Introduction

Non-bank financial companies (NBFCs) are financial institutions that provide banking services
without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These
institutions are not allowed to take deposits from the public. Nonetheless, all operations of these
institutions are still exercised under bank regulation. A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act,1956 of India, engaged in the business of loans and
advances, acquisition of shares, stock, bond sire purchase, insurance business, orchid business: but
does not include any institution whose principal business is that includes agriculture or industrial
activity; or the sale, purchase or construction of immovable property.
A non-bank finance company can be defined as an institution, which mobilises the savings of the
community and diverts them for financing different activities. Investment Companies, Investment
Trusts, Nidhis, Hire Purchase and Leasing Companies, and Housing Finance specialise on giving loans
for consumption, commerce and trading purposes. They have close local links and they constitute
small-scale decentralized sector financial system in India.
In order to identify a non-banking finance company, Reserve Bank considers both the assets and the
income pattern of the company as evidenced from the last audited balance sheet. A company is
treated as NBFC, if its financial assets are more than 50% of its total assets and income from financial
assets should be more than 50% of the gross income.
Definition
Non-Banking finance company is defined as a company which is a financial institution and has its
business of receiving the deposits or pending under any scheme or arrangement.











NBFC Registration
The role of NBFCs is very impressive and vital for development and prosperity in the industrial,
commercial, institutional, and service sectors of economy in any progressing country. Now-a-days,
these NBFCs have fortified their respected place as significant complementary to the banking and
financial sector in every country. These non-banking financial companies help and support small to
big investors and businessmen in transactions related with the fields of deposits, diverse loans, and
investment funds, hire-purchasing, leasing, instruments of the capital and money markets, and
finance. Activities and services of these companies are different from those of the banks, and the
institutions dealing with the agricultural, industrial, real estate, etc., dealings and transactions. These
NBFCs are registered very strictly under the rules and regulations of the apex financial institution in
any country, working under the ministry of finance. Our prestigious and globally reputed law firm
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NBFC Registration Process In India, these NBFCs are rather prominent and supportive, and are
broadly classified in the categories of --- asset finance companies, loan companies, and the
investment companies. Any company registered properly under the Companies Act, 1956 of India,
and dealing with matters and transactions in any of the above-mentioned fields, is mandatorily
required to have the NBFC registration certificate issued by the Reserve Bank of India. Such a
registration is compulsory, if its all financial transactions in business get more than 50% of its own
capital in any year. Again, for seeking registration under the category of a non-banking financial
company, the aspirant company must have a total capital of Rs. 2 Crore. The NBFC registration
process comprises of submitting the prescribed application form together with all necessary
documents to the Reserve Bank of India, and then prosecuting for brisk registration. If the apex bank
finds that the requirements and conditions mentioned in the Section 45-IA of the RBI Act of 1934,
are fully satisfied by the company, then it grants NBFC registration certificate to the applicant
company.








Types of Non-Banking Financial companies:
(i) Hire-purchase finance companies:
Hire Purchase Finance Company means company is carrying on as its business the hire purchase
transactions or the financing of such transactions. Hire-purchase or instalment credit is needed by
transport operators, farmers and professionals needing equipment who find it difficult to offer
security to the lending institutions. In this form of credit, the goods themselves serve a security
because they remain the property of the lender until the loan has been repaid. It is a less risky
business since the goods purchased on hire purchase basis themselves serve as securities till the last
instalment of the loan is paid. In fact, a major share of the hire purchase goes to the automobile
industry. A Hire Purchase Act, 1972, was enacted to control and regulate this type of finances. This
Act puts limitation on hire-purchase charges and also imposes restrictions on owner's right to
recover possession of goods otherwise than through court. The Hire-purchase companies charge a
flat rate which is calculated on the entire amount of advance and not on the diminishing balance
basis. The true rate of interest is therefore, far in excess of the flat rate indicated. According to
Section 7 of the Hire Purchase Act, 1972, the statutory charges shall be calculated at the rate of 30%
per annum or on such lower rate as may be fixed by the Central Government in consultation with
the Reserve Bank, but not less than 10% per annum.
