Non-Banking Financial Companies (NBFC)

A Non-Banking Financial Company (NBFC) is a  company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).

Advantages of NBFC

a)      it can provide loans and credit facilities,

b)      it can trade in  money market instruments

c)      it can do wealth management such as Managing portfolios of stocks and shares

d)     it can underwrite stock and shares and other obligations

Disadvantages of NBFC

(a)                an NBFC cannot accept demand deposits as it falls within the realm of activity of commercial banks;

(b)               an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and

(c)                deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

Acceptance of Deposits by NBFC

There are two kinds of NBFCs. NBFC’s accepting deposits and NBFC’s not accepting deposits. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits. NBFCs authorised to accept/hold public deposits besides having minimum stipulated Net Owned Fund (NOF) should also comply with the Directions such as investing part of the funds in liquid assets, maintain reserves, rating etc. issued by the Bank

Procedure to set up a NBFC

Since NBFC is a company, first it has to be incorporated under the Companies Act, 1956. In addition to that, in terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution.

However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.

Setting up an NBFC by a Foreign Company

100% FDI is allowed from all sources on the automatic route. Thus, a Wholly Owned Subsidiary NBFC can be set up by a foreign company under an automatic route.

FDI is allowed in the following 19 NBFC activities 

1. Merchant banking
2. Underwriting
3. Portfolio Management Services
4. Investment Advisory Services
5. Financial Consultancy
6. Stock Broking
7. Asset Management
8. Venture Capital
9. Custodial Services
10. Factoring
11. Credit Reference Agencies
12. Credit rating Agencies
13. Leasing & Finance
14. Housing Finance
15. Foreign Exchange Brokering
16. Credit card business
17. Money changing Business
18. Micro Credit
19. Rural Credit

Conditions

·         Minimum Capitalization for fund based NBFCs:

        i.            For FDI up to 51% - US$ 0.5 million to be brought upfront

      ii.            For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

    iii.            For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months

·         Minimum capitalization for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment.

·         Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as mentioned above without any restriction on number of operating subsidiaries without bringing in additional capital.

·         Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow mentioned above.

·         FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India.  RBI would issue appropriate guidelines in this regard.

·         The minimum capitalization norms would apply would be applicable where the foreign holding in a NBFC (both direct and indirect) exceeds the limits indicated above

·         The capital for the purpose of minimum capitalization norms shall consist of ordinary shares only.