NON- BANK FINANCE COMPANIES(NBFCs)

Definition

They are a company registered under the Companies Act, 1956 or the Companies Act, 2013.

They are engaged in financial activities like loans, investments, leasing, etc.

Conditions to Register as NBFC

The NBFCs must be registered as a company under the Companies Act, 1956, or the Companies Act, 2013.

Their minimum capital or Net Owned Fund requirement is Rs. 2 crores.

More than 50% of their total assets and gross income must come from financial activities.

At least 1 Director of NBFCs should be from the financial field or a senior banker.

How does an NBFC

work?

They operate by raising funds via deposits, loans, or other financial instruments, excluding traditional demand deposits. 

They lend to individuals, businesses, or other entities in their specific sectors or niches.

They earn revenue through interest on loans, fees, and other financial services.

What they can not do?

They cannot accept demand deposits. 

They are not part of payment systems and they cannot issue cheques. 

Types of NBFCs in India

Types of NBFCs

Based on regulation:

NBFCs registered and regulated by RBI

These are NBFCs that are involved in providing financial activities and are required to obtain a registration with RBI.

PNB Housing Finance (PNBHF), Bajaj Finance, Mahindra & Mahindra

Finance Services (Mahindra Finance), and Shriram Finance are some

examples.

NBFC Not Registered and regulated under RBI

These are NBFCs that are involved in providing financial activities but they are not required to obtain a registration with RBI.

These types of entities are regulated by other financial sector regulators and they do not need to obtain an NBFC License from RBI to avoid dual regulation.

They are:

• Insurance Companies: These are regulated by the Insurance Regulatory and Development Authority of India (IRDA),
• Housing Finance Companies: They Are regulated by the National Housing Bank (NHB),
• Stock-Broking Companies and Merchant Banking Companies: These companies are under the regulation of the Securities and Exchange Board of India (SEBI),
• Mutual Funds: They are also regulated bySEBI.
• Venture Capital Companies: SEBI is the regulatory authority,
• Collective Investment Schemes: They are also regulated by the SEBI.
• Chit Fund Companies: These are regulated under the Chit Fund Act by the respective State Governments,
• Nidhi Companies: They are regulated by the Ministry of Corporate Affairs (MCA).

Based on deposits, NBFC is broadly classified as

(NBFC-D)-Deposit-taking Non-Banking Financial Company: 

Deposit Accepting NBFCs have been registered with RBI as per the provisions in the RBI Act, 1934.

(NBFC-ND)-Non-Deposit taking Non-Banking Financial Company

They also need to register themselves under RBI. The guidelines for NBFC-D and NBFC-ND are different.

Within the above broad categorization, the NBFCs can, be further, broadly divided into:

1. Asset Finance Company (AFC): They are financial institutions (FI) with the primary business of financing physical assets. AFCs can finance tractors, motorcycles, buses, and trains.
2. Investment Company (IC): They are engaged in the acquisition of securities, as its principal business.
3. Loan Company (LC): They provide loans, as its principal business. 
4. Infrastructure Finance Company (IFC): They are a company which extends at least 75% of its total assets in infrastructure loans. They have minimum  300 crore rupees of NOF (Net Owned Funds) with a credit rating of not less than “A”.

NBFC-ND(Non-Deposit taking Non-Banking Financial Company) is further sub-categorized into 2 parts-

Systemically Important NBFC-ND: 

• They are NBFCs with assets of ₹ 500 crore or more. 
• These NBFCs are considered significant because their activities can impact the overall financial stability of the economy.

Other NBFC-ND: It includes all NBFCs which do not fall under NBFC-SI.

Difference between NBFCs and Banks

PRACTICE QUESTION

Q.Consider the following statements about the “Non-bank finance companies (NBFCs)”: 

1. They are companies registered under the Companies Act, 1956, or Companies Act, 2013.
2. They operate by raising funds via deposits, loans, or other financial instruments, excluding traditional demand deposits. 
3. They can accept demand deposits. 

How many of the above statements is/are correct?

A.Only one

B.Only two

C. All Three

D.None

Answer: B

Explanation:

Statement 1 is correct: 

The NBFCs must be registered as a company under the Companies Act, 1956, or Companies Act, 2013.

Their minimum capital or Net Owned Fund requirement is Rs. 2 crores.

More than 50% of their total assets and gross income must come from financial activities.

At least 1 Director of NBFCs should be from the financial field or a senior banker.

Statement 2 is correct: 

They operate by raising funds via deposits, loans, or other financial instruments, excluding traditional demand deposits. 

They lend to individuals, businesses, or other entities in their specific sectors or niches.

They earn revenue through interest on loans, fees, and other financial services. 

Statement 3 is incorrect: 

They cannot accept demand deposits. 

They are not part of payment systems and they cannot issue cheques.