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Non – Banking Financial Companies...

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Non – Banking Financial Companies – India

shape Introduction

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in:

    a) The business of loans and advances,

    b) Acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities,

    c) Leasing, hire-purchase, insurance business, chit business

    But does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

shape NBFC

NBFCs lend & make investments and hence their activities are related to that of banks, but there are some differences:

  • NBFC cannot accept demand deposits.

  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.

  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

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 comply with the following:

  • It should be a company registered under Section 3 of the companies Act, 1956.

  • It should have a minimum net owned fund of Rs 200 lakh.

  • NBFCs whose asset size is of Rs 500 crores or more as per last audited balance sheet are considered as systemically important NBFCs.

  • The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.

  • Housing Finance Companiesare regulated by National Housing Bank.

  • Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokersare regulated by Securities and Exchange Board of India.

  • Insurance companiesare regulated by Insurance Regulatory and Development Authority.

  • Chit Fund Companies are regulated by the respective State Governments.

  • Nidhi Companiesare regulated by Ministry of Corporate Affairs, Government of India.

NBFCs are categorized

    a) in terms of the type of liabilities into Deposit & Non-Deposit accepting NBFCs

    b) Non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies(NBFC-NDSI and NBFC-ND)

    c) By the kind of activity, they conduct

shape Companies


  • An AFC(Asset Finance Company) is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines.

  • Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

Investment Company :

IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

Loan Company :

LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.


Infrastructure Finance Company is a non-banking finance company

    a) which deploys at least 75% of its total assets in infrastructure loans.

    b) has a minimum Net Owned Funds of Rs300 crore

    c) has a minimum credit rating of ‘A ‘or equivalent

    d) and a CRAR of 15%.

CIC – ND – SI :

Systematically Important Core Investment Company (CIC-ND-SI) is an NBFC carrying on the business of acquisition of shares and securities, satisfies the given conditions:

  • It holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies.

  • its investments in the equity shares in group companies constitutes not less than 60% of its Total Assets.

  • it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment

  • it does not carry on any other financial activity except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

  • Its asset size is Rs100 crores or above.

  • It accepts public funds

IDF – NBFC(Infrastructure Debt Fund – Non Banking Financial Companay :

  • IDF- NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects.

  • IDF- NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5-year maturity.

  • Only Infrastructure Finance Companies (IFC) can sponsor IDF – NBFCs.

Non Banking Financial Company – Micro Finance Institution :

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

  • loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs 1,00,000 or urban and semi-urban household income not exceeding Rs 1,60,000;

  • loan amount does not exceed Rs 50,000 in the first cycle and Rs 1,00,000 in subsequent cycles;

  • total indebtedness of the borrower does not exceed Rs 1,00,000;

  • tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with prepayment without penalty;

  • loan to be extended without collateral;

  • aggregate amount of loans, given for income generation, is not less than 50 percent of the total loans given by the MFIs;

  • loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower.

Non Banking Financial Company – Factors :

  • NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring.

  • The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

Mortgage Guarantee Companies :

MGC are financial institutions for which at least 90% of the business turn over is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is Rs 100 crore.

Non – Operative Financial Holding Company (NOFHC) :

  • It is the financial institution through which promoter / promoter groups will be permitted to set up a new bank.

  • It’s a wholly – owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators.

shape Questions

1. What is ‘ownedfund’and ‘net owned fund’ in relation to NBFCs ?

Owned Fund means the aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of the asset, excluding reserves created by revaluation of the asset.

Net Owned Fund is the amount as arrived at above, minus the number of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances.

2. Is there any ceiling on interest rate charged by the NBFCs to their borrowers ?

RBI has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC-Micro Finance Institution)

3. What is a Residuary Non – Banking Company (RNBC)? In what way it is different from other NBFCs ?

  • Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner.

  • These companies arerequired to maintain investments as per directions of RBI, in addition to liquid assets.

  • There is no ceiling on raising of deposits by RNBCs.

  • Every RNBC has to ensure that the amounts deposited with it are fully invested in approved investments.

  • In order to secure the interests of depositor, such companies are required to invest 100 percent of their deposit liability into highly liquid and secure instruments, namely, Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of Deposits of SCB/FIs, units of Mutual Funds, etc.

  • The minimum interest an RNBC should pay on deposits should be 5% (to be compounded annually) on the amount deposited in lump sum or at monthly orlonger intervals, and 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme.

  • An RNBC can accept deposits for a minimum period of 12 months and a maximum period of 84 months from the date of receipt of such deposit.

  • They cannot accept deposits repayable on demand.

4. What are money circulation/Ponzi/multi ?

  • Money circulation, multi-level marketing / Chain Marketing or Ponzi schemes are schemes promising easy or quick money upon enrollment of members.

  • Income under Multi-level marketing or pyramid-structured schemes do not come fromthe sale of products they offer as much as from enrolling more and more members from whom hefty subscription fees are taken.