Non Banking Financial Company
A Non Banking Financial Company (NBFC) is a company registered under the Companies Act 2013 or Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bond hire-purchase, insurance business, or chit business but does not include any institution whose principal business includes agriculture or industrial activity or the sale, purchase or construction of immovable property.
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 Rs.200 Lakhs(earlier Rs.25 Lakhs). 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 406 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.
A company incorporated under the Companies Act, 2013 or Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45-IA of the RBI Act, 1934 should comply with the following:
i. it should be a company registered under Section 3 of the companies Act, 2013
ii. It should have a minimum net owned fund of Rs. 200 lakhs (except for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs)
Types of Non-Banking Financial Entities (Regulated by RBI)
- Asset Finance Company (AFC)
- Investment Company (IC)
- Loan Company (LC)
- Infrastructure Finance Company (IFC)
- Systemically Important Core Investment Company (CIC-ND-SI)
- Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)
- Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
- Non-Banking Financial Company – Factors (NBFC-Factors)
- Mortgage Guarantee Companies (MGC)
- NBFC- Non-Operative Financial Holding Company (NOFHC)
Difference between NBFCs & Banks
NBFCs perform functions similar to that of banks, however there are a few differences that NBFC cannot accept demand deposits, an NBFC is not a part of the payment and settlement system and as such, an NBFC cannot issue cheques drawn on itself and deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks.
Alignment of the RBI's Regulations with Companies (Amendment) Act, 2000
In terms of the RBI Act, 1934, registration of NBFCs with the RBI is mandatory, irrespective of whether they hold public deposits or not. The amended Act (1997) provides an entry point norm of Rs. 25 lakh as the minimum net owned fund (NOF), which has been revised upwards to Rs.2 crore for new NBFCs seeking grant of COR on or after April 21, 1999. Certain types of financial companies, viz., insurance companies, housing finance companies, stock broking companies, chit fund companies, companies notified as 'nidhis' under Section 406 of the Companies Act, 2013 and companies engaged in merchant banking activities (subject to certain conditions), however, have been exempted from the requirement of registration under the RBI Act, as they are regulated by other agencies.