Dr.

S H Uzma, Assistant Professor, School of

Management, NIT Rourkela
 A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 engaged in the
business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable
securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include any
institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods
(other than securities) or providing any services and
sale/purchase/construction of immovable property. A
non-banking institution which is a company and has
principal business of receiving deposits under any scheme
or arrangement in one lump sum or in installments by way
of contributions or in any other manner, is also a non-
banking financial company (Residuary non-banking
company).
 Financial activity as principal business is when a company’s
financial assets constitute more than 50 per cent of the total
assets and income from financial assets constitute more than 50
per cent of the gross income. A company which fulfils both these
criteria will be registered as NBFC by RBI. The term 'principal
business' is not defined by the Reserve Bank of India Act. The
Reserve Bank has defined it so as to ensure that only companies
predominantly engaged in financial activity get registered with it
and are regulated and supervised by it. Hence if there are
companies engaged in agricultural operations, industrial activity,
purchase and sale of goods, providing services or purchase, sale
or construction of immovable property as their principal business
and are doing some financial business in a small way, they will
not be regulated by the Reserve Bank. Interestingly, this test is
popularly known as 50-50 test and is applied to determine
whether or not a company is into financial business.
 NBFCs lend and make investments and hence
their activities are akin to that of banks; however
there are a few differences as given below:
 NBFC cannot accept demand deposits;
 NBFCs do not form part of the payment and
settlement system and cannot issue cheques
drawn on itself;
 deposit insurance facility of Deposit Insurance
and Credit Guarantee Corporation is not available
to depositors of NBFCs, unlike in case of banks.
 In terms of Section 45-IA of the RBI Act, 1934, no Non-banking
Financial company can commence or carry on business of a non-
banking financial institution without a) obtaining a certificate of
registration from the Bank and without having a Net Owned
Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in
terms of the powers given to the Bank, to obviate dual
regulation, certain categories of NBFCs which are regulated by
other regulators are exempted from the requirement of
registration with RBI viz. Venture Capital Fund/Merchant Banking
companies/Stock broking companies registered with SEBI,
Insurance Company holding a valid Certificate of Registration
issued by IRDA, Nidhi companies as notified under Section 620A
of the Companies Act, 1956, Chit companies as defined in clause
(b) of Section 2 of the Chit Funds Act, 1982,Housing Finance
Companies regulated by National Housing Bank, Stock Exchange
or a Mutual Benefit company.
 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
comply with the following:
 it should be a company registered under Section
3 of the companies Act, 1956
 It should have a minimum net owned fund of ₹
200 lakh. (The minimum net owned fund (NOF)
required for specialized NBFCs like NBFC-MFIs,
NBFC-Factors, CICs is indicated separately in the
FAQs on specialized NBFCs)
 NBFCs whose asset size is of ₹ 500 cr or more
as per last audited balance sheet are
considered as systemically important NBFCs.
The rationale for such classification is that
the activities of such NBFCs will have a
bearing on the financial stability of the overall
economy.
 Does the Reserve Bank regulate all financial
companies?
 No. Housing Finance Companies, Merchant
Banking Companies, Stock Exchanges,
Companies engaged in the business of stock-
broking/sub-broking, Venture Capital Fund
Companies, Nidhi Companies, Insurance
companies and Chit Fund Companies are NBFCs
but they have been exempted from the
requirement of registration under Section 45-IA
of the RBI Act, 1934 subject to certain conditions.
 Housing Finance Companies are regulated by
National Housing Bank, Merchant Banker/Venture
Capital Fund Company/stock-exchanges/stock
brokers/sub-brokers are regulated by Securities and
Exchange Board of India, and Insurance companies
are regulated by Insurance Regulatory and
Development Authority. Similarly, Chit Fund
Companies are regulated by the respective State
Governments and Nidhi Companies are regulated by
Ministry of Corporate Affairs, Government of India.
Companies that do financial business but are
regulated by other regulators are given specific
exemption by the Reserve Bank from its regulatory
requirements for avoiding duality of regulation.
 NBFCs are categorized
 in terms of the type of liabilities into Deposit
and Non-Deposit accepting NBFCs,
 non deposit taking NBFCs by their size into
systemically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-
ND) and
 by the kind of activity they conduct. Within
this broad categorization the different types
of NBFCs are as follows:
 Asset Finance Company (AFC) : An AFC is a 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, lathe
machines, generator sets, earth moving and material handling equipments,
moving on own power and general purpose industrial machines. Principal business
for this purpose is defined as aggregate of financing real/physical assets
supporting economic activity and income arising there from is not less than 60%
of its total assets and total income respectively.
