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 Indian 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 NBFC (residuary non-banking company i.e. RNBC).
Non-Banking Financial Companies are doing functions akin to that of banks, however there are a few differences:
- An NBFC cannot accept demand deposits (which are payable on demand), like the savings and current accounts.
- It is not a part of the payment and settlement system and as such cannot issue cheques to its company customers and
- Deposit insurance facility is not available for NBFC depositors unlike in case of banks (It means the public deposits with them are ‘unsecured’. In case a NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover the deposits).
Under the RBI Act, 1934, any Non-Banking Financial Company (NBFC) have to get registered with Reserve bank of India (RBI). However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI such as:
- Venture capital fund, merchant banking companies, stock broking companies register with Sebi;
- Insurance company holding a valid certificate of registration issued by IRDA;
- Nidhi companies under the Companies Act, 1956;
- Chit companies under the Chit Funds Act, 1982;
- Housing finance companies regulated by National Housing Bank (of the RBI).
A company incorporated under the Companies Act, 1956 and desirous of commencing business of the NBFC should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 2 crore from April 21, 1999). NBFCs registered with RBI have been reclassified (since 2006) as the Asset Finance Company (AFC); Investment Company (IC) and the Loan Company (LC). Provisions for accepting deposits are:
- There is ceiling on acceptance of public deposits an NBFC maintaining required NOF and CRAR and complying with the prudential norms can accept public deposits maximum upto four times of NOF;
- Can offer the maximum 11% rate of interest;
- Minimum investment grade credit rating (MIGR) is essential (may get itself rated by any of the four rating agencies namely, CRISIL, CARE, ICRA and FITCH Ratings India Pvt. Ltd.);
- Are allowed to accept/renew public deposits for a minimum period of one year and maximum period of 5 years; and
- Effective from April 2004, cannot accept deposits from NRIs except deposits by debit to NRO account of NRIs provided such amount do not represent inward remittance or transfer from NRE/FCNR (B) account, however, the existing NRI deposits can be renewed (Note: different foreign currency accounts opened by the Indian banks have been given as the last sub-topic of this Chapter).