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WELCOME TO COMPANY SETUP INDIA

Non Banking Financial Company
  Definition
  Registration
  Types of Non-Banking Financial Entities (Regulated by RBI)
  Regulatory Norms and Directions for NBFCs
  Chapter III B of the RBI Act as applicable to NBFCs
  Difference between NBFCs & Banks
  Alignment of the RBI's Regulations with Companies (Amendment) Act, 2000
Definition

A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bond sire-purchase, insurance business, or chit business but does not include any institution whose principal business includes agriculture or industrial activity or the sale, purchase or construction of immovable property.

Registration

In terms of the RBI Act, 1934, registration of NBFCs with the RBI is mandatory, irrespective of whether they hold public deposits or not. The amended Act (1997) provides an entry point norm of Rs. 25 lakh as the minimum net owned fund (NOF), which has been revised upwards to Rs.2 crore for new NBFCs seeking grant of COR on or after April 21, 1999. Certain types of financial companies, viz., insurance companies, housing finance companies, stock broking companies, chit fund companies, companies notified as 'nidhis' under Section 620A of the Companies Act, 1956 and companies engaged in merchant banking activities (subject to certain conditions), however, have been exempted from the requirement of registration under the RBI Act, as they are regulated by other agencies.

Types of Non-Banking Financial Entities (Regulated by RBI)

Non-Banking Financial Entity Principal Business
I. Non-Banking Financial Company In terms of the Section 45-l(f) read with Section 45-i(c) of the RBI Act, 1934, as amended in 1997, their principal business is that of receiving deposits or that of a financial institution, such as lending, investment in securities, hire purchase finance or equipment leasing. 
(a) Equipment leasing company (EL) Equipment leasing or financing of such activity. 
(b) Hire purchase finance company (HP) Hire purchase transactions or financing of such transactions. 
(c) Investment company (1C)  Acquisition of securities. These include Primary Dealers (PDs) who deal in underwriting and market making for government securities. 
(d) Loan company (LC) Providing finance by making loans or advances, or otherwise for any activity other than its own; excludes EL/HP/Housing Finance Companies (HFCs). 
(e) Residuary non-banking company (RNBC)  Company which receives deposits under any scheme or arrangement by whatever name called, in one lump-sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments, or in any manner. These companies do not belong to any of the categories as stated above. 
II. Mutual Benefit Financial Company (MBFC) i.e., Nidhi Company Any company which is notified by the Central Government as a Nidhi Company under section 620A of the Companies Act, 1956 (1 of 1956) 
III. Mutual Benefit Company (MBC), i.e., potential Nidhi company A company which is working on the lines of a Nidhi company but has not yet been so declared by the Central Government, has minimum net owned fund(NOF) of Rs.10 lakh, has applied to the RBI for COR and also to Department of Company Affairs (DCA) for being notified as Nidhi company and has not contravened directions/ regulations of RBI/DCA. 
IV. Miscellaneous non-banking company (MNBC), Managing, Conducting or supervising as a promoter, foreman ori.e., Chit Fund Company Managing, conducting or supervising as a promoter, foreman or agent of any transaction or arrangement by which the company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscribers shall in turn, as determined by tender or in such manner as may be provided for in the arrangement, be entitled to the prize amount.
Difference between NBFCs & Banks

NBFCs perform functions similar to that of banks, however there are a few differences that NBFC cannot accept demand deposits, an NBFC is not a part of the payment and settlement system and as such, an NBFC cannot issue cheques drawn on itself and deposit insurance facility of the Deposit Insurance and Credit Guarantee CORporation is not available for NBFC depositors, unlike banks.

