A Non-Banking Financial Company (NBFC) is a company
- Registered under the Companies Act. 1956,
- Its principal business is lending, investments in various types of shares/stocks/bond/debentures/securities, leas-ing, hire-purchase, insurance business, chit business
- Its principal business is receiving deposits under any scheme or arrangement in one lump sum or in installments.
However, a Non-Banking Financial Company does not include any institution whose principal business is agricultural activity , industrial activity, trading activity or sale/purchase/construction of immovable property. (Section 45 I (c) of the RBI Act, 1934) .
One key aspect to be kept in view is that the financial activity of loans/advances as stated in 45 I ( c), should be for activity other than its own. In the absence of this provision, all companies would have been NBFCs.
NBFCs whose asset size is of Rs.100 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 in our country.
The Reserve Bank of India regulates and supervises Non-Banking Financial Companies which are into the business of (i) lending (ii) acquisition of shares, stocks, bonds, etc., or (iii) financial leasing or hire purchase.
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 res-ult 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.
RBI tightened Tier 1 capital requirements and said NBFCs wou-ld need to hold capital levels of at least of Rs 1 crore ($162,668) by the end of March 2016 and Rs 2 crore by March-end 2017 to avoid losing their right to operate.
The country's apex bank also said only certain investment-grade NBFCs would be allowed to take deposits, saying the firms would have until the end-March 2016 to acquire a credit rating. RBI capped deposit-taking at 1.5 times the size of a firm's minimum capital - down from four times previously.
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 che-ques 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.