• A Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 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 agricultural 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 NBFC). NBFCs are not a part of the
payment and settlement system and as such, they cannot issue cheques drawn
on itself and they cannot also borrow from the RBI.
According to the amendment of 1997 to the Reserve Bank of India Act, 1934, a Non-Banking
Finance Company means:

(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 RBI may, with the previous
approval of the Central Government, specify.

• In terms of Section 45-1A of the RBI Act, a non-banking financial company can commence or
carry on the business of non-banking financial institution subject to:

• Obtaining a Certificate of Registration (CoR) from the Bank (RBI)

• Having net owned funds of minimum of Rs 2 crores.

REGULATORS OF NBFCs
• In terms of powers given to RBI, under the Reserve Bank of India Act, it regulates a section of the
NBFCs., However, in order to obviate dual regulation, certain categories of NBFCs as mentioned
below, which are supervised by other regulators, are exempted from the requirement of registration
with RBI. These are:

• Venture Capital Funds/Merchant Banking companies/Stock Broking companies, registered with the
SEBI

• Insurance company holding a valid Certificate of Registration, issued by the IRDAI

• Nidhi companies as notified under section 620A of the Companies Act, 1956, regulated by the
Ministry of Corporate Affairs

• Chit companies, as defined in section 2(b) of the Chit Funds Act, 1982, regulated by the respective
State Governments

• Housing finance companies regulated by the NHB, and

• Stock Exchange or a Mutual Benefit Company, regulated by SEBI.

CLASSIFICATION OF NBFCs
• NBFCs have three broad classifications, based on the kind of liabilities they access, the type of activities they
pursue and their perceived systemic importance.

Liabilities Based Classification

• NBFCS are classified on the basis of liabilities into two categories, viz., Category 'A' companies, (i.e., NBFCs
having public deposits, also known as 'NBFCs-D'), and Category 'B' companies, (NBFCs not having public
deposits, also known as 'NBFCs-ND' ).
Activity Based Classification

NBFCs are classified in terms of activities into following categories, viz.,

• Asset Finance Companies (AFCs),

• Loan Companies (LCs),
• Investment Companies (1Cs),
• Infrastructure Finance Companies (IFCs),
• Systemically Important Core Investment Companies (CICs-ND-SI)
• Infrastructure Debt Fund Companies (IDF-NBFC)
• NBFC Microfinance Institutions (NBFC-MFI)
• Residuary NBFC (RNBFC)
• NBFC- Factors
• NBFC Non-Operating Financial Holding Companies (NOFHC)
• Mortgage Guarantee Companies (MGC)
• NBFC Account Aggregator (NBFC-AA), and
• NBFC Peer-to-Peer Lending Platform (NBFC-P2PL)

Size Based Classification

• At present, non-deposit taking NBFCs, with assets of Rs 500 crores and above, are termed as Systemically
Important Non-Deposit taking NBFCs (NBFCs-ND-SI), and prudential regulations such as capital adequacy
requirements, exposure norms along with reporting requirements are applicable to them.
TYPES OF NBFCS
• The characteristics and operations of different types of NBFCs are discussed in the following paragraphs:

Deposit Taking NBFCs

• Some of the important parameters governing the NBFC-Ds, which are permitted to accept deposits from the
public are enumerated below:

• The NBFCs are allowed to accept and 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, presently
12.5% pa.

• 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 and they may get their company rated by any of
the six rating agencies namely, CRISIL, CARE, ICRA, FITCH Ratings India Pvt. Ltd, Brickwork Ratings India
Pvt. Ltd. and SMERA.
• The deposits with NBFCs are not insured.

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

• Only those NBFCs to which the RBI 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.

Asset Finance Company (AFC)

• An AFC is a 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,
generator sets, earthmoving and material handling equipment, etc. Principal business for the
purpose is defined as aggregate of financing real/physical assets supporting economic activity and
income arising therefrom is not less than 60% of its total assets and total income respectively.

Loan Company (LC)

• Loan Company means any company which is a financial institution carrying on, as its principal
business, the activity of 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.
Core Investment Company (CIC)

• CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities.

Some of its important characteristics are as follows:

• It holds not less than 90% of its total assets in the form of investments in equity shares,
preference shares, debts or loans in group companies.

• Its investments in the equity shares (including instruments compulsorily convertible into
equity shares, within a period not exceeding 10 years from the date of issue) in group
companies constitutes not less than 60% of its total assets.

• It does not trade in its investments in shares, debt, or loans in group companies except
through block sale for the purpose of dilution or disinvestment.

• Its asset size is Rs 100 crore or above.

• It accepts public funds.

