in other countries, ensuring that these entities comply with relevant
financial regulations and guidelines. Below is a detailed explanation of the
incorporation process for an NBFC in India, which can serve as a general guide.
1. Understanding the NBFC Framework
Before proceeding with the incorporation process, it’s essential to understand the
different categories and classifications of NBFCs. The RBI categorizes NBFCs
based on their business activities, such as:
 Asset Finance Companies (AFCs)
 Loan Companies (LCs)
 Investment Companies (ICs)
 Infrastructure Finance Companies (IFCs)
 Housing Finance Companies (HFCs)
 Microfinance Institutions (MFIs)
 Venture Capital Companies (VCCs)
The incorporation of an NBFC will depend on the type of financial services it aims
to offer, and it will also determine the specific regulatory requirements.
2. Eligibility Requirements for Incorporation of NBFCs
The eligibility criteria to establish an NBFC are governed by the Reserve Bank
of India (RBI). Key eligibility requirements include:
1. Minimum Net Owned Funds (NOF):
o The company must have a minimum net owned fund (NOF) of ₹2
crore to be eligible to apply for an NBFC license. This is one of the
primary financial prerequisites for incorporation.
o Net Owned Fund is defined as the total of paid-up equity capital and
free reserves, excluding accumulated losses and intangible assets.
2. Registered as a Public Limited Company:
o An NBFC must be incorporated as a Public Limited Company
under the Companies Act, 2013. This means the company must
have a formal structure, a board of directors, and shareholders.
3. Appropriate Management and Financial Capacity:
o The company must demonstrate the financial capacity and
management expertise to manage and operate a financial
institution. The company should have a board of directors with
experience in finance and business management.
4. No Prior Defaults:
 o The promoters and directors should not have any history of
defaulting on financial obligations, including tax liabilities, loans, or
other financial commitments.
5. Business Plan:
o The applicant must have a detailed business plan that outlines its
operations, financial projections, and target market. The plan should
specify the type of financial services it intends to offer and its
potential growth.

3. Step-by-Step Process for Incorporating an NBFC

Step 1: Incorporating the Company under the Companies Act
The first step in the incorporation process is to form a company under the
Companies Act, 2013, which governs the establishment of companies in India.
The company must be incorporated as a Public Limited Company. The process
involves:
 Choosing a Name:
o The company must choose a name that is unique and does not
infringe on existing trademarks or company names. The name
should also be compliant with RBI regulations.
 Filing with the Registrar of Companies (RoC):
o The company must file the necessary documents such as
Memorandum of Association (MoA), Articles of Association
(AoA), and proof of the registered office address with the RoC to
obtain a Certificate of Incorporation.
Step 2: Meeting Minimum Net Owned Funds (NOF) Requirement
As mentioned earlier, an NBFC must have a minimum NOF of ₹2 crore (for most
types of NBFCs). This funding must be raised and made available before applying
for the NBFC license. The funds can come from various sources, including:
 Equity investment from promoters or investors.
 Loans from other institutions.
 Internal accruals, if applicable.
Step 3: Applying for the RBI License
Once the company is incorporated and meets the minimum NOF requirement,
the next step is to apply for a Certificate of Registration (CoR) with the
Reserve Bank of India (RBI). The application process involves submitting an
application to the RBI along with the following documents:
 Incorporation Certificate: Proof of the company being registered under
the Companies Act.
  NOF Declaration: Document declaring that the company has the
required Net Owned Funds.
 Business Plan: A detailed plan that outlines the company’s financial
products and services, market analysis, and financial projections.
 Promoter Details: Information on the promoters, their qualifications, and
their business history.
 Board Members: Details of the directors, their experience in financial
management, and their qualifications.
 Financial Statements: Preliminary financial documents showcasing the
capital base and financial health of the company.
The application can be submitted to the RBI's regional office based on the
location of the company’s registered office.
Step 4: RBI Evaluation of the Application
The RBI carefully reviews the application and supporting documents. The
evaluation process may include:
 Verification of Financial and Legal Standing: The RBI assesses
whether the company has the necessary financial resources and legal
structure to operate as an NBFC.
 Scrutiny of Business Plan: The business plan is examined to ensure
that the proposed services are in line with the company's objectives and
that it is financially feasible.
 Due Diligence on Promoters and Directors: The RBI will scrutinize the
background of the promoters and directors to ensure they have no history
of financial irregularities.
If the RBI is satisfied with the application and documentation, it will grant a
Certificate of Registration (CoR). This certificate is necessary for the
company to operate legally as an NBFC.
Step 5: Compliance with Regulatory Requirements
Once the NBFC receives the CoR, it must comply with ongoing regulatory
requirements. Some of the key requirements include:
 Maintaining Capital Adequacy Ratio (CAR): NBFCs are required to
maintain a minimum CAR, typically 15%, to ensure financial stability.
 Periodic Reporting to RBI: NBFCs must submit financial reports and
other documents to the RBI at regular intervals, including annual returns
and financial statements.
 Adherence to Prudential Norms: The RBI imposes prudential guidelines
regarding asset classification, provisioning, and management of non-
performing assets (NPAs).
 Licensing for Specific Activities: Depending on the type of services the
NBFC intends to offer (e.g., housing finance, microfinance, etc.), it must
 obtain relevant approvals from regulatory authorities like the National
Housing Bank (NHB) for housing finance or the Microfinance Institutions
Network (MFIN) for microfinance companies.

