NBFCs

Financial institution
A financial institution is an institution which
collects funds from the public, and places
them in financial assets, such as deposits,
loans and bonds rather than tangible
property.
FINANCIAL
INSTITUTION

Banking
institution

Non
banking
institution

meaning
The financial institution which provide
various banking facilities but are not
termed as banks because they do not hold
banking license are known as non banking
financial institution.

A Non-Banking Financial Company (NBFC) is a

company registered under the Companies Act, 1956
and is engaged in the business of :
loans and advances,
acquisition of shares / stock / bonds / debentures /
securities issued by Government / local authority /
other securities of like marketable nature,
leasing,
hire-purchase,
insurance business,
chit business
stock broking companies
merchant banking companies
RNBCs

NBFC does not include any institution whose principal

business is that of :
agriculture activity,
industrial activity,
sale / purchase / construction of immovable property.

Features of NBFCs
Registration with RBI is mandatory
All the NBFC are not entitled to accept public
deposits
NBFC can accept public deposit for a minimum
period of 12 months and maximum of 60 months
They cannot accept deposits repayable on
demand
NBFCs cannot offer interest rates higher than the
ceiling rate prescribed by RBI from time to time
NBFCs cannot offer gifts/incentives or any other
additional benefit to the depositors

CONTD.
NBFCs (except certain AFCs) should have minimum
investment grade credit rating.
The deposits with NBFCs are not insured
The repayment of deposits by NBFCs is not guaranteed by
RBI
There are certain mandatory disclosures about the company
in the Application Form issued by the company soliciting
deposits
If a NBFC defaults in repayment of deposit, the depositor can
approach
A. Company Law Board or
B. Consumer Forum or
C. file a civil suit to recover the deposits.

NBFIs VERSUS BANKs

BANKS

NBFIS

Definition

Banking is acceptance of deposits

withdraw able by cheque or
demand;

NBFI cannot accept

demand deposits
NBFI are companies
carrying financial business

Scope of business

Scope of business of the bank is

limited.

There is a various types of

business regarding
financial activities.

function

They generate multiple expansion

of credit

Only mobilise savings for

investment.

Need for a license

License norms are tightly

It is comparatively much
controlled and generally it is
easier to get a registration
perceived to be quite difficult to get as an NBFI.
a license for a bank

Types of group

Banks form homogeneous group

doing banking business

NBFC form a
heterogeneous group

Difference between Banks & NBFCs

NBFCs are doing functions akin to that of banks,
however there are a few differences:
i. NBFC cannot accept demand deposits;
ii. it is not a part of the payment and settlement system
and as such cannot issue cheques to its customers ;
and
iii. deposit insurance facility is not available for NBFC
depositors unlike in case of banks.

Registration of NBFCs
In terms of Section 45-IA of the RBI Act, 1934, it is
mandatory that every NBFC should be registered
with RBI to commence or carry on any business of
non-banking financial institution as defined in clause
(a) of Section 45 I of the RBI Act, 1934.

(a)
(b)
(c)
(d)
(e)

However, to obviate dual regulation, certain category 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 620 A 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

Working of NBFC

Filing of application in prescribed form

Submit it in regional office of RBI
Processing by RBI
RBI issue certificate

Requirements for Registration with RBI

A company incorporated under the Companies Act, 1956 and
desirous of commencing business of non-banking financial
institution as defined under Section 45 I (a) of the RBI Act, 1934
Should have a minimum net owned fund of Rs 25 lakh (raised
to Rs 200 lakh wef April 21, 1999).
The company is required to submit its application for
registration in the prescribed format along with necessary
documents for Banks consideration.
The Bank issues Certificate of Registration after satisfying itself
that the conditions as enumerated in Section 45-IA of the RBI
Act, 1934 are satisfied.

NBFCs and Public Deposits

All NBFCs are not entitled to accept public deposits.
Only those NBFCs holding a valid Certificate of
Registration with authorization to accept Public
Deposits can accept / hold public deposits.
The NBFCs accepting public deposits should have
minimum stipulated Net Owned Fund and comply with
the Directions issued by the Bank.

Ceiling on Acceptance of Public Deposits

A NBFC maintaining required NOF and complying with the prudential
norms can accept public deposits as follows:

Category of NBFC

Ceiling on Public deposits

EL / HP Companies
maintaining CRAR of 15%
without credit rating

1.5 times of NOF or Rs 10

crores whichever is less

EL / HP Companies with
CRAR of 12% and having
minimum investment grade
credit rating

4 times of NOF

LC / IC with CRAR of 15%

and having minimum
investment grade credit
rating

1.5 times of NOF

 Presently, the maximum rate of interest a NBFC can offer is

11%. The interest may be paid or compounded.
The NBFCs are allowed to accept / renew public deposits for
a minimum period of 12 months and maximum period of 60
months.
They cannot accept deposits repayable on demand.

Important Regulations relating to Acceptance of Deposits by

NBFCs
i.

The NBFCs are allowed to accept / renew public deposits

for a minimum period of 12 months and maximum period of
60 months. They cannot accept deposits repayable on
demand.

ii.

NBFCs cannot offer interest rates higher than the ceiling

rate prescribed by RBI from time to time. The present
ceiling is 11 per cent per annum. The interest may be paid or
compounded at rests not shorter than monthly rests.

iii.

