What is NBFC?

We all hear the term NBFC being used to indicate various financial institutions. But what exactly is an NBFC? The full form of an NBFC is a Non-Banking Financial Company. The Reserve Bank of India (RBI), the apex body and regulator for the Indian financial sector, has clearly defined NBFCs as part of its guidelines.

RBI Definition of an NBFC

NBFCs are companies registered under the 1956 Companies Act, which carry out businesses of advances and loans along with acquiring bonds, shares, debentures, stocks or securities that have been issued by the Government or any other authority or even other securities which are marketable. They are also entities engaged in activities such as leasing, nature, insurance, hire-purchase, etc. However, it does not cover any institution which is principally engaged in agriculture or industrial or related activities and also those which are engaged in providing construction, purchase or sale of any property. Non-banking entities also come under the NBFC category. These are institutions which are principally engaged in getting deposits under any specific scheme in installments or a lump sum through contributions.

Principal Nature of the Business

The RBI has defined the principal business activity of any NBFC as financial activity. This happens whenever the financial assets of any entity are more than half of its total assets, with income from these financial assets contributing more than 50% of its gross income. Companies fulfilling both these parameters get NBFC registration from the RBI. Principal business has not been defined by the RBI officially. It has instead laid out the set of guidelines for registration in case of companies which are primarily engaged in financial activity and will remain under its supervision and rules. The application of the above-mentioned parameters is done by the RBI to assess whether a company can become an NBFC or not. This is also known as the 50-50 test in some cases.

How are NBFCs different from banks?

NBFCs and banks may not have many differences on paper. However, they are completely different types of institutions. Here are the main differences:

   1.NBFCs cannot take any demand deposits.

   2.NBFCs are not a part of any settlement or payment framework and cannot issue any cheque that are drawn on themselves.

   3.The facilities of deposit insurance by the DICGC (Deposit Insurance and Credit Guarantee Corporation) will not be provided for NBFC depositors unlike regular banks.

Requirements for NBFC Registration with RBI

• The RBI Act specifies in Section 45-IA that no NBFC can start or continue business without getting its certificate of registration from it.

• It should also have Rs. 2 crore (Rs. 25 lakh earlier) in net owned funds.

• Some NBFC categories have exemptions from RBI registration since they are under the regulation of other authorities like SEBI, IRDA, etc.

• The company should be established under the 1956 Companies Act and should be willing to start a non-banking financial institution business as per the RBI Act’s definition.

• It should be registered under Section 3 of the above-mentioned Act.

Growth of the NBFC Sector in India

With the expansion of financial services to cover a larger section of the population, there has been skyrocketing growth in the NBFC segment. Along with mainstream banking entities, NBFCs also offer varied financial products to customers across the country. They are also setting newer standards in terms of swift and easy loan processing, quick responses to customer needs, more technology-integrated financial processes and better customer experiences and satisfaction. All of these aspects have naturally contributed towards their rapid expansion throughout major cities, towns and even semi-urban and rural zones.