4. Post-Incorporation Compliance
After incorporation, the NBFC is required to maintain certain standards of
operation, such as:
1. Governance Standards: The company must have a functioning board of
directors and an internal audit mechanism.
2. Capital and Risk Management: The company must maintain the
required capital adequacy ratio and implement appropriate risk
management practices.
3. Internal Controls and Transparency: NBFCs must have transparent
accounting practices and internal controls to prevent financial
mismanagement and fraud.
Monitoring and Regulation by RBI
NBFCs in India are primarily regulated by the Reserve Bank of India (RBI). The
RBI’s role involves monitoring their operations, ensuring compliance with
regulations, and taking corrective action in cases of non-compliance. Regular
inspections and audits are conducted by the RBI to maintain the integrity of the
financial system.

5. Challenges in Incorporating an NBFC

While incorporating an NBFC can be a profitable venture, it comes with
challenges that need to be navigated carefully:
 Capital Requirements: Meeting the minimum net owned funds
requirement of ₹2 crore can be a challenge for smaller entrepreneurs or
start-ups.
 Regulatory Complexity: The regulatory environment is stringent, and
non-compliance with RBI guidelines can result in penalties or even
revocation of the license.
 Operational Risks: Managing a financial institution involves a high
degree of risk management, particularly with regards to loan defaults,
interest rates, and liquidity.

