1. What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC registration) 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. Non-banking institutions are companies that receive deposits in the form of instalments, contributions or any other method.
2. What does conducting financial activity as “principal business” mean?
When financial activity is the primary business, it means that the financial assets of a company are more than 50% of its total assets, and the income from these assets is more than 50% of its gross income. RBI will register a company that meets both of these criteria as an NBFC Registration. The Reserve Bank of India Act does not define the term "principal business". The Reserve Bank defined it to ensure that companies primarily engaged in financial activities are registered and regulated by the Reserve Bank. The Reserve Bank will not regulate companies that are engaged in agricultural activities, industrial activity or the purchase and sale goods, or providing services, or in the purchase, sale, or construction of immovable properties as their primary business, but are also doing some financial transactions in a minor way. This test, also known as the 50-50 test, is used to determine if a company is in financial business.
3. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?
The NBFCs are similar to banks in that they lend and invest. However, there are some differences.
I. NBFCs cannot accept deposits on demand;
II. NBFCs are not part of the system for payment and settlement and therefore cannot issue checks drawn on themselves;
III. Deposit insurance is not offered to NBFC depositors.
4. Is it necessary that every NBFC should be registered with RBI?
According to Section 45-IA, the RBI Act of 1934, no nonbanking financial company may commence or continue business as a nonbanking institution without: a) obtaining from the Bank a certificate of Registration and b) having Net Owned funds of Rs 25 lakhs (2 crores since April 1999). To avoid dual regulation and to comply with the powers granted to the Bank to prevent double regulation, certain categories NBFCs that are regulated by another regulator are exempted. Venture Capital Fund/Merchant Banking Companies/Stock Broking Companies registered with SEBI. Insurance Companies holding a valid certificate of registration issued by IRDA. Nidhi Companies as notified by Section 620A. Chit Companies as defined by clause (b). Section 2 of Chit Funds Act 1982. Housing Finance Companies regulated either by National Housing Bank or Stock Exchange.
5. What are the requirements for registration with RBI?
If you are a company formed under the Companies Act of 1956, and wish to start a business as a non-banking institution, according to Section 45 I (a) of the RBI Act of 1934, then please follow the steps below:
I. It should be a registered company under Section 3 Companies Act, 1956
II. It must have a net owned fund (NOF) of at least Rs 200 lakh. The minimum net-owned fund (NOF), required by specialized NBFCs such as NBFCs-MFIs and NBFCs-Factors or CICs, is specified separately in the FAQs about specialized NBFCs.
6. What is the procedure for application to the Reserve Bank for Registration?
The company must apply online, and then submit the physical application with all the required documents to the Regional Office of Reserve Bank of India. You can submit your application online through the RBI's secure website. The applicant company does not have to login to the COSMOS Application at this stage. User IDs are therefore not required. On the login page for the COSMOS Application, the company can click to register as a company. The Excel application form will be shown in a window. The company will then be able to download the appropriate application form (i.e. The company can then download the appropriate application form (i.e. In the Excel application, the company should indicate the correct Regional Office name in the field C-8 of "Annex-I Dentification Particulars". The Company Application Reference Number would be issued to the company for its online CoR application. The company must then submit the hardcopy of the application (including the online Company Reference Number) along with all supporting documents to the Regional Office concerned. By entering the acknowledgment number, the company can check the status of their application at the secure address above.
7. What are the essential documents required to be submitted along with the application form to the Regional Office of the Reserve Bank?
The application form and an indicative checklist of the documents required to be submitted along with the application is available at www.rbi.org.in → Site Map → NBFC List → Forms/ Returns.
8. What are systemically important NBFCs?
Systemically important NBFCs are those NBFCs with assets of at least Rs 500 crore as per the last audited financial statement. This classification is based on the fact that the activities of these NBFCs have an impact on the financial stability in the economy.
B. Entities regulated by RBI and applicable regulations
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9. 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. Chit Fund Companies and Nidhi Companies, on the other hand, are regulated both by state governments, as well as by Ministry of Corporate Affairs of Government of India. Reserve Bank of India gives specific exemptions to companies that are engaged in financial activities but are regulated under other regulators. This is done to avoid duality in regulation.
You may also mention that Mortgage Guarantee Companies were notified to be Non-Banking Financial Companies based on Section 45 I (f) (iii) the RBI Act of 1934. Core Investment Companies that have assets of less than 100 crore rupees and those who have assets of 100 crore rupees and more but do not use public funds, are exempt from registration.
