General Knowledge Today

varunthediscoverer | discovervarungupta@gmail.com | 18681 | www.gktoday.in/prep/banking-awareness

Module-12: Non-Banking Financial

Companies

Banking Awareness E-Book Pack 2015-16

Last Updated: August 26, 2015
Published by: GKTODAY.IN
GKToday © 2015 | All Rights Reserved

GKToday has authorized the download by you of an unrestricted number of copies of

this document in PDF format. GKToday grants you a nonexclusive, non-transferable
license to use this document for your personal use only. The document is a property
of GKToday and is protected by India and international copyright and other
intellectual property laws. Unauthorized duplication, redistribution and resale of this
document and content herein is not permitted.
 Module-12: Non-Banking Financial Companies

Contents
Regulation of NBFCs .................................................................................................................................. 3
Difference between NBFC and Banks .................................................................................................... 4
Different Categories of NBFCs ........................................................................................................................ 4
Asset Finance Company(AFC) ................................................................................................................. 4
Investment Company (IC) ......................................................................................................................... 4
Loan Companies (LC) ................................................................................................................................ 4
Infrastructure Finance Company (IFC) .................................................................................................. 4
Systemically Important Core Investment Company (CIC-ND-SI) ................................................... 4
Infrastructure Debt Fund (IDF-NBFC) .................................................................................................. 4
Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI) ............................... 5
Non-Banking Financial Company – Factors (NBFC-Factors) .......................................................... 5
Deposit Taking by NBFCs ................................................................................................................................. 5
Other Important Information ........................................................................................................................... 6
Residuary Non-Banking Company .......................................................................................................... 6
Do Multi-Level Marketing companies, Chit funds come under the purview of RBI? ................. 6
What are Unincorporated Bodies (UIBs)? ............................................................................................. 6

varunthediscoverer | discovervarungupta@gmail.com | 18681 | www.gktoday.in/prep/banking-awareness

© 2015 GKToday | All Rights Reserved | www.gktoday.in

Banking Awareness E-Book Pack 2015-16 2

 Module-12: Non-Banking Financial Companies

NBFCs or Non Banking Financial Companies are those companies which provide banking services
without meeting the legal definition of a bank. A NBFC is incorporated under the Companies Act,
1956 and desirous of commencing business of non-banking financial institution as defined under
Section 45 I(a) of the RBI Act, 1934.
The NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures,
securities issued by Government. They also deal in other securities of like marketable nature, leasing,
hire-purchase, insurance business, chit business.
However, the companies cannot be NBFCs if their primary business is related to agriculture activity,
industrial activity, sale/purchase/construction of immovable property.
Usually, the 50-50 test is used as an anchor to register an NBFC with RBI. 50-50 Test means that the
companies at least 50% assets are financial assets and its income from financial assets is more than
50% of the gross income.
Regulation of NBFCs
Non-Banking Financial Companies are regulated by different regulators in India such as RBI, Irda,
SEBI, National Housing Bank and Department of Company Affairs. RBI regulates the companies
which deal in lending, accepting| discovervarungupta@gmail.com
varunthediscoverer deposits, financial |leasing, hire purchase and acquisition of shares /
18681 | www.gktoday.in/prep/banking-awareness

stocks etc. The companies that take up activities like stock broking, merchant banking etc. are
regulated by SEBI while the Nidhi and Chitfund companies are regulated by Department of
Company Affairs. Housing finance companies are regulated by National Housing Bank.

NBFCs which are regulated by other regulators are exempted from the
requirement of registration with RBI but they need to register with respective
regulators. For example:
Venture Capital Fund/Merchant Banking companies/Stock broking companies are registered
with SEBI
Insurance Company needs to hold a certificate of registration with IRDA
Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies
© 2015 GKToday | All Rights Reserved | www.gktoday.in

Banking Awareness E-Book Pack 2015-16 3

 Module-12: Non-Banking Financial Companies

as defined in clause (b) of Section 2 of the Chit Funds Act, 1982

Housing Finance Companies regulated by National Housing Bank.
Difference between NBFC and Banks
The major differences between NBFCs and Banks are as follows:
NBFC cannot accept demand deposits (they can accept term deposits)
NBFCs do not form part of the payment and settlement system
NBFCs cannot issue cheques drawn on themselves
Deposits with NBFCs are not covered by Deposit Insurance.
Different Categories of NBFCs
All NBFCs are either deposit taking or Non-deposit taking. If they are non-deposit taking, ND is
suffixed to their name (NBFC-ND). The NBFCs which have asset size of Rs.100 Crore or more are
known as Systematically Important NBFC. They have been classified so because they can have
bearing on financial stability of the country. The Non-deposit taking NBFCs are denoted as NBFC-
NDSI. Under these two broad categories, the different NBFCs are as follows:
Asset Finance Company(AFC)
The main businessvarunthediscoverer
of these companies is to finance
| discovervarungupta@gmail.com | 18681 |the assets such as machines, automobiles,
www.gktoday.in/prep/banking-awareness

generators, material equipments, industrial machines etc.

