Updated Apr 13, 2022

What is a Non-Banking Financial Company (NBFC)?

What is a Non-Banking Financial Company (NBFC)?

Non-Banking Financial Companies (NBFC) or non-banking financial institutions (NBFI) offer various banking services but do not have a banking licence. The NBFCs are incorporated under the Companies Act 1956 or 2013. According to section 45-I (c) of the RBI Act, NBFC engages in the business of Loans and Advances, acquiring stocks, equities, debts etc., issued by any local authority or Government or other marketable securities. They work as financial institutions and can receive money in deposits under any scheme or arrangement as one lump amount or in instalments through contributions or any other manner.

However, NBFCs can not include institutions having a principal business - agriculture, industrial, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

Principal business

According to the Reserve Bank of India, financial activity is the principal business to bring clarity to the companies monitored and regulated as NBFC under the RBI Act. The criteria for NBFC is called the 50-50 test, and it is as follows:

• 50% of the total assets must be the company's financial assets.
• 50% of the total income must be from financial assets.

These criteria are overlooked by the Ministry of Corporate Affairs and the Reserve Bank of India. RBI issues the licence for the operation which is incorporated as a company business under applicable land laws.

Difference between Bank and NBFC

NBFC, just like a bank, lend and invest. The points that separate NBFC from banks are:

• Unlike banks, NBFC cannot become a part of the settlement and payment system. They cannot issue a cheque drawn in its name.
• NBFCs cannot accept demand Deposits.
• The depositors do not get the deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation like in banks.

Types of NBFC

NBFCs are classified based on their activity and liabilities. They are:

1. Asset Finance Company
2. Loan Company
3. Investment Company
4. Micro Finance Company
5. Core Investment Company
6. Infrastructure Finance Company
7. Housing Finance Company
8. Mortgage Guarantee Company

Requirements of an NBFC Company

For obtaining NBFC status, a company must comply with the following requirements:

• The company should either be a Private Limited or a Public Limited company registered under the Companies Act 2013 or 1956.
• The Company should own a minimum net fund of Rs 2 crore.
• Finance experience is a must for 1/3rd of the Directors.
• It should have clean CIBIL records.
• A detailed business plan for the next five years is also a must.
• The Company must comply with the requirements of capital compliances and FEMA.

Attaining NBFC licence

If your company meets the above requirements, you can apply for an NBFC licence online on RBI's website. Following are the steps of attaining an NBFC licence:

• The application and the necessary documents should be filled out and submitted online.
• A CARN number is generated on submission.
• The application's hard copy is sent to the regional branch of the Reserve Bank of India.
• After scrutinising the application correctly, the licence is granted to the company.

Rules and regulations for NBFC

After attaining an NBFC licence, the company must follow the guidelines mentioned below. Failing to do so can lead to revoking the licence.

• NBFC cannot take deposits payable on demand.
• The public deposits the company can take should be for 12 months minimum and 60 months maximum.
• The company cannot charge interest more than the prescribed rate of the Reserve Bank of India.
• If the company takes an amount from someone, its repayment will not be guaranteed by the Reserve Bank of India.
• The company should present all the information including any change in the composition to the RBI.
• Deposits taken by the public will not be secure.
• Every year, the company must submit its audited balance sheet.
• The company must furnish statutory returns on the deposits taken in NBS-1 every year.
• A quarterly return on the company's liquid assets has to be delivered.
• The public must take an auditors certificate on the company's position. It must be taken for paying back all the deposits or money.
• A company with a public deposit of more than Rs 20 crore or an asset worth Rs 100 crore or more needs to provide a half-yearly asset-liability management return.
• Credit rating has to be submitted every six months to the RBI.
• The company's current liquid asset should comprise of minimum 15% of the public's deposit.

Conclusion

An NBFC is thus an organisation with limited benefits to offer to the public. However, it holds the capacity to give loans for a predefined interest rate and earn from it. It cannot demand money from the public but can receive it institutionally.