10. What are the different types/categories of NBFCs registered with RBI?
NBFCs can be classified a) according to the type of liability into Deposit and NonDeposit Accepting NBFCs; b) according to their size, into Systemically Important and Other Non-Deposit Holding Companies (NBFC -NDSI and NBFC -ND), and c) according to the type of activity that they perform. The different types of NBFCs within this broad categorization are:
I. Asset Finance Company: Asset Finance Company is a company that is a financial institution and carries on its primary business financing physical assets to support productive/economic activities, such as automobiles and tractors. It also includes generators and earth-moving and material handling equipments. The principal business is defined for this purpose as the aggregate of financing physical assets that support economic activity, and income generated from them.
II. Investment Company (IC), also known as a financial institution, is a company that specializes in the acquisition of securities.
III. Loan Company (LC). LC is any financial institution that provides finance, whether through loans, advances or other means for activities outside its own. Asset Finance Companies are not included.
IV. Infrastructure Finance Company (IFC). IFC is non-banking financing company that a) deploys at minimum 75 percent of its assets into infrastructure loans b) has Net Owned funds of Rs 300 crore c) has minimum credit ratings of "A" or equivalent d) a CRAR (15%).
V. Systemically Important Core Investment Company: CIC-NDSI is a NBFC that carries out the business of acquiring shares and securities. It must meet the following criteria:
It holds at least 90% of its total assets in equity, preference shares, loans or debt in group companies.
b) the total assets of the group company are not less than 60% of the investments made in equity shares, including instruments that are compulsorily convertible into equity shares in a period of not more than 10 years after the date of issuance;
It does not sell its shares, loans or debt in group companies other than through a block sale to dilute or disinvest;
It does not engage in any financial activities referred to at Section 45I (c) and 45I (f) of the RBI Act, 1934, except for investments in money market instruments, Government securities, loans and investments to group companies, or guarantees issued by group companies.
If the asset size of a company is at least Rs 100 crore, it will be considered e.
It accepts public money
VI. Infrastructure Debt fund: Non- Banking Financial Company IDF-NBFC: IDF-NBFC, a company that is registered as NBFC in order to facilitate the flow long-term loans into infrastructure projects. IDF-NBFC raises resources by issuing Rupee and Dollar denominated Bonds with a minimum maturity of 5 years. IDF-NBFCs can only be sponsored by Infrastructure Finance Companies.
VII. Non-Banking Financial Company - Micro Finance Institution: NBFC-MFI: NBFC-MFI: is a non-deposit-taking NBFC with not less than 85% in the form of qualifying assets that satisfy the following criteria.
a. a loan granted by an NBFC to a borrower whose household income is not more than Rs 1,000,000 in rural areas or Rs 1,60,000 in urban and semi-urban areas;
b. Loan amount cannot exceed Rs. 50,000 for the first cycle, and Rs. 1,00,000.
c. the total amount of debt owed by the borrower is not more than Rs 1,000,000;
The loan tenure cannot be less than 24 months for a loan amount exceeding Rs 15,000. Prepayment is allowed without penalty.
Loans without collateral
f. the aggregate amount of income-generating loans is at least 50% of all loans granted by MFIs.
The borrower can choose to repay the loan in weekly, fortnightly, or monthly instalments.
VIII. Non-Banking Financial Company - FACTORS: NBFC-Factors is a NBFC that does not take deposits and engages in factoring as its primary business. Financial assets should be at least 50% of the total assets of the company and income from factoring should not be below 50% of gross income.
IX. Mortgage Guarantee Companies (MGCs) - MGCs are financial institutions that have at least 90 percent of their business in mortgage guarantee or gross income from mortgage guarantee, and a net owned fund of at least Rs 100 crore.
X. NBFC- Non-Operative Financial Holding Company is a financial institution that allows promoters/promoter groups to establish a new banking. It is a Non-Operative Financial Holding Company that will own the bank and all other financial service companies regulated either by RBI or another financial sector regulator, as permitted under the applicable regulations.
11. What are the powers of the Reserve Bank with regard to 'Non-Bank Financial Companies’, that is, companies that meet the 50-50 Principal Business Criteria?
Under the RBI Act of 1934, the Reserve Bank is empowered to register, set policy, issue directives, inspect, regulate and supervise NBFCs who meet the 50-50 principal business criteria. Reserve Bank may penalize NBFCs that violate the RBI Act, or directions or orders given by RBI under the RBI Act. RBI can also take penal action by cancelling the Certificate of Registration that was issued to an NBFC or prohibiting it from accepting deposits, alienating its assets, or filing a winding-up petition.
12. What action can be taken against persons/financial companies making false claim of being regulated by the Reserve Bank?
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.
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