Conclusion
The incorporation of an NBFC involves multiple steps that require careful
planning, adequate funding, and a detailed understanding of the regulatory
environment. The process is designed to ensure that only those companies that
meet the financial and operational standards are allowed to operate as NBFCs.
With proper adherence to the RBI guidelines, an NBFC can offer vital financial
services, contribute to economic development, and play a critical role in financial
inclusion.
Benefits of Incorporating a Non-Banking Financial Institution (NBFC)
Incorporating a Non-Banking Financial Institution (NBFC) can offer several
strategic advantages to entrepreneurs, businesses, and economies. NBFCs play a
crucial role in the financial system by providing a wide range of financial
products and services. Their incorporation can bring numerous benefits, both
from a business perspective and in terms of broader economic and financial
stability. This section outlines the key benefits of incorporating an NBFC.
1. Diversification of Financial Services
Incorporating an NBFC allows a business to diversify into various financial
services that traditional banks may not focus on. These services include:
 Consumer Finance: Providing loans for purchasing consumer goods,
vehicles, or home appliances.
 Microfinance: Offering small loans to low-income individuals or
communities.
 Lease and Hire-Purchase: Financing equipment or vehicle purchases
through lease or hire-purchase agreements.
 Investment and Advisory Services: Offering portfolio management and
other investment-related services.
 Housing Finance: Providing home loans for purchasing or constructing
residential properties.
This diversification enables the NBFC to cater to a wider range of customers with
different financial needs, from individuals seeking home loans to small
businesses in need of working capital.
2. Access to a Wider Market and Financial Inclusion
NBFCs have been instrumental in promoting financial inclusion by serving market
segments that traditional banks often overlook, such as:
 Unbanked Populations: NBFCs are essential in reaching rural and semi-
urban populations that may not have easy access to banking services.
 Low-Income Groups: Microfinance institutions (MFIs) under the NBFC
category play a key role in offering financial services to lower-income
groups, particularly women and small entrepreneurs, who otherwise lack
access to conventional loans.
 SMEs and Startups: Many small and medium-sized enterprises (SMEs)
find it easier to obtain loans from NBFCs, which are more flexible and
quicker in their decision-making compared to traditional banks.
By serving these underserved groups, an NBFC can tap into a growing and
relatively untapped customer base, improving financial inclusion and
contributing to economic development.
3. Flexibility in Operations
Unlike traditional banks, NBFCs have greater operational flexibility. This flexibility
allows them to design and implement customized financial products, which can
cater to the specific needs of various customers. This is particularly beneficial
when:
 Tailoring Financial Products: NBFCs can offer bespoke loan terms,
interest rates, and repayment schedules based on the needs of individual
borrowers or businesses.
 Faster Processing: NBFCs often have less bureaucratic red tape
compared to banks, allowing for quicker decision-making and faster loan
approval processes.
The ability to adapt quickly to changing market conditions and customer
demands gives NBFCs a competitive edge over traditional financial institutions.
4. Higher Profitability and Growth Potential
The incorporation of an NBFC presents significant opportunities for growth and
profitability. Due to the wide range of services they offer, NBFCs can earn
revenue from various sources:
 Interest Income: NBFCs can earn substantial income from interest on
loans, which constitutes a major revenue stream.
 Fees and Charges: NBFCs may charge fees for various services, such as
loan processing fees, prepayment penalties, or advisory services.
 Investments: Investment-related activities, such as buying and selling
securities or managing mutual funds, provide opportunities for capital
gains.
Additionally, NBFCs often have higher margins compared to traditional banks,
particularly in niche markets such as microfinance, housing finance, and asset-
backed financing.
Example:
 Bajaj Finance, one of India’s largest NBFCs, has grown significantly by
expanding its portfolio to include consumer loans, business loans, and
investment services. It enjoys high profitability due to the diversity of its
offerings and its ability to cater to both urban and rural markets.
5. Lower Regulatory Burden Compared to Banks
While NBFCs are regulated by financial authorities (such as the RBI in India), they
face a relatively lighter regulatory burden compared to traditional banks. For
example:
 No Requirement to Maintain Statutory Liquidity Ratio (SLR): Unlike
banks, NBFCs are not required to maintain a Statutory Liquidity Ratio
(SLR), which requires banks to hold a certain percentage of their assets in
the form of liquid government securities.
  No Capital Adequacy Requirements for Some Categories: While
certain categories of NBFCs are required to maintain a minimum capital
adequacy ratio (CAR), the requirements are often lower than those for
banks, providing more flexibility.
 Fewer Reporting Obligations: Although NBFCs need to follow specific
financial disclosure guidelines, the reporting requirements are generally
less cumbersome compared to banks.
This relatively lighter regulatory framework allows NBFCs to operate more
efficiently and allocate resources toward business expansion rather than
regulatory compliance.
6. Ability to Leverage Technology for Efficiency
NBFCs have increasingly adopted technology to enhance their operations,
offering services like:
 Digital Loan Applications: Many NBFCs now provide online platforms
where customers can apply for loans, check their eligibility, and receive
approvals within hours or days.
 Automated Credit Scoring Systems: By using advanced data analytics
and AI, NBFCs can assess a borrower’s creditworthiness more accurately
and quickly.
 Mobile Applications and Payment Solutions: With the increasing use
of smartphones, NBFCs can offer services like mobile wallets, instant loan
disbursements, and online payment solutions.
These technological advancements improve operational efficiency, reduce costs,
and make it easier for customers to access financial products and services.
Example:
 Lendingkart, a leading NBFC in India, leverages technology to provide
working capital financing to small and medium enterprises (SMEs). It uses
a digital platform to assess creditworthiness and offer loans within 3-5
days, demonstrating how technology can streamline processes.
7. Market Adaptability and Innovation
NBFCs are more agile in responding to market conditions and customer needs,
which enables them to innovate quickly. This adaptability allows them to
introduce new products and services faster than traditional banks. For example:
 Customized Loan Products: NBFCs can design specialized loan