Investment Company (IC)
The main business of these companies is to deal in securities.
Loan Companies (LC)
The main business of such companies is to make loans and advances (not for assets but for other
purposes such as working capital finance etc. )
Infrastructure Finance Company (IFC)
A company which has net owned funds of at least Rs. 300 Crore and has deployed 75% of its total
assets in Infrastructure loans is called IFC provided it has credit rating of A or above and has a CRAR
of 15%.
Systemically Important Core Investment Company (CIC-ND-SI)
A systematically important NBFC (assets Rs. 100 crore and above) which has deployed at least 90%
of its assets in the form of investment in shares or debt instruments or loans in group companies is
called CIC-ND-SI. Out of the 90%, 60% should be invested in equity shares or those instruments
which can be compulsorily converted into equity shares. Such companies do accept public funds.
Infrastructure Debt Fund (IDF-NBFC)
A debt fund means an investment pool in which core holdings are fixed income investments. The
Infrastructure Debt Funds are meant to infuse funds into the infrastructure sector. The importance
of these funds lies in the fact that the infrastructure funding is not only different but also difficult in
© 2015 GKToday | All Rights Reserved | www.gktoday.in

Banking Awareness E-Book Pack 2015-16 4

 Module-12: Non-Banking Financial Companies

comparison to other types of funding because of its huge requirement, long gestation period and
long term requirements.
In India, an IDF can be set up either as a trust or as a company. If the IDF is set up as a trust, it
would be a mutual fund, regulated by SEBI. Such funds would be called IDF-MF. The mutual fund
would issue rupee-denominated units of five years’ maturity to raise funds for the infrastructure
projects.
If the IDF is set up as a company, it would be an NBFC; it will be regulated by the RBI. The IDF
guidelines of the RBI came in September 2011. According to these guidelines, such companies would
be called IDF-NBFC.
An IDF-NBFC is a non-deposit taking NBFC that has Net Owned Fund of Rs 300 crores or more
and which invests only in Public Private Partnerships (PPP) and post commencement operations
date (COD) infrastructure projects which have completed at least one year of satisfactory commercial
operation and becomes a party to a Tripartite Agreement.
Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
NBFC-MFI is a non-deposit taking NBFC which has at least 85% of its assets in the form of m
microfinance. Suchvarunthediscoverer
microfinance should be in the| 18681
| discovervarungupta@gmail.com form of loan given to those who have annual
| www.gktoday.in/prep/banking-awareness

income of Rs. 60,000 in rural areas and Rs. 120,000 in urban areas. Such loans should not exceed Rs.
50000 and its tenure should not be less than 24 months. Further, the loan has to be given without
collateral. Loan repayment is done on weekly, fortnightly or monthly installments at the choice of
the borrower.
Non-Banking Financial Company – Factors (NBFC-Factors)
Factoring business refers to the acquisition of receivables by way of assignment of such receivables or
financing, there against either by way of loans or advances or by creation of security interest over
such receivables but does not include normal lending by a bank against the security of receivables etc.
An NBFC-Factoring company should have a minimum Net Owned Fund (NOF) of Rs. 5 Crore and
its financial assets in the factoring business should constitute at least 75 percent of its total assets and
its income derived from factoring business should not be less than 75 percent of its gross income.
Systemically important NBFCs.
Deposit Taking by NBFCs
All NBFCs are not allowed to take deposits. Only those NBFCs which have specific
authorization from RBI are allowed to accept/hold public deposits. NBFCs cannot take
demand deposits. They can accept only term deposits with a tenure of minimum 12 months.
The NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from
time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or
© 2015 GKToday | All Rights Reserved | www.gktoday.in

Banking Awareness E-Book Pack 2015-16 5

 Module-12: Non-Banking Financial Companies

compounded at rests not shorter than monthly rests.

NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. NBFCs
(except certain AFCs) should have minimum investment grade credit rating.
The deposits with NBFCs are not insured under Deposit Insurance Scheme.
NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI
provided such amount does not represent inward remittance or transfer from NRE/FCNR
(B) account. However, the existing NRI deposits can be renewed.
An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public
deposits.
There is no Ombudsman for hearing complaints against NBFCs. However, all NBFCs have in
place a Grievance Redressal Officer, whose name and contact details have to be mandatorily
displayed in the premises of the NBFCs.
Other Important Information
Residuary Non-Banking Company
Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal
business the receiving of deposits.
varunthediscoverer | discovervarungupta@gmail.com | 18681 | www.gktoday.in/prep/banking-awareness

Do Multi-Level Marketing companies, Chit funds come under the purview of RBI?
No, Multi-Level Marketing companies, Direct Selling Companies, Online Selling Companies don’t
fall under the purview of RBI. Activities of these companies fall under the regulatory/administrative
domain of respective state government.
What are Unincorporated Bodies (UIBs)?
Unincorporated bodies (UIBs) include an individual, a firm or an unincorporated association of
individuals, which accept deposits. In terms of provision of section 45S of RBI act, accepting such
deposit is illegal. The state government has to play a proactive role in arresting the illegal activities of
such entities to protect interests of depositors/investors.

© 2015 GKToday | All Rights Reserved | www.gktoday.in

Banking Awareness E-Book Pack 2015-16 6