Definition under the RBI Act Section 45I of the Reserve Bank of India Act, 1934 defines ‘‘non-banking financial company’’ as–

(i)                  a financial institution which is a company;

(ii)                a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

(iii)               such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify;

Definition under the RBI Act Section 45 I (c) of the RBI defines “financial institution”: A nonbanking company carrying business of financial institution will be an NBFC. Activities included in the definition:

ü  Financing, whether by giving loans, advances or otherwise

ü  Acquisition of shares, stocks or securities

ü  Hire purchase

ü  Insurance – excluded by notification

ü  Management of chits,  etc

ü  Money circulation schemes

ü  If principal business is industrial, trading, etc., the company will not be an NBFC .RBI circulars have specified majority of assets and majority of income as the criteria for defining NBFC

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956/2013 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.

A non-banking institution which is a company and has PRINCIPAL BUSINESS of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

In order to identify a particular Company as NBFC, the Asset-Income Pattern of the last audited Balance Sheet is to be considered for the principal business criteria:  

PRINCIPAL BUSINESS: Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income.

A company which fulfils both these criteria will be registered as NBFC by RBI. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank.

• RBI Act

• NBFC (Acceptance of Public Deposits) Directions, 1998

• NBFC (Deposit Accepting or Holding) Prudential Directions 2007

• NBFC (Non Deposit Accepting or Holding) Prudential Directions 2007

• NBFCs Auditors Directions 2008

• Several circulars and press notes of the RBI issued from time to time.

Requirements for registration with RBI

A company 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 should comply with the following:

• it should be a company registered under the companies Act, 2013
• It should have a minimum net owned fund of 200 lakh

Application to the Reserve Bank for Registration

The application can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in .

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.

Classification of NBFCs in terms of applicability of various regulations

Broad categorization the different types of NBFCs are as follows:

Relevance of Last Audited Balance Sheet

• NOF for NBFCs – Rs. 200 Lakhs (Registered/Applied after 20th April 1999)
• Rs. 100 Lakhs by 31st March 2016
• Rs. 200 Lakhs by 31st March 2017
• Asset Size of the Group Companies to be clubbed

An arrangement involving two or more entities related to each other through any of the following relationships:

? Subsidiary – parent (defined in terms of AS 21),

? Joint venture (defined in terms of AS 27),

? Associate (defined in terms of AS 23),

? Promoter - promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997],

? For listed companies, a related party (defined in terms of AS 18), common brand name, and investment in equity shares of 20% and above

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds. All existing unrated Asset Finance Company that have been allowed to accept deposits shall have to get themselves rated by March 31, 2016. Those Asset Finance Company that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated Asset Finance Company or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till they obtain an investment grade rating.

However, as a matter of public policy, Reserve Bank has decided that only banks should be allowed to accept public deposits and as such has since 1997 not issued any Certificate of Registration (CoR) to new NBFCs for acceptance of public deposits.

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

       NBFC-ND-NSI (Asset Size below 500 Crores) :Non-Systemically Important Non-Banking Financial (NonDeposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

       NBFC-ND-SI (Asset Size above 500 Crores) :Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

       NBFC-D (Deposit Accepting NBFCs) Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007

Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements

Corporate Governance Norms- Every NBFC-ND-SI and NBFC-D shall:

       Frame internal guidelines on corporate governance

       Frame a Fit and Proper Policy

       Rotate partners of CA Firm every 3 years and ensure the retiring partner completes the cooling off period of 3 years before re-appointment

Committees -Every NBFC-ND-SI and NBFC-D are to formulate the following committees:

       Audit Committee

       Nomination Committee

       Risk Management Committee

Miscellaneous Compliances:

       Membership of All Credit Information Companies

       Core Investment Companies’ submission of annual auditor’s certificate under CIC Directions 2011

       Transfer to Statutory Reserve U/s 45-IC

Disclosures :

       Every NBFC Should follow Financial Year as accounting year (1stApril to 31st March)

       Prior approval of RBI is required for following any other accounting year

       Provisioning made for the credit assets should be disclosed separately without netting it

       Such provisions should be separate from depreciation and should not be an appropriation (i.e. to be recoded in P&L)

       Additionally, NBFC-SIs are to disclose:

       Capital to Risk Assets Ratio

       Exposure to Real Estate Sector (Both direct and indirect)

       Maturity pattern of Assets and Liabilities

       Percentage of Loans against Gold Jewellery to Total Assets is to be disclosed if such loans are advanced

       Restructured Loans are to be disclosed in the prescribed format

       Disclosures under Corporate Governance Norms

Asset Classification-Every NBFC has to classify its lease/hire purchase assets, loans and advances and any other forms of credit into:

       Standard Assets

       Sub-Standard Assets

       Doubtful Assets

       Loss Assets

       The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

       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 compounded at rests not shorter than monthly rests.

       NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

       NBFCs should have minimum investment grade credit rating.

       The deposits with NBFCs are not insured.

       The repayment of deposits by NBFCs is not guaranteed by RBI.

       Certain mandatory disclosures are to be made about the company in the application Form issued by the company soliciting deposits.

       Prior Approval from RBI

       Takeover/Acquisition/Mergers/Amalgamation

       Before approaching the court

       Resulting in acquisition/transfer of shareholding of 26% or more

       Resulting in change of management of 30% or more

       Progressive change over time

       Public Notice of one month

       Intimation of all the changes are to be communicated

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 result 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.

       Lending against its own shares

       NBFC-D is prohibited to make investments or give loans if it has defaulted in repayment of any deposit and for as long as such default exists

       All NBFCs are prohibited from becoming partners in Partnership Firms

Further NBFCs require prior approval from RBI For opening branches in excess of 1000 in number

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