products, such as loans for purchasing two-wheelers, electric vehicles, or
home loans for specific income groups, which are often not available
through banks.
 Targeted Services for Specific Sectors: Some NBFCs focus on
particular industries or sectors, such as agriculture, real estate, or
education, offering specialized services tailored to those needs.
This ability to innovate gives NBFCs a distinct advantage in capturing niche
markets and responding to emerging trends.
8. Better Risk Management and Operational Control
NBFCs are generally more focused on specific market segments, which enables
them to better understand the risk profiles of their customers. This specialization
leads to more efficient risk management and operational control. For example:
 Asset-Based Lending: Many NBFCs specialize in asset-backed lending,
such as loans against property, vehicles, or gold. By taking collateral,
these institutions minimize their risk exposure.
 Microfinance: NBFCs that offer microfinance services tend to build closer
relationships with their customers, making it easier to assess
creditworthiness and manage defaults.
The focused business models adopted by NBFCs allow them to exercise greater
control over their operations and reduce the risks typically associated with more
generalized financial services.
9. Contribution to Economic Growth and Employment
NBFCs play a vital role in supporting the economy by promoting:
 Small and Medium-Sized Enterprises (SMEs): By providing working
capital, loans for machinery, and other forms of financing, NBFCs support
the growth of SMEs, which are crucial for job creation and economic
diversification.
 Housing Development: Housing finance companies (HFCs) under the
NBFC umbrella support homeownership by providing loans to middle and
low-income groups, contributing to the real estate sector’s growth and
improving the living standards of the population.
 Job Creation: The expansion of NBFCs leads to the creation of jobs in
various sectors, such as sales, customer service, risk management, and
technology, further contributing to the economy.
By supporting these key areas, NBFCs help drive economic development and
social progress, particularly in emerging markets.
Conclusion
Incorporating an NBFC offers several strategic benefits, including the ability to
diversify financial services, provide financial inclusion, improve profitability, and
leverage technology for operational efficiency. The flexibility in operations,
combined with a lighter regulatory framework, enables NBFCs to rapidly adapt to
market needs, innovate, and contribute significantly to economic growth.
Moreover, NBFCs provide essential financial products to underserved sectors,
thereby promoting inclusivity and development in both urban and rural areas. For
entrepreneurs and businesses, the opportunity to incorporate an NBFC presents
a chance to tap into growing markets and expand their financial services
portfolio, making it a valuable addition to the financial landscape.
Registration Process of Non-Banking Financial Companies (NBFC) with
RBI
The process of registering a Non-B Banking Financial Company (NBFC) in
India is governed by the Reserve Bank of India (RBI) under the regulatory
framework laid out by the RBI Act, 1934, and further reinforced through various
circulars and regulations. The registration process ensures that only financially
sound, well-managed companies can enter the financial services sector, thus
protecting the interests of depositors and the broader financial system.
Below is a step-by-step guide to the process of registering an NBFC with the RBI:
1. Pre-Registration Requirements
Before initiating the registration process, the applicant company needs to meet
specific requirements outlined by the RBI. These include the following key
prerequisites:
a. Incorporation as a Public Limited Company
An NBFC must be incorporated under the Companies Act, 2013 as a public
limited company. The company must have a distinct legal identity, a
functioning board of directors, and a governance structure in place.
 Memorandum of Association (MoA) and Articles of Association
(AoA) must be aligned with the business objectives and activities of the
NBFC.
 The company should have a registered office and an active business plan
for providing financial services.
b. Minimum Net Owned Fund (NOF)
The company applying for registration must have a minimum Net Owned Fund
(NOF) of ₹2 crore. NOF is calculated as the paid-up equity capital plus free
reserves (excluding accumulated losses and intangible assets). This is a basic
financial requirement that ensures the company has the necessary financial
resources to operate as an NBFC.
c. Experienced Management
The company should have experienced management with a proven track record
in financial services. The promoters and directors must be of good repute, with
no history of financial fraud, mismanagement, or criminal records.
d. Capital Adequacy
The company must ensure that it meets the capital adequacy requirements
prescribed by the RBI for NBFCs. This includes maintaining appropriate reserves
and liquidity ratios based on the nature and scale of operations.
e. Sound Business Plan
A detailed business plan that outlines the company’s objectives, target markets,
products, services, and financial projections is essential. The business plan
should demonstrate the feasibility of the operations and show how the company
plans to meet the financial and regulatory requirements.
2. Application to RBI for Registration
Once the company has met all the eligibility criteria, the next step is to apply for
registration with the RBI. The following steps are involved in this process:
a. Prepare the Application
The applicant company must submit a formal application for registration to
the Regional Office of the Reserve Bank of India (RBI) in the region where
the company is based.
The application must include the following documents:
1. Certificate of Incorporation: Proof of the company’s registration under
the Companies Act, 2013.
2. MoA and AoA: These documents detail the company’s objectives and
governance structure.
3. Proof of Net Owned Fund (NOF): Evidence that the company meets the
minimum ₹2 crore NOF requirement.
4. Business Plan: A comprehensive business plan, outlining the company’s
operational plans, financial projections, and market strategy.
5. Promoter and Director Information: Details of the company’s
promoters and directors, including their backgrounds, qualifications, and
financial standing.
6. Financial Statements: Preliminary financial documents showing the
company’s capital base, including the balance sheet, profit and loss
statement, and audited accounts if available.
7. Operational and Risk Management Policies: An outline of the
company’s internal policies on risk management, loan recovery, internal
controls, and compliance procedures.
The application must be submitted in the prescribed format along with the
necessary application fee.
b. Application Fees
As part of the registration process, the applicant must pay the registration fee as
prescribed by the RBI. The exact fee may vary, so it’s important to check the
latest RBI guidelines.

