1.

Introduction
Non-bank financial companies (NBFCs) are financial institutions that pro
vide banking services without meeting the legal definition of a bank. A Non Bank
ing Financial Company (NBFC) is a company registered under the Companies Act,195
6 of India, engaged in the business of loans and advances, acquisition of shares
, stock, insurance business, the sale, purchase or construction of immovable pro
perty.
2. 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.
3. NBFC Registration
The role of NBFCs is very impressive and vital for development and prosp
erity in the industrial, commercial, institutional, and service sectors of econo
my in any progressing country. Now-a-days, these NBFCs have fortified their resp
ected place as significant complementary to the banking and financial sector in
every country. These non-banking financial companies help and support small to b
ig investors and businessmen in transactions related with the fields of deposits
, diverse loans, investment funds, hire-purchasing, leasing, instruments of the
capital and money markets, and finance. Activities and services of these compani
es are different from those of the banks, and the institutions dealing with the
agricultural, industrial, real estate, etc., dealings and transactions. These NB
FCs are registered very strictly under the rules and regulations of the apex fin
ancial institution in any country, working under the ministry of finance. Our pr
estigious and globally reputed law firm has been providing legal services to peo
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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 c
ompanies, loan companies, and the investment companies. Any company registered p
roperly under the Companies Act, 1956 of India, and dealing with matters and tra
nsactions 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 re
gistration 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 submi
tting the prescribed application form together with all necessary documents to t
he Reserve Bank of India, and then prosecuting for brisk registration. If the ap
ex bank finds that the requirements and conditions mentioned in the Section 45-I
A of the RBI Act of 1934, are fully satisfied by the company, then it grants NBF
C registration certificate to the applicant company.
4. Types of Non-Banking Financial companies:
(i) Hire-purchase finance companies:
Hire Purchase Finance Company means company is carrying on as its business the h
ire purchase transactions or the financing of such transactions. Hire-purchase o
r installment credit is needed by transport operators, farmers and professionals
needing equipment who find it difficult to offer security to the lending instit
utions. In this form of credit, the goods themselves serve a security because th
ey remain the property of the lender until the loan has been repaid. It is a les
s risky business since the goods purchased on hire purchase basis themselves ser
ve as securities till the last installment 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 ri
ght to recover possession of goods otherwise than through court. The Hire-purcha
se companies charge a flat rate which is calculated on the entire amount of adva
nce and not on the diminishing balance basis. The true rate of interest is there
fore, far in excess of the flat rate indicated. According to Section 7 of the Hi
re 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 busi
ness 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 th
e small investors by collecting their small savings and investing them on divers
ified securities so that risk may be spread. The investment company has formed f
or the collective investment of money subscribed by many investor particularly s
mall 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 discreti
onary trusts who enjoy wide discreationary powers on the choice of the compositi
on of their investment portfolios. The management companies are divided into two
groups such as Closed-ended companies and Open-ended companies. Close ended inv
estment 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 hav
e right to redeem their securities. However, the securities of such companies ca
n 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 regul
arly offer shares and securities to the public. There is no limit to their capit
al. These types of companies also give their security holders the right to redee
m if they so desire.
2] Unit Trusts: Unit Trust is an investment company which is designed to pool th
e savings of small investors by selling their units and employ the savings in co
rporate securities as well as other securities in order to earn safe and fair re
turns 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 exp
erienced selection and supervision with safety and security. The unit holders ar
e 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 prop
erty of the trusts.
(iii) Chit Fund Companies:
A chit fund is a financing agency which collects subscriptions from a group of p
ersons and distributes the same to each member of the find. One of the oldest fo
rms of indigenous financial institution in India is chit fund also known as kuri
es. 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 bro
adly 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 tak
ing out a lottery after specified period of time.
3. Business chit: All the members subscribe a fixed amount every month to the co
mmon pool. The number of members of a group and the number of draws are equal. T
he 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 discou
nt is deducted for meeting the expenses of conducting the chit. In case of aucti
on to the lowest bidder, the difference between the total subscription and the a
mount 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 b
ut has to go on paying his periodical subscriptions. Thus, each member in turn g
ets 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-fi
nancial 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 favorable
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 a
nd lower class people, the Government has granted certain concessions under Sect
ion 620A of the Companies Act.
Mutual Benefit Financial Company means any company which is notified by the Cent
ral Government under Sec.620A of the Companies Act 1956. Generally it is registe
red with only nominal shares. It receives deposits from its member and lends onl
y to members against tangible securities. Loans are given for marriages, redempt
ion of old debts, for the construction and repairs of houses etc., which do not
come within the purview of commercial bank's lending.
5. Deposits With NBFCs
Non-banking financial institutions (NBFIs), engaged in varied financial activiti
es are part of the Indian financial system providing a range of financial servic
es. NBFCs are incorporated under the Companies Act, 1956. NBFCs can be classifie
d into two broad categories, viz., (i) NBFCs accepting public deposit (NBFCs-D)
and (ii) NBFCs not accepting/holding public deposit (NBFCs-ND). Residuary Non-Ba
nking Companies(RNBCs) are another category of NBFCs whose principal business is
acceptance of deposits and investing in approved securities. In the interest o
f depositors, RBI has evolved a regulatory framework the salient features of whi
ch 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 financ
e) and Residuary Non-Banking Companies. An NBFC must be registered with the Rese
rve Bank of India (RBI) and have specific authorization to accept deposits from
the public. NBFC must display the Certificate of Registration or a certified cop
y thereof at the Registered office and other offices/branches. Registration of a
n NBFC with the RBI merely authorizes it to conduct the business of NBFC. RBI do
es not guarantee the repayment of deposits accepted by NBFCs. NBFCs cannot use t
he name of the RBI in any manner while conducting their business.