 Investment Company (IC) : IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities,
 Loan Company (LC): LC means any company which is a financial institution
carrying on as its principal business the providing of finance whether by making
loans or advances or otherwise for any activity other than its own but does not
include an Asset Finance Company.
 Infrastructure Finance Company (IFC): IFC is a non-banking finance company a)
which deploys at least 75 per cent of its total assets in infrastructure loans, b) has
a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A
‘or equivalent d) and a CRAR of 15%.
 V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-
ND-SI is an NBFC carrying on the business of acquisition of shares and
securities which satisfies the following conditions:-
 it holds not less than 90% of its Total Assets in the form of investment in
equity shares, preference shares, debt or loans in group companies;
 its investments in the equity shares (including instruments compulsorily
convertible into equity shares within a period not exceeding 10 years
from the date of issue) in group companies constitutes not less than 60%
of its Total Assets;
 it does not trade in its investments in shares, debt or loans in group
companies except through block sale for the purpose of dilution or
disinvestment;
 it does not carry on any other financial activity referred to in Section
45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits,
money market instruments, government securities, loans to and
investments in debt issuances of group companies or guarantees issued
on behalf of group companies.
 Its asset size is ₹ 100 crore or above and
 It accepts public funds
 Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC
is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5 year maturity. Only Infrastructure Finance
Companies (IFC) can sponsor IDF-NBFCs.
 Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI
is a non-deposit taking NBFC having not less than 85% of its assets in the nature
of qualifying assets which satisfy the following criteria:
 a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual
income not exceeding ₹ 1,00,000 or urban and semi-urban household income not
exceeding ₹ 1,60,000;
 b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in
subsequent cycles;
 c. total indebtedness of the borrower does not exceed ₹ 1,00,000;
 d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹
15,000 with prepayment without penalty;
 e. loan to be extended without collateral;
 f. aggregate amount of loans, given for income generation, is not less than 50 per
cent of the total loans given by the MFIs;
 g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of
the borrower
 VIII. Non-Banking Financial Company – Factors (NBFC-Factors):
NBFC-Factor is a non-deposit taking NBFC engaged in the
principal business of factoring. The financial assets in the
factoring business should constitute at least 50 percent of its
total assets and its income derived from factoring business
should not be less than 50 percent of its gross income.
 IX. Mortgage Guarantee Companies (MGC) - MGC are financial
institutions for which at least 90% of the business turnover is
mortgage guarantee business or at least 90% of the gross
income is from mortgage guarantee business and net owned
fund is ₹ 100 crore.
 X. NBFC- Non-Operative Financial Holding Company (NOFHC) is
financial institution through which promoter / promoter groups
will be permitted to set up a new bank .It’s a wholly-owned Non-
Operative Financial Holding Company (NOFHC) which will hold
the bank as well as all other financial services companies
regulated by RBI or other financial sector regulators, to the
extent permissible under the applicable regulatory prescriptions.
 The Reserve Bank has been given the powers
under the RBI Act 1934 to register, lay down
policy, issue directions, inspect, regulate,
supervise and exercise surveillance over NBFCs
that meet the 50-50 criteria of principal
business. The Reserve Bank can penalize NBFCs
for violating the provisions of the RBI Act or the
directions or orders issued by RBI under RBI Act.
The penal action can also result in RBI cancelling
the Certificate of Registration issued to the NBFC,
or prohibiting them from accepting deposits and
alienating their assets or filing a winding up
petition.
 It is illegal for any financial entity or
unincorporated body to make a false claim of
being regulated by the Reserve Bank to
mislead the public to collect deposits and is
liable for penal action under the Indian Penal
Code. Information in this regard may be
forwarded to the nearest office of the Reserve
Bank and the Police.
 If companies that are required to be registered with
the Reserve Bank as NBFCs, are found to be
conducting non-banking financial activity, such as,
lending, investment or deposit acceptance as their
principal business, without seeking registration, the
Reserve Bank can impose penalty or fine on them or
can even prosecute them in a court of law. If
members of public come across any entity which
does non-banking financial activity but does not
figure in the list of authorized NBFC on RBI website,
they should inform the nearest Regional Office of the
Reserve Bank, for appropriate action to be taken for
contravention of the provisions of the RBI Act, 1934.