3. Scrutiny and Evaluation by RBI

Once the application is submitted, the RBI will conduct a thorough scrutiny and
evaluation of the application. This process can take several months, depending
on the completeness of the application and the regulatory checks involved.
a. Verification of Documents
The RBI verifies all documents submitted as part of the registration application.
This includes the company’s financial records, business plan, and
compliance with regulatory requirements.
b. Inspection of Business Operations
In some cases, the RBI may conduct a physical inspection of the applicant
company’s business premises. This is to ensure that the company’s operations,
infrastructure, and risk management systems are in place.
c. Background Check on Directors and Promoters
The RBI will also perform a background check on the promoters, directors, and
senior management of the company. This includes verifying their financial
standing, business history, and reputation in the industry. If any of the promoters
or directors have a criminal record or a history of financial mismanagement, the
application may be rejected.
d. Financial Viability and Operational Feasibility
The RBI evaluates the financial viability of the company and assesses whether
the business model is sustainable. The company’s financial projections and
operational plans are thoroughly reviewed to ensure that they align with the
financial services regulations.
e. Compliance with Prudential Norms
NBFCs must comply with certain prudent financial norms, including the
maintenance of adequate capital reserves, liquidity, and solvency. The RBI will
examine whether the applicant is well-equipped to meet these norms.

4. Issuance of Certificate of Registration (CoR)

If the RBI is satisfied with the application and the company meets all the
regulatory requirements, the RBI will grant a Certificate of Registration (CoR)
to the company. This certificate is crucial, as it legally authorizes the company to
operate as an NBFC under Indian law.
The CoR includes:
 The type of NBFC (e.g., asset finance company, housing finance company,
microfinance institution, etc.)
 Any specific conditions that the company must adhere to in order to
continue operating as an NBFC.
 The terms of the company's registration, including compliance timelines.

5. Post-Registration Compliance and Reporting

Once registered, the company must comply with various regulatory
requirements to maintain its registration status. These include:
a. Compliance with Prudential Norms
The NBFC must maintain regulatory norms such as:
 Capital Adequacy Ratio (CAR)
 Asset Classification Norms for loan repayments
 Provisioning for Non-Performing Assets (NPAs)
b. Regular Reporting to RBI
The company must file regular reports with the RBI. These reports include:
 Quarterly/Annual Financial Statements
 Loan Portfolio Details
 Non-Performing Asset (NPA) status
c. Internal Control and Governance
The NBFC must maintain a robust system of internal controls, audits, and risk
management to ensure that its operations remain transparent, efficient, and in
compliance with RBI regulations.
d. Prudential Guidelines
The company must adhere to guidelines issued by the RBI, including guidelines
related to the types of investments it can make, lending limits, interest rates,
and the management of risk.