The NBFC whose application for grant of Certificate of Registration (CoR) has be
en rejected or cancelled by the RBI is neither authorized to accept fresh deposi
ts 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 pur
chase finance) companies and Residuary Non-Banking Companies (RNBCs),
Acceptance of deposits by companies engaged in activities including plantation a
ctivities, commodities trading, multilevel marketing, manufacturing activities,
housing finance, nidhis (mutual benefit financial companies), and potential nidh
is (mutual benefit company) and companies engaged in collective investment schem
es do not come under the purview/regulations of the RBI.
Individuals, firms and other unincorporated association of individuals or bodi
es shall not accept deposits from the public
(i) if his or its business wholly or partly includes any of the financial activi
ties 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 i
n any manner.
6. NBFCs In India
The total number of Non-Banking Financial Companies (NBFCs) registered with Rese
rve 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 man
y NBFCs from deposit-taking activity.
According to a report which was released by Icra Management Consulting Services
on NBFCs said that NBFCs, including NBFCs accepting deposits, Residuary NBFC, mu
tual 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 de
posit-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 thei
r financial assets within three years from the date of application/cancellation
of the certificate or convert themselves into non-banking and non-financial comp
anies. In recent years, there has been a fall in number of operating NBFCs refle
cting mergers, closure and cancellation licences.
7. Role Of NBFCs
Non Banking Financial Companies (NBFCs) in India were having golden days during
1990s. Their heady days were fueled with the rapid industrial growth due to libe
ralization in 1991, simple resource-raising regulations and eager & greedy inves
tors 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 invest
ed heavily but unwisely. Growth-at- any-cost was the strategies of some of the N
BFCs. Moreover, due to this many weak NBFCs could not pay the hefty interest dur
ing 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 R
BI tightening the resource raising and prudential norms in January 1998.
8. Services provided
NBFCs offer most sorts of banking services, such as loans and credit facilities,
private education funding, retirement planning, trading in money markets, under
writing stocks and shares, TFCs(Term Finance Certificate) and other obligations.
These institutions also provide wealth management such as managing portfolios o
f stocks and shares, discounting services e.g. discounting of instruments and ad
vice on merger and acquisition activities. The number of non-banking financial c
ompanies has expanded greatly in the last several years as venture capital compa
nies, retail and industrial companies have entered the lending business. Non-ban
k institutions also frequently support investments in property and prepare feasi
bility, 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 o
f funding their operations such as issuing debt instruments.
The NBFCs play a positive role in accessing certain deposits segments. These com
panies 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
percent of the deposits received by them are at the rate of 13 percent and above
. NBFCs offer and timely credit to those who are in need of it. They do not foll
ow much formalities and procedures. Moreover, they provide loans even for meetin
g unusual expenses like marriage and other religious functions.
NBFCs mobilize the small savings of the public and direct them to productive ven
tures. 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 installments basis, these NBFCs increases the s
tandard of living of the people. Above all, an impetus has been given to the tra
nsport operators. Increased transport facilities facilitates the movement of goo
ds from one place to another and this availability of all kinds of goods, in tur
n, increases the standard of living of the people.
9. 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 devel
opment that may push up their lending rates. Under the new RBI norms, both depos
it and non-deposit taking NBFCs will have to set aside 0.25 per cent of performi
ng loans to meet any financial exigencies.
The central bank recently directed all deposit-taking non-banking finance compan
ies to maintain a CAR of 15% by March next year. Previously, deposit-taking NBFC
s were required to keep their capital base at 12% against 15% reserves held by n
on-deposit taking non-banks. Since NBFCs lack deposit insurance coverage and ref
inance facilities, RBI sees the need for wider capital base to weed out deposito
r risks. At some level, RBI's decision to raise risk provisioning norm to 15% do
esn't make sense for NBFCs which are into secured lending business. An NBFC enga
ged in gold loans or vehicle leasing need not keep such high reserves as they in
dulge in pure securitised lending. Raising funds through private equity is also
a long-drawn process with investors raising scores of questions and seeking righ
ts, 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, wa
s 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 furt
her 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 bee
n significant increase in such companies since1990s.They is playing a vital role
in the development financial system of our country. The banking sector is financ
ing 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 prominen
t in a wide range of activities like hire purchase finance, equipment lease fina
nce, loans, and investments. NBFCs have greater reach and flexibility in tapping
resources. In desperate times, NBFCs could survive owing to their aggressive ch
aracter and customized services. They are focusing now on retailing sector housi
ng finance, personal loans, and marketing of insurance. Many of the NBFCs have v
entured in to the domain of mutual funds and insurance. NBFCs under take both li
fe and general insurance business as joint venture participants in insurance com
panies.