 The regulation on non-deposit accepting NBFCs with asset
size of less than ₹ 500 crore would be as under:
 They shall not be subjected to any regulation either
prudential or conduct of business regulations viz., Fair
Practices Code (FPC), KYC, etc., if they have not accessed
any public funds and do not have a customer interface.
 Those having customer interface will be subjected only to
conduct of business regulations including FPC, KYC etc., if
they are not accessing public funds.
 Those accepting public funds will be subjected to limited
prudential regulations but not conduct of business
regulations if they have no customer interface.
 Where both public funds are accepted and customer
interface exist, such companies will be subjected both to
limited prudential regulations and conduct of business
regulations.
 Public funds are not the same as public deposits.
 Public funds include public deposits, inter-
corporate deposits, bank finance and all funds
received whether directly or indirectly from
outside sources such as funds raised by issue of
Commercial Papers, debentures etc.
 However, even though public funds include
public deposits in the general course, it may be
noted that CICs/CICs-ND-SI cannot accept public
deposits.
 Further, indirect receipt of public funds means
funds received not directly but through
associates and group entities which have access
to public funds.
 The Bank has issued detailed directions on
prudential norms, vide Non-Banking Financial
(Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions,
2007, Non-Systemically Important Non-Banking
Financial (Non-Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank)
Directions, 2015 and Systemically Important
Non-Banking Financial (Non-Deposit Accepting
or Holding) Companies Prudential Norms
(Reserve Bank) Directions, 2015. Applicable
regulations vary based on the deposit acceptance
or systemic importance of the NBFC.
 Owned Fund’ means aggregate of the paid-up equity
capital, preference shares which are compulsorily
convertible into equity, free reserves, balance in share
premium account and capital reserves representing
surplus arising out of sale proceeds of asset, excluding
reserves created by revaluation of asset, after deducting
therefrom accumulated balance of loss, deferred revenue
expenditure and other intangible assets.
 'Net Owned Fund' is the amount as arrived at above, minus
the amount of investments of such company in shares of
its subsidiaries, companies in the same group and all
other NBFCs and the book value of debentures, bonds,
outstanding loans and advances including hire purchase
and lease finance made to and deposits with subsidiaries
and companies in the same group, to the extent it exceeds
10% of the owned fund.
 NBS-1 Quarterly Returns on deposits in First Schedule.
 NBS-2 Quarterly return on Prudential Norms is required to be
submitted by NBFC accepting public deposits.
 NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
 NBS-4 Annual return of critical parameters by a rejected
company holding public deposits. (NBS-5 stands withdrawn as
submission of NBS 1 has been made quarterly.)
 NBS-6 Monthly return on exposure to capital market by deposit
taking NBFC with total assets of ₹ 100 crore and above.
 Half-yearly ALM return by NBFC holding public deposits of more
than ₹ 20 crore or asset size of more than ₹ 100 crore
 Audited Balance sheet and Auditor’s Report by NBFC accepting
public deposits.
 Branch Info Return.
 Returns to be submitted by NBFCs-ND-SI
 NBS-7 A Quarterly statement of capital funds, risk
weighted assets, risk asset ratio etc., for NBFC-ND-
SI.
 Monthly Return on Important Financial Parameters of
NBFCs-ND-SI.
 ALM returns:
(i) Statement of short term dynamic liquidity in
format ALM [NBS-ALM1] -Monthly,
(ii) Statement of structural liquidity in format ALM
[NBS-ALM2] Half yearly,
(iii) Statement of Interest Rate Sensitivity in format
ALM -[NBS-ALM3], Half yearly
 Branch Info return
 Reserve Bank of India has deregulated interest
rates to be charged to borrowers by financial
institutions (other than NBFC- Micro Finance
Institution). The rate of interest to be charged by
the company is governed by the terms and
conditions of the loan agreement entered into
between the borrower and the NBFCs. However,
the NBFCs have to be transparent and the rate of
interest and manner of arriving at the rate of
interest to different categories of borrowers
should be disclosed to the borrower or customer
in the application form and communicated
explicitly in the sanction letter etc.