6. Non-Compliance and Penalties

Failure to comply with RBI guidelines can result in penalties or revocation of
registration. If the company deviates from the approved business plan, violates
regulations, or faces financial instability, the RBI may issue warnings, fines, or
even cancel the registration.

7. Re-registration and Exit Process

If an NBFC wishes to alter its business structure or cease operations, it
must notify the RBI. The process for re-registration or exit involves:
 Submitting an application with reasons for the changes.
 Addressing any outstanding liabilities.
 Ensuring that all regulatory requirements are met during the exit or
transformation process.

Conclusion
The registration process for an NBFC with the RBI is a comprehensive, multi-step
procedure designed to ensure that only well-managed and financially sound
companies are permitted to operate within India’s financial sector. While the
process requires meeting various financial, operational, and regulatory
requirements, the benefits of being a registered NBFC—such as legal recognition,
access to financial markets, and the ability to provide specialized services—make
it a worthwhile endeavor for businesses and entrepreneurs looking to participate
in the financial services industry. Proper adherence to the registration process
and ongoing compliance with RBI norms ensures the long-term success and
stability of the NBFC.
Procedure for Filing an Application for Registration of NBFC with RBI
To operate as a Non-Banking Financial Company (NBFC) in India, a company
must obtain a Certificate of Registration (CoR) from the Reserve Bank of
India (RBI). The process of filing an application with the RBI involves several
steps, from preparing the application to submitting necessary documents,
ensuring compliance with regulatory norms, and addressing any further
requirements specified by the RBI. Below is a detailed procedure for filing the
application for NBFC registration with the RBI:

1. Preparation of the Application

Before submitting the application to the RBI, the company must ensure that it
meets all the eligibility criteria set by the RBI. The key requirements include:
 Incorporation as a Public Limited Company under the Companies
Act, 2013.
 Minimum Net Owned Fund (NOF) of ₹2 crore (for most categories of
NBFCs).
 A business plan with clear operational details and financial projections.
 Appointment of qualified and experienced management.
 Sufficient infrastructure and risk management policies in place.
 Adequate capital to maintain financial stability.
The company must also ensure that it adheres to prudential norms, such as
maintaining sufficient liquidity and solvency to operate as an NBFC.

2. Gathering Necessary Documents

Once the company confirms that it meets the eligibility criteria, the next step is
to gather all the required documents for filing the application. The documents
that need to be included are:
1. Certificate of Incorporation: Proof that the company is legally
incorporated under the Companies Act, 2013.
2. Memorandum of Association (MoA) and Articles of Association
(AoA): These documents should state that the company’s main objective
is to provide financial services and activities permissible under the RBI
regulations for NBFCs.
 3. Net Owned Fund (NOF) Details: Evidence showing that the company
has a minimum NOF of ₹2 crore, including the latest balance sheet, paid-
up capital, and reserves.
4. Business Plan: A detailed plan outlining the company’s objectives, target
market, product offerings (e.g., loan types, financial services), and
financial projections for the next 3-5 years.
5. Director and Promoter Details: The company should submit personal
and professional details of its promoters, directors, and key management
personnel. This includes qualifications, financial standing, and past
experience.
6. Financial Statements: Preliminary financial statements (balance sheets,
profit & loss accounts) for the last 3 years (if available), showing the
company’s financial position.
7. Certificate of No Objection: If the company intends to engage in certain
activities (e.g., insurance business, housing finance), a no-objection
certificate from the relevant regulatory authority may be required.
8. Operational and Risk Management Policies: Documents that
demonstrate the company's internal governance structure, internal
controls, risk management, and compliance frameworks.

