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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 nature, leasing, hire-purchase, insurance business, chit business. This 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 is a company and has a 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 (Residuary non-banking company). The NBFC registration can be obtained in 90-120 days.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 approved by RBI for NBFC Registration. 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.
NBFCs lend and make investments and hence their activities are kin to that of banks; however, there are a few differences as given below:
All NBFCs are either deposit-taking or Non-deposit taking. If they are non-deposit taking, ND is suffixed to their name (NBFC-ND). The NBFCs which have an asset size of Rs.100 Crore or more are known as Systematically Important NBFC. They have been classified so because they can have bearing on financial stability of the country. The Non-deposit taking NBFCs are denoted as NBFC-NDSI. Under these two broad categories, the different NBFCs are as follows:
Though the NBFC’s have been around for a long time, they have recently gained popularity amongst institutional investors, since they facilitate access to credit for semi-rural and rural India where the reach of traditional banks has traditionally been poor. NBFC’s have also had a major impact in developing small business in rural India through local presence and strong customer relationships. Usually, the loan officers in such NBFC’s know the end customer or have a strong ‘informal’ understanding of the credibility of the borrower and are able to structure their loans appropriately.
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act that is engaged in the business of loans and advances, receiving deposits (some NBFC’s only), acquisition of stocks or shares, leasing, hire-purchase, insurance business, chit business. Therefore, NBFCs lend and take deposits similar to banks. In spite of this, there are few differences such as NBFC cannot accept demand deposits, NBFCs cannot issue cheques drawn on itself and NBFC depositors are not covered by the Deposit Insurance and Credit Guarantee Corporation.
The Reserve Bank of India regulates and supervises Non-Banking Financial Companies which are into the principal business of lending or acquisition of shares, stocks, bonds, etc., or financial leasing or hire purchase or accepting deposits. The principal business of financial activity 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 must have NBFC license. This test for NBFC license is popularly known as the 50-50 test.Therefore, 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 activity in a small way, will not require NBFC registration.
The following types of entities that are involved in the principal business of financial activity don't require NBFC License: Housing Finance Companies – Regulated by the National Housing Bank;Insurance Companies – Regulated by Insurance Regulatory and Development Authority of India (IRDA); Stock Broking – Regulated by Securities and Exchange Board of India;Merchant Banking Companies – Regulated by Securities and Exchange Board of India;Venture Capital Companies – Regulated by Securities and Exchange Board of India; Companies that run Collective Investment Schemes – Regulated by Securities and Exchange Board of India;Companies that run Collective Investment Schemes – Regulated by Securities and Exchange Board of India;Mutual Funds – Regulated by Securities and Exchange Board of India;Nidhi Companies – Regulated by the Ministry of Corporate Affairs (MCA);Chit Fund Companies – Regulated by the respective State Governments.The above types of companies have been exempted from NBFC registration requirements and NBFC regulations of RBI as they are regulated by other financial sector regulators.
To apply and obtain NBFC License, the following are the basic requirements:A Company Registered in India (Private Limited Company or Limited Company);It should be a company having minimum net owned funds of INR 2 Crores.The online application is available on RBI's website (COSMOS).Submission of hard copy of the application along with attached documents shall be submitted RBI Office. The NBFC license will be granted only after vigilant inspection of the application and documents attached with it.
Certified copy of Certificate of Incorporation issued by the registrar of companies.
Extract of the main object clause in the MOA clearly depicting the financial business. The Audited balance sheet and Profit & Loss account along with directors & auditors report for the entire period of company's existence, or for last three years, whichever is less.
Copy of the certificate of Director's highest educational and professional qualification. Copy of Director's experience certificate.
Any NBFC activity.
Accepting any public deposit.
Only the NBFCs which have been issued a license to accept a deposit in its certificate of Registration from RBI are allowed to accept public deposits. To ensure, NBFCs don't misuse the License issued by Government, there have been certain limits imposed and conditions specified, for accepting deposits by the NBFCs, which varies depending upon various factors.
Whether it is an Asset finance Company or Loan/Investment Company.
Based upon the Net Owned Funds of the Company.
Based upon the prudential norms as prescribed by the RBI.
Based on the combination of factors mentioned above, NBFCs are allowed to accept public deposits as a multiple of Net Owned Funds.
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