NON- BANKING FINANCIAL COMPANY [NBFC]

Non-Banking Financial Corporations (NBFCs) play a crucial role in India’s

financial landscape. Governed by the Reserve Bank of India (RBI), NBFCs
offer diverse financial services, from loans to investment activities.
Understanding their regulation, types, and core functions is essential for
stakeholders in the financial sector.

REGULATOR : Reserve Bank of India is regulator of the Non-Banking

Financial Companies under the provisions of Chapter III B of the Reserve
Bank of India Act, 1934. With the amendment of the Reserve Bank of India
Act, 1934 in January 1997, in terms of Section 45 IA of the Act, all Non-
Banking Financial Companies have to be mandatorily registered with the
Reserve Bank of India.

Non-Banking Financial Company (NBFC) –

A) Meaning of NBFC –

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

the Companies Act, 1956/2013 engaged in the business of –

a) loans and advances,

b) acquisition of shares/stocks/bonds/debentures/securities issued by

Government or local authority or other marketable securities

c) leasing,

d) hire-purchase,

e) insurance business,

f) chit business

but does not include any institution whose principal business is that of

a) agriculture activity,

b) industrial activity,

c) purchase or sale of any goods (other than securities) or providing any

services and sale/purchase/construction of immovable property.

Note- 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 instalments by way of contributions or in any other
manner, is also a non-banking financial company.

Meaning of Financial activity as principal business – 50-50 test for

NBFC’s A 50/50 test means that – a) a firm’s financial assets constitute
more than 50% of the total assets; and b) income from financial assets
constitute more than 50% of the gross income. A firm which fulfills both
these criteria will be registered with the RBI as an NBFC. If, after
registration, a firm violates the 50/50 criteria then RBI has the authority to
penalize the NBFC.

Definition of NBFC Section 45 I (f) of RBI Act, 1934 a financial

institution which is a company; a non-banking institution which is a
company and which has as its principal business, the receiving of
deposits, under any scheme or arrangement or in any other manner, or
lending in any manner; such other non-banking institution or class of such
institutions, as the Bank may, with the previous approval of the Central
Government and by notification in the Official Gazette,

specify Section 45 I (c) of RBI Act, 1934- Financial Institution includes

Making loans and advances, Acquisition of shares, stock, bonds,
debentures, securities issued by Government or other marketable
securities, etc, Letting/delivering of goods to hirer under Hire Purchase
Agreement, Carrying on any class of insurance business. Chit business or
accepting public deposits under any Scheme / Arrangement.

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.

No NBFC shall commence or carry on business of non-banking financial

institution without: – Obtaining Certificate of Registration from RBI and –
Having a Minimum Net Owned Fund of Rs. 200 Lakhs. A company also
needs to register as NBFC with RBI, if it fulfils the 50:50 test – financial
assets constitute more than 50 percent of the total assets and – income
from financial assets constitute more than 50 percent of its gross income.
Exemptions: To avoid dual regulation, certain categories of NBFCs which
are regulated by other regulators are exempted from the requirement of
registration with RBI – Venture Capital Fund/Merchant Banking companies/
Stock broking companies registered with SEBI – Insurance Company
holding a valid Certificate of Registration issued by IRDA – Nidhi
companies as notified under Section 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 – 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.

Types of NBFC’s
Functions of NBFCs

 Hire Purchase services– A hire purchase service is a way

through which the seller delivers the goods to the buyer
without transferring the ownership of the goods. The
payment of the goods is ensured to be made in instalments.
Once the buyer pays all the instalments of the goods, then
only ownership of the good is transferred to the buyer.

 Retail Financing– Companies that provides short term funds

for loans against shares, gold, property, primarily for
consumption purposes.

 Trade Finance– Companies dealing in Dealer/ Distributor

finance so that they can for working capital requirements,
vendor finance, and other business loans.

 Infrastructural Funding– This is the largest section where

major NBFCs deal in. A lot portion of this segment alone
makes up a major portion of funds lent, amongst the
different segments. This majority includes Real Estate,
Railways or Metros, Flyovers, Ports, Airports, etc.

 Asset Management Company– Asset Management Companies

are those companies that consist of fund managers (who
invest in equity shares to gain handsome gains) who invest
the funds pooled by small investors and actively manage it.

 Venture Capital Services– The companies that invest in small

businesses are at their initial stage but their success rate is
high and are promising enough of sufficient return in the
coming time.

 Micro Small Medium Enterprise (MSME) Financing– MSME is

one of the roots of our economy and millions of livelihoods
depends on this sector that is why the government
announced such luring schemes for the MSME sector to
promote its growth.

Features of NBFCs

 The NBFCs are permitted to either accept or renew public

deposits for minimum of 12 months and a maximum of 60
months.

 NBFCs cannot offer higher interest rates. It should fall under

the ceiling rate that is specified by the RBI. The interest
must be paid or on a monthly basis.
  NBFCs cannot offer any benefit to the depositors.

 The deposits with NBFCs are not provided insurance.

 The guarantee of the repayment of deposits by NBFCs is not

provided by the RBI.

IMPORTANT ISSUES : All NBFC are prohibited from granting loans

against their own shares. NBFC Not to be partner in partnership firm. Net
owned fund’ in relation to NBFCs 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.

Conclusion: As integral players in India’s financial ecosystem, NBFCs

operate under the regulatory oversight of the Reserve Bank of India.
Diverse in nature, they offer a range of financial services, from deposit-
taking to asset financing. With stringent criteria and regulatory mandates,
NBFCs contribute significantly to the country’s economic growth and
financial stability.