3. Filling the Application Form

The application to the RBI must be filled in the prescribed format available on
the RBI’s official website or can be obtained directly from the RBI’s regional
office. The application must contain the following information:
 Company Details: Name, registered office address, incorporation details,
and legal structure of the company.
 Type of NBFC: Specify the type of NBFC the company intends to operate
as (e.g., asset financing company, housing finance company, microfinance
institution).
 Capital Details: Breakdown of paid-up capital, reserves, and other equity
funding that make up the company’s NOF.
 Business Objectives: Clear indication of the financial services the
company plans to offer (e.g., loans, leasing, investments).
 Market Strategy: The target market, including demographics, location,
and specific customer segments the company will serve.
 Risk Management Framework: Overview of risk assessment
procedures, loan recovery strategies, and internal control systems.
 Details of Management and Promoters: Information about the
qualifications, experience, and history of the company’s promoters,
directors, and senior management.
The application form should be signed by the authorized signatories of the
company, such as the managing director or CEO.

4. Submission of the Application

The completed application form, along with the necessary supporting
documents, must be submitted to the Regional Office of the RBI that
corresponds to the company’s location. Companies must also ensure that the
application fee (if applicable) is paid along with the submission.
 Online Submission: Some parts of the application process may be
facilitated through the RBI's official online portal (e.g., filing fees,
document upload), depending on the latest RBI procedures.
 Hard Copy Submission: In most cases, the company will be required to
submit physical copies of the documents to the RBI regional office.

5. Scrutiny and Evaluation by RBI

Once the application is submitted, the RBI undertakes a detailed scrutiny of
the application to assess whether the company meets the regulatory
requirements for registration as an NBFC. The RBI may:
 Verify Documents: Check the authenticity of the submitted documents,
such as financial records, incorporation certificates, and business plans.
 Review Financial Viability: Examine the company’s capital adequacy,
liquidity, and solvency position, ensuring that the company meets the
minimum Net Owned Fund (NOF) requirement and maintains healthy
financial stability.
 Check Management Credentials: Conduct background checks on the
promoters, directors, and senior management personnel, ensuring that
they do not have a history of financial fraud or mismanagement.
 Assess Operational Readiness: Evaluate the company’s infrastructure,
governance mechanisms, and internal controls to ensure that it can
effectively manage financial operations and risks.
The RBI may also conduct an on-site inspection to assess the company's
readiness to comply with its regulatory obligations.

6. Addressing Additional Queries (if any)

During the evaluation process, the RBI may raise additional queries or request
further information from the applicant company. These could include:
 Clarification on Financial Statements: If there are discrepancies or
missing data in the financial documents, the RBI may ask for clarification.
  Changes in Business Plan: The RBI may request a revised business plan
if it identifies any potential concerns regarding the company’s operational
or financial strategies.
 Compliance with Regulatory Norms: The company may be asked to
submit additional proof or modify certain policies to ensure full compliance
with RBI regulations.
The company must promptly address any queries or requests for clarification to
avoid delays in the registration process.

7. Issuance of Certificate of Registration (CoR)

If the RBI is satisfied with the application and the company complies with all the
required regulatory norms, it will issue the Certificate of Registration (CoR).
This certificate is the official approval for the company to operate as an NBFC
and engage in financial services as per the scope defined in the application.
The CoR will specify:
 The type of NBFC the company is registered as (e.g., asset finance
company, housing finance company, etc.).
 Conditions or compliance requirements that the company must
adhere to as part of its operational framework.
 The validity period of the registration (if applicable) and any specific
reporting requirements.

8. Post-Registration Compliance
Once the CoR is granted, the company must adhere to ongoing regulatory
compliance requirements set forth by the RBI. This includes:
 Quarterly and Annual Reports: Filing regular financial statements and
reports with the RBI, including Non-Performing Asset (NPA) details,
capital adequacy ratio (CAR), and liquidity status.
 Adherence to Prudential Norms: Ensuring that the company maintains
appropriate levels of solvency, liquidity, and capital reserves.
 Operational Control and Governance: Regular audits and inspections
by the RBI to ensure compliance with all operational and governance
standards.
 Internal Control Systems: Continuous monitoring and updating of risk
management, credit assessment, and loan recovery policies.

Conclusion
The process of filing an application for NBFC registration with the Reserve Bank
of India (RBI) is a multi-step procedure that involves preparing the necessary
documentation, complying with financial requirements, submitting a detailed
application, and undergoing RBI scrutiny. Successful registration allows a
company to legally operate as an NBFC, providing a wide range of financial
services, from loans to asset financing. However, the company must continue to
comply with RBI’s regulatory norms to maintain its registration status and
operate effectively in the financial sector.