Regulatory Norms and Directions for NBFCs

S.No. Subject Particulars
1 Certificate of Registration (COR) No company, other than those exempted by the RBI, can commence the business of non-banking financial institution without obtaining a COR from RBI. The pre-requisite for eligibility for such a COR is that the NBFC have a minimum NOF of Rs. 25 lakh (since raised to Rs. 2 crore on and April 21, 1999 for any new applicant NBFC). The RBI grant COR after satisfying itself about the company's compliance with the conditions enumerated in Section 45-1A of the RBI Act 
2 Maintenance of Liquid Assets NBFCs have to invest in unencumbered approved securities, valued at a not exceeding current market price, an amount which, at the close of business on any day, shall not be less than 5.0 per cent but not exceeding 25.0 per cent specified by RBI, of the deposits outstanding at the close of business on the working day of the second preceding quarter. 
3 Creation of Reserve Fund Every non-banking financial company shall create a reserve fund and transfer thereto a sum not less than 20.0 per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. Such fund is to be created by every NBFC irrespective of the fact whether it accepts deposits or not. Further, no appropriation can be made from the fund without prior written approval of RBI. 
(1) Deposit Acceptance Related Regulations 
1 Ceiling on quantum of public deposits Loan and investment companies - 1.5 times of NOF if the company has NOF of Rs. 25 lakh, minimum investment grade (MIG) credit rating, complies with all the prudential norms and has CRAR of 15%.Equipment leasing and hire purchase finance companies - if company has NOF of Rs. 25 lakh and complies with all the prudential norms. 

i. With MIG credit rating and 12 per cent CRAR - 4 times of NOF

ii Without MIG credit rating but CRAR 15 per cent or above -1.5 times of NOF, or Rs. 10 crore, whichever is less.

2 Investment in liquid assets NBFCs - 15 per cent of outstanding public deposit liabilities as at the close of business on the last working day of the second preceding quarter, of which 
i. not less than 10 per cent in approved securities and 
ii. not more than 5 per cent in term deposits with scheduled commercial banks. 

Directions for investments by RNBCs were rationalized in June 2004 with a view to reducing the overall systemic risk in the financial sector and safeguarding the interest of the depositors. In this regard the following roadmap was prescribed:

a) From the quarter ended June 2005 and onwards, RNBCs were permitted to invest only to the extent of 10% of the Aggregated Liabilities to Depositors (ALDs) as at the second preceding quarter or one time of their Net Owned Funds, whichever is lower, in the manner which in their opinion of the company is safe as per approval of its Board of Directors.

b) From the quarter ended June 2006 onwards, this limit would stand abolished and RNBCs would not be permitted to invest any amount out of ALDs as per their discretion. However, to avoid strain, in complying with 100% directed investments by companies, the same had been modified to 95% of ALD up to March 31, 2007 and 100% of ALD thereafter. These liquid asset securities are required to be lodged with one of the scheduled commercial banks or Stock Holding CORporation of India Ltd.. or a depository or its participant (registered with SEB1).Effective October 1, 2002, government securities are to be necessarily held by NBFCs either in Constituent's Subsidiary General Ledger Account with a scheduled commercial bank or in a demat account with a depository participant registered with SEBI. These securities cannot be withdrawn or otherwise dealt with for any purpose other than repayment of public deposits.
3 Period of Deposits No demand deposits NBFCs 12 to 60 months RNBCs 12 to 84 months MNBCs (chit Funds) 6 to 36 months 
4 Ceiling of deposit rate NBFCs, MNBCs and Nidhis -11.0 per cent per annum (effective March 4, 2003) RNBCs - Minimum interest of 4.0 per cent on daily deposits and 6.0 per cent on other than daily deposits. Interest may be paid or compounded at periods not shorter than monthly rests. 
5 Advertisement methodology for acceptance of deposits/public deposits Every company which accepts deposits by advertisement has to comply with the advertisement rules prescribed in this regard, the deposit acceptance form should contain certain prescribed information, issue receipt for deposits and maintain a deposit register. etc. 
6 Submission of returns All NBFCs holding or accepting public deposits have to submit periodical returns to RBI at Quarterly, half yearly and annual intervals.
Alignment of the RBI's Regulations with Companies (Amendment) Act, 2000

In terms of the RBI Act, 1934, registration of NBFCs with the RBI is mandatory, irrespective of whether they hold public deposits or not. The amended Act (1997) provides an entry point norm of Rs. 25 lakh as the minimum net owned fund (NOF), which has been revised upwards to Rs.2 crore for new NBFCs seeking grant of COR on or after April 21, 1999. Certain types of financial companies, viz., insurance companies, housing finance companies, stock broking companies, chit fund companies, companies notified as 'nidhis' under Section 620A of the Companies Act, 1956 and companies engaged in merchant banking activities (subject to certain conditions), however, have been exempted from the requirement of registration under the RBI Act, as they are regulated by other agencies.



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