A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act that is engaged in the business of loans and advances, receiving deposits (some NBFC’s only), acquisition of stocks or shares, leasing, hire-purchase, insurance business, chit business. Therefore, NBFCs lend and take deposits similar to banks; however there are a few differences a) NBFC cannot accept demand deposits, NBFCs cannot issue cheques drawn on itself and NBFC depositors are not covered by the Deposit Insurance and Credit Guarantee Corporation.
The Reserve Bank of India regulates and supervises Non-Banking Financial Companies which are into the principal business of lending or acquisition of shares, stocks, bonds, etc., or financial leasing or hire purchase or accepting deposits. Principal business of financial activity 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 percent of the gross income. A company which fulfills both these criteria must have NBFC license. This test for NBFC license is popularly known as the 50-50 test.
Therefore, 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 activity in a small way, will not require NBFC registration.
The following types of entities that are involved in the principal business of financial activity do NOT require NBFC License:
The above types of companies have been exempted from NBFC requirements and NBFC regulations of RBI as they are regulated by other financial sector regulators.
To apply and obtain NBFC License, the following are the basic requirements:
The Net Owned Funds would be calculated based on the last audited balance sheet of the Company. Net owned Fund will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Further, investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Fund.
Before applying for NBFC License, the type and category of NBFC license must first be determined. The following are the categories of NBFC Companies:
Asset Finance Company(AFC): An Asset Finance Company is a company which is a financial institution carrying on as its principal business the financing of physical assets such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines.
Investment Company: An Investment Company is any company which is a financial institution carrying on as its principal business the acquisition of securities (shares / stocks / bonds / other financial securities).
Loan Company: Loan Company is any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
Infrastructure Finance Company: Infrastructure Finance Company is a non-banking finance company that deploys at least 75 per cent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs. 300 crore, maintains a minimum credit rating of ‘A ‘or equivalent with a Capital to Risk Assets Ratio of 15%.
Systemically Important Core Investment Company: Systemically Important Core Investment Company is an NBFC with an asset size of over Rs.100 crores and accepts deposits, involved in the business of acquisition of shares and securities which satisfies certain conditions.
Infrastructure Debt Fund: Infrastructure Debt Fund is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. Infrastructure Debt Funds raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity.
Non-Banking Financial Company: Micro Finance Institution (Most Popular): Micro Finance Institution is a non-deposit taking NBFC that is engaged in micro finance activities.
NBFC Factor: NBFC Factor is a non-deposit taking NBFC engaged in the principal business of factoring.
The application for NBFC License must be submitted online and offline with the necessary documents to the Regional Office of the Reserve Bank of India. The following are the documents that needs to be submitted for NBFC License:
The above types of companies have been exempted from NBFC requirements and NBFC regulations of RBI as they are regulated by other financial sector regulators.