What is Non-Banking Financial Company (NBFC)?
Non-Banking Financial Company (NBFC) refers to a financial institution. As per Companies Act, 2013 NBFC is a type of company engaged in the business of receiving loans and advances, acquisition of stocks or shares, leasing, hire-purchase, insurance business, chit business. In India, The Reserve Bank of India regulates the NBFC registration.
NBFCs provides a variety of banking and non-banking services to the concerned people. They do not hold banking license but they have to follow the rules and regulations laid down by RBI. NBFCs functions are regulated and supervised by RBI according to the provisions mentioned in Chapter III B of the RBI Act 1934. NBFC License must be done according to rules & regulations given in Section 45-IA of the RBI Act 1934. It must be duly registered as per Companies Act 2013. It does not include any institution whose principal business is related to agriculture activity, industrial activity, sale/purchase/construction of immovable property.
The main business activity of the NBFCs is to raise capital funds from public depositors and investors and then lend to borrowers as per the rules and regulations prescribed by the Reserve Bank of India. NBFCs are becoming an alternative to the banking and financial sector. In NBFC there is a requirement of minimum net owned fund of Rs. 2 Crore. NBFCs can commence its operations only after obtaining "Certificate of Registration" from the RBI.
What are the Types of Non Banking Financial Companies?
Based on Liabilities:
- Deposit Accepting NBFCs (NBFCs-D) [Deposit Taking]
- Non-Deposit NBFCs (NBFCs-ND) [Non-Deposit Taking]
- Systematically Important NBFCs-ND (NBFCs-ND-SI)
- Others NBFCs-ND
Based on Activities:
- Asset Finance Company (AFC)
- Equipment Leasing Company
- Hire Purchase Finance Company
- Investment Company (IC)
- Loan Company (LC)
NBFC Registration Procedure
Here are the following steps that need to be taken for NBFC registration with RBI:
- Acquire DSC and Din for directors
- File Name approval application
- An affidavit from directors to fulfill RBI compliance
- Draft MOA & AOA
- File incorporation forms with necessary documents
- Obtain a certificate of registration from Registrar of Companies
- Deposit Net Owned Funds in a bank account opened for company
- Apply for registration with RBI under RBI Act, 1934.
- Applicant Company has to file an online application with the RBI on its official website.
- After this, an applicant will get a reference number to facilitate inquiry in the future.
- After this, it is required to submit the duplicate hard copies to the concerned regional office of RBI.
- The regional office shall check the accuracy of all submitted documents.
- The regional office will send the application for NBFC LIcense to the central office.
- The central office of RBI grants NBFC registration only when applicant company fulfills prescribed requirements under section 45-IA.
- NBFC must commence its business within 6 months from the date of Certificate of Registration.
NBFC License Requirements with RBI
- The company must be registered as a public limited company or private limited company in India.
- The company must have a minimum net owned fund of Rs.2 Crore.
*Provided that, net owned funds should be calculated according to the last audited balance sheet of the company.
- For a minimum period of 12 months and a maximum period of 60 months, NBFCs are allowed to accept/renew public deposits.
- NBFCs cannot accept deposits repayable on demand.
- NBFCs can offer interest rates not higher than the ceiling rate prescribed by RBI from time to time.
- Offering gifts/incentives or any other additional benefit to the depositors is not allowed.
- There is a requirement of minimum investment grade credit rating.
- Repayment of deposits by NBFCs is not guaranteed by RBI.
- Furnishing hard copies of the list of documents with the regional office of the RBI.
What is the Difference between Banks & NBFCs?
Here are the following differences between NBFC and Bank:
- Banks are the government authorized financial intermediary that aims at providing banking services to the general people. Whereas NBFC provides banking services to people without carrying a bank license.
- NBFC is incorporated under the Companies Act whereas a bank is registered under the Banking Regulation Act, 1949.
- NBFCs are not allowed to accept deposits which are repayable on demand whereas banks which accepts demand deposits.
- In NBFC, foreign Investments up to 100% is allowed. Whereas in the case of private sector banks they are eligible for foreign investment, but which would be not more than 74%.
- Banks are an integral part of the payment and settlement cycle while NBFC is not a part of this system.
- It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of NBFC it is not required to maintain reserve ratios.
- Deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit Guarantee Corporation (DICGC). In the case of NBFC, this type of facility shall not be available.
- Banks can create credit whereas in case of NBFC they are not involved in the creation of credit.
- Banks can provide transaction services to its customers such as providing overdraft facility, issue of traveler's cheque, transfer of funds, etc. Whereas these type of services cannot be provided by NBFC.
From where we can find a list of registered NBFCs and directions issued to NBFCs?
On the website of Reserve Bank of India at www.rbi.org.in, one can find a list of registered NBFCs and directions issued to NBFCs from time to time. Besides this instruction and press releases are also issued through Official Gazette notifications.
What are the requirements for accepting public deposits and can all NBFCs accept deposits?
Only those NBFCs holding a valid certificate of registration with authorization to accept public deposits can accept public deposits not all NBFCs can accept deposits. NBFCs accepting public deposits should have minimum stipulated net owned fund and comply with the directions issued by the bank.