Non-banking financial companies (NBFCs) are fast emerging
as an important segment of Indian financial system. It is an 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
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
The types of NBFCs registered with the RBI are:-
Now, these NBFCs have been reclassified into three categories:-
- 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.
- 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.