A Non-Banking Financial Company (NBFC) is a corporation incorporated under the Companies Act, 1956, specializing in providing loans and advances, as well as investing in shares, stocks, bonds, debentures, and other securities issued by the government, local authorities, or other marketable entities.
- The functioning and activities of NBFCs fall under the regulatory purview of the Reserve Bank of India (RBI), governed by the provisions of the RBI Act, 1934.
- Registration with the RBI is compulsory for any NBFC operating under this legal framework.
Classification of NBFCs
- Asset Finance Companies: These are financial institutions primarily engaged in financing tangible assets essential for productive or economic activities, such as machinery, automobiles, tractors, material handling equipment, power generators, and similar items.
- Investment Company (IC): An IC is any financial institution whose main business involves acquiring securities.
- Loan Company (LC): LC refers to any financial institution whose primary business is providing financing, whether through loans, advances, or other means, for activities other than its own. However, LC excludes Asset Finance Companies.
- Infrastructure Finance Company (IFC): IFCs are non-banking financial companies that allocate at least 75 percent of their total assets to infrastructure loans. Additionally, they must possess a minimum Net Owned Funds of ₹300 crore, a minimum credit rating of ‘A’ or its equivalent, and a Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
- Systemically Important Core Investment Company (SICIC): This designation applies to a non-banking financial company (NBFC) primarily engaged in acquiring shares and securities, meeting the following criteria:
- It maintains at least 90% of its Total Assets in the form of investments in equity shares, preference shares, debt, or loans within its group of companies.
- The investments in equity shares (including instruments compulsorily convertible into equity shares within 10 years from the date of issue) within its group constitute no less than 60% of its Total Assets.
- It refrains from trading its investments in shares, debt, or loans within its group, except through block sale for dilution or disinvestment purposes.
- It does not engage in any other financial activities mentioned in Sections 45-I(c) and 45-I(f) of the RBI Act, 1934, except for 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 more, and it accepts public funds.
- Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC): IDF-NBFCs are NBFCs registered with the purpose of facilitating the infusion of long-term debt into infrastructure ventures. These entities gather funds by issuing bonds denominated in Rupees or Dollars, with a minimum maturity period of 5 years. Only Infrastructure Finance Companies (IFCs) are eligible to sponsor IDF-NBFCs.
Key Facts About NBFCs:
- Non-Banking Financial Companies (NBFCs) are permitted to accept or renew public deposits for a duration ranging from a minimum of 12 months to a maximum of 60 months.
- However, they are prohibited from accepting deposits that are repayable on demand and from providing gifts, incentives, or any other supplementary benefits to depositors.
- Furthermore, NBFCs must maintain minimum investment-grade credit ratings.
- It’s important to note that the repayment of deposits by NBFCs is not backed or guaranteed by the Reserve Bank of India.
FAQs
1. What is an NBFC?
- A Non-Banking Financial Company (NBFC) is a financial institution that offers banking services like loans, advances, acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities, leasing, hire-purchase, insurance business, and 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.
2. How are NBFCs different from banks?
- While NBFCs provide various banking services, they differ from banks in several key aspects. Unlike banks, NBFCs cannot accept demand deposits and do not form part of the payment and settlement system. Additionally, NBFCs are not regulated under the Banking Regulations Act, 1949, although they are regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934.
3. What are the different types of NBFCs?
- NBFCs are classified into different categories based on their activities and functions. Some common types include Asset Finance Companies, Investment Companies, Loan Companies, Infrastructure Finance Companies, Microfinance Companies, Housing Finance Companies, and Core Investment Companies.
4. What regulations govern NBFCs in India?
- NBFCs in India are regulated primarily by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934. They are subject to various prudential norms, capital adequacy requirements, and reporting standards to ensure financial stability and consumer protection. Additionally, NBFCs may also be subject to regulations specific to their activities, such as housing finance or microfinance.
5. What role do NBFCs play in the Indian financial system?
- NBFCs complement the banking sector by providing credit and financial services to segments not adequately served by traditional banks, such as small and medium enterprises (SMEs), rural areas, and individuals with limited access to formal banking channels. They contribute to financial inclusion and economic growth by offering tailored financial solutions and innovative products to meet the diverse needs of customers.
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