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).
Difference between Banks & NBFCs
NBFCs are doing functions akin to that of banks, however there are a few differences:
(i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)
(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and
(iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
Registration of NBFC with RBI
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 as defined in clause (a) of Section 45 I of the RBI Act, 1934.
However, to obviate dual regulation, certain category 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.
Different types of NBFCs registered with RBI
The NBFCs that are registered with RBI are:
1. Equipment leasing company
2. Hire-purchase company
3. Loan company
4. Investment company.
With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)
AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines.
Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively.
The above type of companies may be further classified into those accepting deposits or those not accepting deposits.
Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank.
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 have a minimum net owned fund of Rs 25 lakh (raised to Rs 2 crore from April 21, 1999).
The company is required to submit its application for registration in the prescribed format alongwith necessary documents for bank's consideration. The bank issues certificate of registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.
Requirements for accepting public 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. The NBFCs accepting public deposits should have minimum stipulated net owned fund and comply with the directions issued by the bank.
Ceiling on acceptance of public deposits, interest and period of deposit which NBFCs can accept
There is ceiling on acceptance of public deposits. An NBFC maintaining required NOF/CRAR and complying with the prudential norms can accept public deposits as follows:
Category of NBFC
Ceiling on public deposits
AFCs maintaining CRAR of 15% without credit rating
AFCs with CRAR of 12% and having minimum investment grade credit rating 1.5 times of NOF or Rs 10 crore whichever is less
4 times of NOF
LC/IC with CRAR of 15% and having minimum investment grade credit rating 1.5 times of NOF
Presently, the maximum rate of interest a NBFC can offer is 11%. 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.
The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this booklet.
Salient features of NBFCs regulations which the depositor may note at the times of investment
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
i) 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.
ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating.
v) The deposits with NBFCs are not insured.
vi) The repayment of deposits by NBFCs is not guaranteed by RBI.
vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.
Deposit and public deposit
The term 'deposit' is defined under Section 45 I(bb) of the RBI Act, 1934. 'Deposit' includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:
amount raised by way of share capital, or contributed as capital by partners of a firm;
amount received from scheduled bank, co-operative bank, a banking company, State Financial Corporation, IDBI or any other institution specified by RBI;
amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;
amount received by a registered money lender other than a body corporate;
amount received by way of subscriptions in respect of a 'Chit'.
Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ' public deposit' as a 'deposit' as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following: amount received from the Central/State Government or any other source where repayment is guaranteed by Central/State Government or any amount received from local authority or foreign government or any foreign citizen/authority/person;
any amount received from financial institutions;
any amount received from other company as inter-corporate deposit;
amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;
amount received from shareholders by private company;
amount received from directors or relative of the director of a NBFC;
amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;
the amount brought in by the promoters by way of unsecured loan;
amount received from a mutual fund;
any amount received as hybrid debt or subordinated debt;
any amount received by issuance of Commercial Paper.
Thus, the directions have sought to exclude from the definition of public deposit amount raised from certain set of informed lenders who can make independent decision.
Deposits from NRI
Effective from April 24, 2004, NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR (B) account.
However, the existing NRI deposits can be renewed.
Various prudential regulations applicable to NBFCs
The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares.
Please explain the terms 'owned fund' and 'net owned fund' in relation to NBFCs?
'Owned Fund' means aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.
The amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances made to and deposits with subsidiaries and companies in the same group is arrived at. The amount thus calculated, to the extent it exceeds 10% of the owned fund, is reduced from the amount of owned fund to arrive at 'Net Owned Fund'.
What are the responsibilities of the NBFCs accepting/holding public deposits with regard to submission of Returns and other information to RBI?
The NBFCs accepting public deposits should furnish to RBI:
i. Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors;
ii. Statutory Annual Return on deposits - NBS 1;
iii. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise;
iv. Quarterly Return on liquid assets;
v. Half-yearly Return on prudential norms;
vii. Half-yearly ALM Returns by companies having public deposits of Rs 20 crore and above or with assets of Rs 100 crore and above irrespective of the size of deposits ;
viii. Monthly return on exposure to capital market by companies having public deposits of Rs 50 crore and above; and
ix. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at (v) above.
What are the documents or the compliance required to be submitted to the Reserve Bank of India by the NBFCs not accepting/holding public deposits?
The NBFCs having assets size of Rs 100 crore and above but not accepting public deposits are required to submit a Monthly Return on important financial parameters of the company. All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.
However, all the NBFCs (other than those exempted) are required to be registered with RBI and also make sure that they continue to be eligible to remain Registered. Further, all NBFCs (including non-deposit taking) should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934.
RBI has powers to cause Inspection of the books of any company and call for any other information about its business activities.
For this purpose, the NBFC is required to furnish the information in respect of any change in the composition of its board of directors, address of the company and its directors and the name/s and official designations of its principal officers and the name and office address of its auditors. With effect from April 1, 2007 non-deposit taking NBFCs with assets size of Rs 100 crore and above have been advised to maintain minimum CRAR of 10% and shall also be subject to single/group exposure norms.
The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.
As per Reserve Bank's directions, overdue interest is payable to the depositors in case the company has delayed the repayment of matured deposits, and such interest is payable from the date of receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be liable to pay interest for the period from the date of claim till the date of repayment. For the period between the date of maturity and the date of claim it is the discretion of the company to pay interest.
Source: Reserve Bank of India