Non-Banking Financial Companies
- 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 a principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).
NBFCs are doing functions similar to banks. What is the difference between banks & NBFCs?
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.
- Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government, RBI and NABARD.
- The norm of Public Sector Lending does not apply to NBFCs.
- The Cash Reserve Requirement also does not apply to NBFCs.
Classification and Categorization of NBFCs
| Asset Finance Company | AN AFC is a company which is a financial institution whose principle business is the financing of physical assets such as automobiles, tractors, machines etc. |
| Investment Company | AN IC is any company which is a financial institution carrying on its principle business of acquisitions of securities. |
| Loan Company | LC is a financial institution whose primary business is of providing finance by making loans and advances. |
| Infrastructure Finance Company | IFC is an NBFC which deploys 75% of its total assets in infrastructure loans and has a minimum net owned fund of Re 300 Crore. |
| Systematically Important Core Investment Company | CIC is an NBFC carrying on the business of acquisition of shares and securities. CIC must satisfy 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; (c) 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; (d) 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. (e) Its asset size is ₹ 100 crore or above and (f) It accepts public funds |
| Infrastructure Debt Fund NBFC | IDF NBFC primary role is to facilitate long term flow of debt into infrastructure projects. Only Infrastructure Finance Companies can sponsor IDF. |
| Micro Finance NBFC | MFI NBFC 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 a 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 the 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
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