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A Non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and engaged in the business of :

loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, BUT DOES NOT INCLUDE any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property

Deposits repayable on demand are not accepted - NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.
NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. Unsecured Deposits - The repayment of deposits by NBFCs is not guaranteed by RBI. NBFCs (expect certain AFCs) should have minimum investment grade credit rating Certain mandatory disclosures are to be made about the company in the application form issued by the company soliciting deposits.

Greater reach to various markets and have greater efficiency in mobilizing funds.

Reduces operational costs in comparison to banks.


Liberal policies by RBI Compared with the commercial banks. Cater to a class of borrowers who do not necessarily have a high income but have adequate net worth

As recognized by RBI & expert committees


Development of sectors like transport & infrastructure

Substantial employment generation


Wealth creation Broad sense economic development To finance economically weaker sections Huge contribution to the state exchequer

Asset Finance Company

Asset Finance Company would be defined as any 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 etc.

Investment company

Investment Company means a company which is a financial institution carrying on as its main business of the acquisition of securities

Loan Company

Loan Company is a company which a financial institution carrying on as its main business by providing finance whether by making loans or advances

NBFC offers most sorts of banking services, such as


loans and credit facilities, Retirement planning, Trading in money markets, underwriting stocks and shares, Discounting services, Advice on merger and acquisition. (additional)

All NBFCs are not entitled to accept public deposits except those holding a valid certificate of registration with authorization for same. Cannot provide checking facilities. Have to maintain certain ratio of deposits in specified securities.

Other statutory limitations as per RBI Act.

Raising of deposits
NBFCs are allowed to collect Deposits from General Public only after complying with various provisions of the Companies Act and after filing all the requirements as per the guidelines issued by the RBI. Raising deposits by advertisement - The person soliciting deposits should file all the relevant documents with the RBI, and then obtain clearances. NBFCs registered with the RBI and had complied with the requirements of credit rating satisfactory grade and prudential norms have also given freedom to offer interest rate (with an upper ceiling of 11.00% prescribed) on deposits exceeding the period of one year and not exceeding the period of 5 years can raise deposits from general public.

An NBFC having Net Owned Funds of Rs. 200.00 lakhs and above only can accept public deposits. It has obtained Minimum Stipulated Credit Rating from any one of the approved Credit Rating Agencies at least once in a year and the copy of the Credit Rating should be sent to the RBI with in 15 days. Deposits taken by the NBFCs are not repayable on demand and the Minimum period for which Public Deposits can be accepted is not less than 12 months with a maximum period of 60 months. There is a ceiling provided for the quantum of deposits accepted by NBFCs.

NBFCs are required to issue a receipt to the depositor in respect of each deposit accepted., that too duly signed by the authorized official.

The depositors receipt should consist the following particulars: I. II. III. IV. V. Date of receipt Name of depositor Amount of deposits accepted Maturity date Rate of interest

Register of Deposits consisting of the details of the depositor and the deposits along with all particulars is mandatory to be maintained. NBFCs are not allowed to pay more than 2% of the deposit amount in the form of brokerage to any broker on the public deposits collected by or through him. and reimbursement of expenditure shall be given to a maximum extent of 0.5% of the deposits collected by or through him.

The Reserve Bank of India [RBI] is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III B of the RBI Act, 1934. Its objective is to :
Ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that, The quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system,

Ensure healthy growth of the financial companies

Registration under Companies Act, 1956


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 have a minimum net owned fund of Rs. 2.00 crore.

Registration u/s 45-IA of the RBI Act, 1934


In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of nonbanking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

The company is required to submit its application online by accessing RBIs secured website. The company would then get a Company Application Reference Number for the COR application filed on-line.

Thereafter, the company has to submit the hard copy of the application form (indicating the Reference Number of on-line application), along with the supporting documents, to the concerned Regional Office.

RBI would then issue COR after satisfying confirming that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

Nidhi & ChitFund Companies Stock Exchanges & Stock Broking Companies
Housing Finance Companies

Venture Capital Fund Companies Insurance Companies

Merchant Banking Companies

Submission of returns and other documents with RBI:


Audited final accounts passed in the general meeting together with a copy of Board report, every year; Statutory Annual Return on deposits - NBS 1; Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise; Quarterly Return on liquid assets; Half-yearly Return on prudential norms; Half-yearly ALM Returns by companies having public deposits of Rs 20 crore and above or with assets of Rs 100 crore and above irrespective of the size of deposits ; Monthly return on exposure to capital market by companies having public deposits of Rs 50 crore and above; and A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at 5 above.

The NBFCs having assets of Rs. 100 crore and above but not accepting public deposits are required to submit a Monthly Return on important financial parameters of the company. All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.

Parameters
Meaning

Banks
Acceptance of deposits withdrawal by cheque or demand

NBFCs
Carrying on financial business but cannot accept demand deposits

Scope

Limited by sec6(1) of the BR Act

No bar for NBFCs carrying activities other than financial activities


Quite easy to form a NBFC. Acquisition is procedurally regulated but no approval required Cannot provide checking facilities

Licensing

Quite stringent transfer of shareholding controlled by RBI Non-banking activities cannot be carried out

Limitations

Parameters
Foreign Investments

Banks
Upto 74% allowed to private sector banks

NBFCs
Upto 100% allowed

Regulations

Banking Regulation Act & RBI Act Stringent Control


To maintain Statutory Liquidity Ratio/Cash Reserve Ratio

RBI Act Relatively much lesser control


Certain ratio of deposits in specified securities; no such requirement for non-depository NBFC Certain minimum exposure required

Requirements

Priority sector lending

Not applicable