Non-Banking Financial Companies (NBFCs)

Non-banking financial companies (NBFCs) are fast emerging as an important segment

of Indian financial system. 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 or local authority or other securities of like marketable nature, leasing, hire-
purchase, insurance business, chit business but does not include any institution whose
principal business is that of agriculture activity, industrial activity,
sale/purchase/construction of immovable property. A non-banking institution which is a
company and which has its principal business of receiving deposits under any scheme
or arrangement or any other manner, or lending in any manner is also a non-banking
financial company (Residuary non-banking company).

Non-banking financial companies are heterogeneous group of institutions (other than

commercial and co-operative banks) performing financial intermediation in a variety of
ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc.
They raise funds from the public, directly or indirectly, and lend them to ultimate
spenders. They advance loans to the various wholesale and retail traders, small-scale
industries and self-employed persons. Thus, they have broadened and diversified the
range of products and services offered by a financial sector. Gradually, they are being
recognised as complementary to the banking sector due to their customer-oriented
services, simplified procedures, attractive rates of return on deposits, flexibility and
timeliness in meeting the credit needs of specified sectors, etc.

The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI)
within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the
directions issued by it under the Act. As per the RBI Act, a 'non-banking financial
company' is defined as:- (i) a financial institution which is a company; (ii) a non banking
institution which is a company and which has as its principal business the receiving of
deposits, under any scheme or arrangement or in any other manner, or lending in any
manner; (iii) such other non-banking institution or class of such institutions, as the bank
may, with the previous approval of the Central Government and by notification in the
Official Gazette, specify.

Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a
deposit taking company. This registration authorises it to conduct its business as an
NBFC. For the registration with the RBI, a company incorporated under the Companies
Act, 1956 and desirous of commencing business of non-banking financial institution,
should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh
w.e.f April 21, 1999). The term 'NOF' means, owned funds (paid-up capital and free
reserves, minus accumulated losses, deferred revenue expenditure and other intangible
assets) less, (i) investments in shares of subsidiaries/companies in the same group/ all
other NBFCs; and (ii) the book value of debentures/bonds/ outstanding loans and
advances, including hire-purchase and lease finance made to, and deposits with,
subsidiaries/ companies in the same group, in excess of 10% of the owned funds.

The registration process involves submission of an application by the company in the

prescribed format along with the necessary documents for RBI's consideration. If the
bank is satisfied that the conditions enumerated in the RBI Act, 1934 are fulfilled, it
issues a 'Certificate of Registration' to the company. Only those NBFCs holding a valid
Certificate of Registration can accept/hold public deposits. The NBFCs accepting public
deposits should comply with the Non-Banking Financial Companies Acceptance of
Public Deposits ( Reserve Bank) Directions, 1998, as issued by the bank. Some of the
important regulations relating to acceptance of deposits by the NBFCs are:-

 They 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.
 They cannot offer interest rates higher than the ceiling rate prescribed by RBI
from time to time.
 They cannot offer gifts/incentives or any other additional benefit to the
depositors.
 They should have minimum investment grade credit rating.
 Their deposits are not insured.

The repayment of deposits by NBFCs is not guaranteed by RBI.

Amendments to NBFC Regulations

 In view of the fact that the mutual funds have the time tested appraisal
techniques for assessment of the borrowers' capacity to repay the debts
and they do not require the same degree of protection as needed by the
depositors under the RBI Act, it has been decided to exempt the
borrowings from mutual funds from the purview of public deposits. The
NBFCs could reduce the amount of borrowings from mutual funds while
computing the outstanding public deposits as on December 31, 1999
and maintain the liquid assets on and from April 1, 2000 on the
remaining public deposit liabilities as per the extant provisions under
Section 45-IB of the RBI Act, 1934.
 NBFC should give at least 3 months public notice prior to the date of
closure of any of its branches/ offices in, at least, one leading national
news paper and a leading local (covering the place of branch / office)
 vernacular language newspaper indicating therein the purpose and
arrangements being made to service the depositors etc.
 (b) (i) To ensure that the new management follows the objectives and to
keep the public informed of the change of management and control of
NBFCs, it has been decided that a public notice of three months shall
be given before effecting the sale of, or transfer of the ownership by
sale of shares, or transfer of control, whether with or without sale of
shares. Such public notice shall be given by the NBFC and also by the
transferor, or the transferee
(ii) The public notice should indicate the intention to sell or transfer
ownership / control, the particulars of transferee and the reasons for
such sale or transfer of ownership / control. The notice should be
published in one leading national and another in leading local (covering
the place of registered office) vernacular language newspaper.
An intimation along with a copy of the notice in respect of items (a) and
(b) above should be sent within 7 days of its publication in the
newspapers to the Regional Office of RBI under whose jurisdiction the
registered office of the company is located.

The types of NBFCs registered with the RBI are:-

 Equipment leasing company: - is any financial institution whose principal

business is that of leasing equipments or financing of such an activity.
 Hire-purchase company: - is any financial intermediary whose principal
business relates to hire purchase transactions or financing of such transactions.
 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).
 Investment company: - is any financial intermediary whose principal business is
that of buying and selling of securities.

Now, these NBFCs have been reclassified into three categories:-

 Asset Finance Company (AFC)

 Investment Company (IC) and

 Loan Company (LC). Under this classification, 'AFC' is defined as a financial

institution whose principal business is that of financing the physical assets which
support various productive/economic activities in the country.
Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions.
 UNIT TRUST OF INDIA
 LIFE INSURANCE CORPORATION (LIC)
 GENERAL INSURANCE CORPORATION (GIC)

UNIT TRUST OF INDIA