(ii) Investment Companies and Unit Trusts:
Investment Company means any company, which is carrying on as its principal business the
acquisition of securities. An investment company may also be called as an investment trust. The
principle aim of an investment company is to protect the small investors by collecting their small
savings and investing them on diversified securities so that risk may be spread. The investment
company has formed for the collective investment of money subscribed by many investor
particularly small investors. Again, there is a holding company which essentially buys shares and
stocks mainly for the purpose of exercising control over another institution. In India, investment
trust companies are popular. They channelize the savings of the productive ventures.
Investments Companies are of two types of investment companies in India:
1] Management Investment Companies and
2] Unit Trusts.
1] Management Investment Companies:
Management investment companies are discretionary trusts who enjoy wide discretionary powers
on the choice of the composition of their investment portfolios. The management companies are
divided into two groups such as Closed-ended companies and Open-ended companies. Close ended
investment companies are those who have fixed capital and they are not committed to a continuous
offering of new issues. Shareholders of those companies do not have right to redeem their
securities. However, the securities of such companies can be bought and sold in the open market as
and when they are issued by operating companies. Open-ended investment companies are those
who continuously and regularly offer shares and securities to the public. There is no limit to their
capital. These types of companies also give their security holders the right to redeem if they so
desire.
2] Unit Trusts: Unit Trust is an investment company which is designed to pool the savings of small
investors by selling their units and employ the savings in corporate securities as well as other
securities in order to earn safe and fair returns on such investments. The purpose of these
companies is to enable the small investors to have an interest in a large spread of investments
coupled with experienced selection and supervision with safety and security. The unit holders are
the owners and they have real interest in shares and securities of the trusts. Unit holders are issued
certificates which represent their interest in the property of the trusts.
(iii) Chit Fund Companies:
A chit fund is a financing agency which collects subscriptions from a group of persons and distributes
the same to each member of the find. One of the oldest forms of indigenous financial institution in
India is chit fund also known as kuries. Such institutions have their origin and are more popular in
South India. The word chit means a written note on a small piece of paper. Chit funds may be
broadly classified into the following three categories:
1. Simple chit: Total subscription of all members goes in turn to one member who is determined by
lot. There are no deductions from the total subscription funds and each member gets his/her
chance.
2. Prize chit: Prize chit is just like a lottery. The amount collected through subscription of member is
distributed to members whose number is selected by taking out a lottery after specified period of
time.
3. Business chit: All the members subscribe a fixed amount every month to the common pool. The
number of members of a group and the number of draws are equal. The draws are held after regular
intervals. At the time of draw the total monthly subscription is either:
a) Allotted by drawing lots, or
b) Auctioned to the lowest bidder.
In case the amount is distributed by allotment of lots, a fixed amount of discount is deducted for
meeting the expenses of conducting the chit. In case of auction to the lowest bidder, the difference
between the total subscription and the amount of the bid is distributed to all the members after
deducting the necessary expenses. A member who gets the chit once is not entitled to getting it
again but has to go on paying his periodical subscriptions. Thus, each member in turn gets a chance
to claim the chit.



(iv) Nidhis or Mutual Benefit Finance Companies:
Nidhis or Mutual Benefit Finance Companies are one of the oldest forms of non-financial companies.
Some of the important objectives of Nidhis are to enable the members to save money, to invest
their savings and to secure loans at favourable rates of interest. Nidhis help in encouraging people to
save more. They work on the principles of complete mutuality of interest and are generally well-
managed. Because, the Nidhis inculcate the idea of thrift and savings among the middle and lower
class people, the Government has granted certain concessions under Section 620A of the Companies
Act.
Mutual Benefit Financial Company means any company which is notified by the Central Government
under Sec.620A of the Companies Act 1956. Generally it is registered with only nominal shares. It
receives deposits from its member and lends only to members against tangible securities. Loans are
given for marriages, redemption of old debts, for the construction and repairs of houses etc., which
do not come within the purview of commercial bank's lending.