NBFCs cannot offer gifts / incentives or any other

additional benefit to the depositors.

iv. NBFCs (except certain equipment leasing / hire-purchase

finance companies) should have minimum investment grade
credit rating.
v. The deposits with NBFCs are not insured.
vi. The repayment of deposits by NBFCs is not guaranteed by
RBI.
vii. There are certain mandatory disclosures about the company
in the Application Form issued by the company soliciting
deposits.

Submission of Returns to RBI

The NBFCs accepting public deposits should furnish to RBI
i.

Audited balance sheet of each financial year and an

audited profit and loss account in respect of that year as
passed in the general meeting together with a copy of the
report of the Board of Directors and a copy of the report and
the notes on accounts furnished by its Auditors;

ii.

Statutory Annual Return on Deposits

iii.

Certificate from the Auditors that the company is in a

position to repay the deposits as and when the claims
arise;

iv. Quarterly Return on liquid assets;

v. Half-yearly Return on prudential norms;
vi. Half-yearly ALM Returns by companies having public deposits
of Rs. 20 crores and above or with assets of Rs. 100 crores and
above irrespective of the size of deposits ;
vii. Monthly return on exposure to capital market by companies
having public deposits of Rs. 50 crores and above; and
viii. A copy of the Credit Rating obtained once a year along with
one of the Half-yearly Returns on prudential norms as at (v)
above.

Types of NBFC

Different types of NBFCs registered with RBI

i. equipment leasing company;
ii. hire-purchase company;
iii. loan company;
iv. investment company;
v. Mutual benefit finance company
vi. Residuary non banking company

INVESTMENT COMPANY
Investment Company is any financial
intermediary whose principal business is that
of buying and selling of securities.
It is a company whose main business is
holding securities of other companies purely
for investment purposes.
The investment company invests money on
behalf of its shareholders who in turn share in
the profits and losses.
Example : Mutual Fund Companies

MUTUAL BENEFIT FINANCIAL

COMPANY (MBFC)
Nidhis or Mutual Benefit Finance Companies are
one of the oldest forms of non-financial
companies. It is a company structure in which
the company's owners are also its clients.
That is, the mutual company's profits are
distributed to its participating customers each
year in proportion to their individual exposures to
the company.
Many insurance companies are structured as
mutual companies.

 Some of the important objectives of Nidhis are to

enable the members to save money, to invest
their savings and to secure loans at favorable
rates of interest.
They work on the principles of complete mutuality
of interest and are generally well-managed.
The
Government
has
granted
certain
concessions under Section 620A of the
Companies Act, 1956.
Primarily regulated by Department of Company
Affairs (DCA) under the directions / guidelines
issued by them under Section 637 A of the
Companies Act, 1956.
The Government of India constituted an Expert
Committee in March 2000 (Chairman: Shri
P.Sabanayagam)

LOAN COMPANY
Loan company means any financial institution
whose principal business is that of providing
finance, whether by making loans or
advances or otherwise for any activity other
than its own (excluding any equipment
leasing or hire-purchase finance activity).
A loan is a type of debt. Like all debt
instruments, a loan entails the redistribution
of financial assets over time, between the
lender and the borrower.

RESIDUARY NON-BANKING
COMPANIES (RNBCS)
Company which receives deposits under any scheme
or arrangement, by whatever name called, in one
lump-sum or in instalments by way of contributions or
subscriptions or by sale of units or certificates or other
instruments, or in any manner are called RNBCs.
RNBCs are a class of NBFCs which cannot be
classified as equipment leasing, hire purchase, loan,
investment, nidhi or chit fund companies, but which
tap public savings by operating various deposit
schemes.
The deposit acceptance activities of these companies
are governed by the provisions of Residuary Non
Banking Companies (Reserve Bank) Directions, 1987

HIRE-PURCHASE COMPANY

Any financial intermediary whose principal

business relates to hire purchase transactions or
financing of such transactions.

A method of buying goods through making

installment payments over time.
Under a hire purchase contract, the buyer is leasing
the goods and does not obtain ownership until the
full amount of the contract is paid.
Hire purchase combines elements of both a loan
and a lease. You reach an agreement with the
dealer to pay an initial deposit, typically anything
between 10% and 50%, and then pay off the
balance in monthly installments over an agreed
period of time. At the end of this period, the product
is yours.

EQUIPMENT LEASING COMPANY

Equipment leasing company is any financial institution whose
principal business is that of leasing equipments or financing of such
an activity.
Leasing
Leasing is a process by which a firm can obtain the use of a certain
fixed assets for which it must pay a series of contractual, periodic,
tax deductible payments.
The lessee is the receiver of the services or the assets under
the lease contract and the lessor is the owner of the assets. The
relationship between the tenant and the landlord is called a tenancy,
and can be for a fixed or an indefinite period of time (called the
term of the lease). The consideration for the lease is called rent.

IMPORTANCE
Non banking financial institutions have the
following importance in Indian economy.
Greater reach.
Flexibility in tapping resources.
Retail services to small and medium
business.
Important component of financial market.

strategies
Development of assets and competencies for
sustainable competitive advantage.
Selection of appropiate strategies
Development of initiatives
Drafting of action plan
Develop a model
Develop internal business plan
Develop tracking model
Create internal reporting pakage

Thank you