Non-Banking Financial

Company (NBFC)
• While the Indian financial system is dominated by
banks, yet Non-Banking Financial Institutions plays
an important role by providing complimentarity and
competitiveness to banks. Non-Banking Financial
Companies (commonly referred to as NBFC), are
engaged in varied financial activities and provides a
wide range of financial services. NBFCs are
incorporated under the Companies Act, 1956 and
can be classified into two broad categories, viz.,
(i) NBFCs accepting public deposit (NBFCs-D) and
(ii)NBFCs not accepting/holding public deposit
(NBFCs-ND).
 Meaning of NBFC
• An NBFC is a company or an institution
basically engaged in acceptance of
deposits under different schemes and
to invest these monies in any manner.
NBFC may be registered as a Company
under Companies Act, 1956, or may be
other form of organization.
• A company registered under the Companies
Act, 1956
• A company engaged iin the business of loans
and advances, in the acquisition of
shares/stock/bonds/debentures/securities
issued by Government or local authority in
other securities of like marketable nature,
leasing, hire-purchase, insurance business,
chit business .
• Section 45I of the Reserve Bank of India Act,
1934 defines ‘‘non-banking financial
company’’ 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;
• Non-banking financial companies, normally,
provides supplementary finance to the
corporate sector. For the purpose of growing
economy the role of NBFC’s is important.
The finance and related services is the major
activity of NBFC’s.
• By implication any non-banking financial
institution engaged in deposits and lending
activities is called NBFC.
 NBFC does not include
• Any institution whose principal
business is that of Agriculture activity,
Industrial activity, sale/ purchase/
construction of immovable property
 What is difference
between banks & NBFCs?
• NBFC cannot accept demand deposits
(demand deposits are funds deposited at a
depository institution that are payable on
demand -- immediately or within a
very short period -- like your
current or savings accounts.),
• It is not a part of the payment and settlement
system and as such cannot issue cheques to
its customers; and
• Deposit insurance facility is not available for
NBFC depositors.
 NBFCs
(i) Loan Companies
(ii) Investment companies.
(iii) Hire purchase finance companies.
(iv) Equipment leasing companies.
(v) Mutual benefit finance companies.
(vi) Housing finance companies.
(vii) Miscellaneous finance companies.
(viii) Other and residuary finance companies
(ix) Chit fund companies
 Activities of NBFCs
Fund-Based Activities Fee-Based Activities
1. Equipment leasing 1. Issue Management
2. Hire Purchase 2. Portfolio Management
3. Bill discounting 3. Corporate Counseling
4. Loan and Investment 4. Loan and Lease
Syndication
5. Venture Capital 5. Project Counseling
6. House Finance 6. Arranging Foreign
Collaboration
7. Factoring 7. Advising on acquisitions
and mergers
8. Short-term loans 8. Advising on Capital
restructuring
9. Inter-Corporate Loans
 Regulation of NBFCs – RBI Act
• The RBI has amended the NBFCs’
regulations from time to time so that
NBFCs grow on sound and healthy
lines and to protect the interest of
NBFC depositors.
• The RBI Act regulates different types of
NBFCs under the provisions of Chapter
III – B & Chapter C.
 Procedure for obtaining
registration.
• Application must be in the form prescribed
by RBI and should be submitted to the
Regional Office of the RBI.
Processing of application by RBI.
• RBI ensures capacity of the NBFC to meet
the creditors claim in full, general character
of the management and the capital structure.
The activity of NBFC shall not be prejudicial
to the operation and consolidation of the
financial sector and also shall not be
prejudicial to the public interest.
 Cancellation of registration.
• Registration can be cancelled under section
44IA (6) wherein certain conditions are
prescribed under the section such as
• Non-compliance of directions issued by the
RBI.
• Fails to maintain accounts in accordance
with any law or order issued by RBI.
• Failed to submit or offer for inspection its
books of accounts or other relevant
documents when demanded by RBI.
• Failed to comply with any conditions
specified by RBI while granting certificate of
registration.
 Procedure for cancellation of
registration
• NBFC should be given a reasonable
opportunity of being heard. NBFC
mustgenerally be given an opportunity
by RBI for taking necessary steps to
comply with the conditions, except in
cases where RBI is of the opinion that
the delay in canceling the certificate of
registration shall be prejudicial to
public interest or to the interest of the
depositors of the NBFC.
 Appellate Remedy

• The NBFC can prefer and appeal to

Central Government within 30 days
from the date on which the cancellation
order was communicated to it. If no
appeal has been prescribed then the
decision of RBI shall be final.
 Overview Of NBFC Sector
NBFCs have seen considerable business
model shift over last decade because of
regulatory environment and market
dynamics.
Majority of NBFCs were not able to face
the pressure created on, and were wiped
out.
However, since 2001-2002, there has
been significant improvement in the
business model of existing NBFCs.
Continued…
In the early 2000s, the NBFC
sector in India was facing
following problems:
1. High cost of Funds
2. Slow industrial growth
3. Stiff competition with NBFCs as well as
with banking sector
4. Small balance sheet size resulting in high
cost of fund and low asset profile
5. Non performing assets
 Role of NBFCs
 As recognized by RBI and expert committees
 Development of sectors like Transport & Infrastructure
 Substantial employment generation
 Help & increase wealth creation
 Broad base economic development
 Irreplaceable supplement to bank credit in rural
segments
 major thrust on semi-urban, rural areas & first time
buyers / users
 To finance economically weaker sections
 Huge contribution to the State exchequer