NBFCs in India
The total number of Non-Banking Financial Companies (NBFCs) registered with Reserve Bank of India
(RBI) declined to 12,809 in June 2008, latest figure which is available, from 12,968 a year ago. The
decline was mainly due to the exit of many NBFCs from deposit-taking activity.
According to a report which was released by Management Consulting Services on NBFCs said that
NBFCs, including NBFCs accepting deposits, Residuary NBFC, mutual benefit companies,
miscellaneous non-banking companies and Nidhi companies, declined to 12,809 as on June 2008
from 12,968 in June 2007 and 13,014 in June 2006. Total number of NBCs-D registered with the RBI
dropped to 364 from 401 last year.
The consulting firm attributed the drop mainly due to exit of many NBFCs from deposit-taking
activity. All NBFCs holding PDs whos CoRs have been either rejected or cancelled have to continue
repaying deposits on due dates and dispose of their financial assets within three years from the date
of application/cancellation of the certificate or convert themselves into non-banking and non-
financial companies. In recent years, there has been a fall in number of operating NBFCs reflecting
mergers, closure and cancellation licences.




Role of NBFCs
Non-Banking Financial Companies (NBFCs) in India were having golden days during 1990s. Their
heady days were fuelled with the rapid industrial growth due to liberalization in 1991, simple
resource-raising regulations and eager & greedy investors ready to put their saving into any finance
company. As has been said, when you have ample amount of something you do not care for it,
NBFCs too have invested heavily but unwisely. Growth-at- any-cost was the strategies of some of the
NBFCs. Moreover, due to this many weak NBFCs could not pay the hefty interest during the
industrial slowdown during 1997 bringing to an end the golden period of NBFCs. The rating agencies
downgraded many companies which was followed by the RBI tightening the resource raising and
prudential norms in January 1998.
Deposits with NBFCs
Non-banking financial institutions (NBFIs), engaged in varied financial activities are part of the Indian
financial system providing a range of financial services. NBFCs are incorporated under the
Companies Act, 1956. NBFCs can be classified into two broad categories, viz., (i) NBFCs accepting
public deposit (NBFCs-D) and (ii) NBFCs not accepting/holding public deposit (NBFCs-ND). Residuary
Non-Banking Companies (RNBCs) are another category of NBFCs whose principal business is
acceptance of deposits and investing in approved securities. In the interest of depositors, RBI has
evolved a regulatory framework the salient features of which are outlined below for the guidance of
depositors.. However, the investors must carefully evaluate their investment decisions while
investing in NBFCs, as the instructions below are illustrative and not exhaustive,
NBFCs include a loan company, an investment company, asset finance company ( i.e. a company
conducting the business of equipment leasing or hire purchase finance) and Residuary Non-Banking
Companies. An NBFC must be registered with the Reserve Bank of India (RBI) and have specific
authorization to accept deposits from the public. NBFC must display the Certificate of Registration or
a certified copy thereof at the registered office and other offices/branches. Registration of an NBFC
with the RBI merely authorizes it to conduct the business of NBFC. RBI does not guarantee the
repayment of deposits accepted by NBFCs. NBFCs cannot use the name of the RBI in any manner
while conducting their business.
The NBFC whose application for grant of Certificate of Registration (CoR) has been rejected or
cancelled by the RBI is neither authorized to neither accept fresh deposits nor renew existing
deposit. Such rejection or cancellation is also published in newspapers from time to time. NBFCs
which accept deposits should have minimum investment grade credit rating granted by an approved
credit rating agency for deposit collection, except certain Asset Finance (equipment leasing and hire
purchase finance) companies and Residuary Non-Banking Companies (RNBCs),
Acceptance of deposits by companies engaged in activities including plantation activities,
commodities trading, multilevel marketing, manufacturing activities, housing finance, nidhis (mutual
benefit financial companies), and potential nidhis (mutual benefit company) and companies engaged
in collective investment schemes do not come under the purview/regulations of the RBI.
Individuals, firms and other unincorporated association of individuals or bodies shall not accept
deposits from the public
(i) if his or its business wholly or partly includes any of the financial activities such as loans and
advances, acquisition of shares or marketable securities, leasing or hire purchase activities , or
(ii) if his or its principal business is that of receiving deposits or lending in any manner.