 Banks, including co-operative banks, can accept deposits. Non-
bank finance companies, which have been issued Certificate of
Registration by RBI with a specific licence to accept deposits, are
entitled to accept public deposit. In other words, not all NBFCs
registered with the Reserve Bank are entitled to accept deposits
but only those that hold a deposit accepting Certificate of
Registration can accept deposits. They can, however, accept
deposits, only to the extent permissible. Housing Finance
Companies, which are again specifically authorized to collect
deposits and companies authorized by Ministry of Corporate
Affairs under the Companies Acceptance of Deposits Rules
framed by Central Government under the Companies Act can
also accept deposits also upto a certain limit. Cooperative Credit
Societies can accept deposits from their members but not from
the general public. The Reserve Bank regulates the deposit
acceptance only of banks, cooperative banks and NBFCs.
 NBFCs are not entitled to accept public deposits. Only
those NBFCs to which the Bank had given a specific
authorisation and have an investment grade rating
are allowed to accept/ hold public deposits to a limit
of 1.5 times of its Net Owned Funds. All existing
unrated AFCs that have been allowed to accept
deposits shall have to get themselves rated by March
31, 2016. Those AFCs that do not get an investment
grade rating by March 31, 2016, will not be allowed
to renew existing or accept fresh deposits thereafter.
In the intervening period, i.e. till March 31, 2016,
unrated AFCs or those with a sub-investment grade
rating can only renew existing deposits on maturity,
and not accept fresh deposits, till they obtain an
investment grade rating.
 However, as a matter of public policy, Reserve
Bank has decided that only banks should be
allowed to accept public deposits and as such
has since 1997 not issued any Certificate of
Registration (CoR) to new NBFCs for acceptance
of public deposits.
 Presently, the maximum rate of interest an NBFC
can offer is 12.5%. The interest may be paid or
compounded at rests not shorter than monthly
rests. The NBFCs 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.
 A company which does not have financial assets
which is more than 50% of its total assets and
does not derive at least 50% of its gross income
from such assets is not an NBFC. Its principal
business would be non-financial activity like
agricultural operations, industrial activity,
purchase or sale of goods or
purchase/construction of immoveable property,
and will be a non-banking non-financial
company. Acceptance of deposits by a Non-
Banking Non-Financial Company are governed by
the rules and regulations issued by the Ministry
of Corporate Affairs.
 The Reserve Bank's overarching concern while
supervising any financial entity is protection of
depositors' interest. Depositors place deposit
with any entity on trust unlike an investor who
invests in the shares of a company with the
intention of sharing the risk as well as return
with the promoters. Protection of depositors'
interest thus is supreme in financial regulation.
Banks are the most regulated financial entities.
The Deposit Insurance and Credit Guarantee
Corporation pays insurance on deposits up to ₹
One lakh in case a bank failed.
 Some of the important regulations relating to acceptance of
deposits by NBFCs are as under:
 The NBFCs 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.
 NBFCs cannot offer interest rates higher than the ceiling rate
prescribed by RBI from time to time. The present ceiling is 12.5
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.
 NBFCs should have minimum investment grade credit rating.
 The deposits with NBFCs are not insured.
 The repayment of deposits by NBFCs is not guaranteed by RBI.
 Certain mandatory disclosures are to be made about the
company in the Application Form issued by the company
soliciting deposits.
 BFCs may get itself rated by any of the six
rating agencies namely, CRISIL, CARE, ICRA,
FITCH Ratings India Pvt. Ltd, Brickwork
Ratings India Pvt. Ltd. and SMERA.
 The symbols of minimum investment grade
rating of the Credit rating agencies are:
 CRISILFA- (FA MINUS)
 ICRAMA- (MA MINUS)
 CARE-CARE BBB (FD)
 FITCH Ratings India Pvt. Ltd. tA-(ind)(FD)
 SMERA -SMERA A
Brickwork Ratings India Pvt. Ltd.- BWR FBBB
 It may be added that A- is not equivalent to A,
AA- is not equivalent to AA and AAA- is not
equivalent to AAA.
 However, if rating of an NBFC is downgraded to
below minimum investment grade rating, it has
to stop accepting public deposits, report the
position within fifteen working days to the RBI
and bring within three years from the date of
such downgrading of credit rating, the amount of
public deposit to nil. With the introduction of
revised regulatory framework in November 2014
deposit taking NBFCs have to mandatorily get
investment grade credit rating for being eligible
to accept public deposits.
 https://www.rbi.org.in/Scripts/FAQView.aspx
?Id=92
 https://rbi.org.in/Scripts/BS_NBFCList.aspx
 https://rbi.org.in/Scripts/BS_ViewMasterCircu
lardetails.aspx?did=333