Services provided
NBFCs offer most sorts of banking services, such as loans and credit facilities, private education
funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term
Finance Certificate) and other obligations. These institutions also provide wealth management such
as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and
advice on merger and acquisition activities. The number of non-banking financial companies has
expanded greatly in the last several years as venture capital companies, retail and industrial
companies have entered the lending business. Non-bank institutions also frequently support
investments in property and prepare feasibility, market or industry studies for companies. However
they are typically not allowed to take deposits from the general public and have to find other means
of funding their operations such as issuing debt instruments.
The NBFCs play a positive role in accessing certain deposits segments. These companies encourage
savings and promote thrift among public. They offer attractive schemes to suit the needs of different
classes of customers and attract the idle money by offering attractive rates of interest too. It is found
that nearly 98 per cent of the deposits received by them are at the rate of 13 per cent and above.
NBFCs offer and timely credit to those who are in need of it. They do not follow much formalities
and procedures. Moreover, they provide loans even for meeting unusual expenses like marriage and
other religious functions.
NBFCs mobilize the small savings of the public and direct them to productive ventures. Industrialists
are able to carry on their production with lesser capital since the capital intensive equipment are
supplied to them by leasing companies. People with limited means are not able to enjoy the
consumer durable goods. By providing consumer goods on easy instalments basis, these NBFCs
increases the standard of living of the people. Above all, an impetus has been given to the transport
operators. Increased transport facilities facilitates the movement of goods from one place to
another and this availability of all kinds of goods, in turn, increases the standard of living of the
people.





Interest Rates
The Reserve Bank today tightened the prudential norms for non-banking financial companies to
protect them from any impact of possible economic downturn, a development that may push up
their lending rates. Under the new RBI norms, both deposit and non-deposit taking NBFCs will have
to set aside 0.25 per cent of performing loans to meet any financial exigencies.
The central bank recently directed all deposit-taking non-banking finance companies to maintain a
CAR of 15% by March next year. Previously, deposit-taking NBFCs were required to keep their capital
base at 12% against 15% reserves held by non-deposit taking non-banks. Since NBFCs lack deposit
insurance coverage and refinance facilities, RBI sees the need for wider capital base to weed out
depositor risks. At some level, RBI's decision to raise risk provisioning norm to 15% doesn't make
sense for NBFCs which are into secured lending business. An NBFC engaged in gold loans or vehicle
leasing need not keep such high reserves as they indulge in pure securitised lending. Raising funds
through private equity is also a long-drawn process with investors raising scores of questions and
seeking rights, which the regulations may not even permit at times. Keeping in view interest rates
prevalent in the financial sector, the ceiling on interest rates on deposits payable by NBFCs, including
chit fund companies and nidhi companies, was reduced from 16 per cent per annum to 14 per cent
per annum effective April 1, 2001 and further to 12.5 per cent per annum effective November 1,
2001 and further to 11% effective from March 2003.
Conclusion
NBFCs are gaining momentum in last few decades with wide variety of products and services. NBFCs
collect public funds and provide loan able funds. There has been significant increase in such
companies since1990s.They is playing a vital role in the development financial system of our
country. The banking sector is financing only 40 per cent to the trading sector and rest is coming
from the NBFC and private money lenders. At the same time 50 per cent of the credit requirement
of the manufacturing is provided by NBFCs. 65 per cent of the private construction activities was also
financed by NBFCs. Now they are also financing second hand vehicles. NBFCs can play a significant
role in channelizing the remittance from abroad to states such as Gujarat and Kerala. NBFCs in India
have become prominent in a wide range of activities like hire purchase finance, equipment lease
finance, loans, and investments. NBFCs have greater reach and flexibility in tapping resources. In
desperate times, NBFCs could survive owing to their aggressive character and customized services.
They are focusing now on retailing sector housing finance, personal loans, and marketing of
insurance. Many of the NBFCs have ventured in to the domain of mutual funds and insurance. NBFCs
under take both life and general insurance business as joint venture participants in insurance
companies.