Infrastructure Finance Company (IFC)

• An IFC is a non-banking finance company, which deploys at least 75% of its total
assets in infrastructure loans, has a minimum net owned funds (NOF) of Rs 300
crore, and has a minimum credit rating of 'A‘ or equivalent and a Capital to Risk
Weighted Assets Ratio (CRAR) of 15%.

Infrastructure Debt Fund Company (|DF-NBFC)

• IDF-NBFC is a company registered as NBFC to facilitate the flow of long-term

debts into infrastructure projects. IDF-NBFCs raise resources through issue of
Rupee or Dollar denominated bonds of minimum 5 years' maturity. Only
Infrastructure Finance Companies can sponsor IDF-NBFCs.
NBFC - Microfinance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit taking NBFC having not less than 75% of its assets in the nature of
qualifying assets' which satisfy the following criteria:

(a) Minimum Net Owned Funds of Rs. 5 crores. (For NBFC-MFIs registered in the North Eastern
Region of the country, the minimum NOF requirement shall stand at Rs.2 crore);

(b) Not less than 75 per cent of its total assets are in the nature of "microfinance loans as defined
under Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022.

(c) NBFC-MFI should be registered with the Bank under the provisions of RBI Act, 1934 and having
an asset size of Rs. 500 crore and above

(d) NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which
shall not be less than 15 per cent of its aggregate risk weighted assets. The total of Tier II Capital at
any point of time, shall not exceed 100 per cent of Tier I Capital.
NBC-Factors

• NBFC-Factor is a non-deposit taking NBFC, engaged in the principal business of factoring, The
financial assets in the factoring business should constitute at least 50% of its total assets and
its income derived from factoring business should not be less than 50% of its gross income.

Mortgage Guarantee Company (MGC)

• MGCs are financial institutions for which, at least 90% of the business turnover is mortgage
guarantee business or at least 90% of the gross income is from mortgage guarantee business,
with net owned funds at Rs 100 crores, at the time of commencement of business, which are
reviewed for enhancement after 3 years.

NBFC-Non-Operative Financial Holding Company (NOFHC)

• NOFHCs are financial institutions through which, promoter/promoter groups are permitted to set
up a new bank. It is a wholly owned Non-Operative Financial Holding Company (NOFHC),
which holds the capital of the bank as well as other financial services companies regulated by
RBI or other financial sector regulators.
Shadow Banking in India

Shadow banks comprise entities which conduct financial intermediation directly, such as finance
companies or NBFCs, and entities which provide finance to such entities, such as mutual funds.
Globally. shadow banking entities could be covered under the broad heads of:

• Money Market Funds

• Credit investment Funds, Hedge Funds
• Finance Companies accepting deposits or deposit like funding
• Securities brokers dependent on wholesale funding
• Credit insurers, financial guarantee providers
• Securitisation vehicles.
CONCEPT OF OWNED FUNDS AND NET OWNED FUNDS (NOF) FOR NBFCSs

• Owned Fund' is the aggregate of the paid-up equity capital, preference shares
which are compulsorily convertible into equity, free reserves, balance in share
premium account and capital reserves representing surplus, arising out of sale
proceeds of assets, excluding reserves created by revaluation of assets, after
deducting therefrom accumulated balance of loss, deferred revenue expenditure
and other intangible assets.

• Net Owned Fund' is the amount as arrived at above, minus the quantum of
investments of the NBFC 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, including hire purchase and lease finance made to and
deposits with subsidiaries and companies in the same group, to the extent it
exceeds 10% of the Owned Funds. In terms of the present regulations, no NBFC
can commence business, if its NOFs is less than Rs 2 crores.
APPLICABILITY OF OMBUDSMAN SCHEME TO NBFCs
• RBI has issued guidelines on Integrated Ombudsman Scheme, 2021 which inter alia
covers the Non- Banking Finance Companies. The Scheme shall apply to the services
provided by a Regulated Entity in India to its customers, under the provisions of the
Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, and the Payment and
Settlement Systems Act, 2007.

• As per the scheme a "Non-Banking Financial Company" (NBFC) means an NBFC as

defined in Section 45-1 (f) of the Reserve Bank of India Act, 1934 and registered with the
Reserve Bank, to the extent not excluded under the Scheme, but does not include a Core
Investment Company (CIC), an Infrastructure Debt Fund-Non Banking Financial Company
(IDF-NBFC), a Non-Banking Financial Company - Infrastructure Finance Company (NBFC-
IFC), a company in resolution or winding up/liquidation, or any other NBFC specified by the
Reserve Bank: (Explanation: The terms CIC and IDF-NBFC shall have the me meaning
assigned to them under the RBI Directions.)

• In a major change, the Executive Director of RBI has now been appointed as appellate
authority in place of Deputy Governor, under the scheme.
SCALE BASED REGULATION (SBR): A REVISED REGULATORY
FRAMEWORK FOR NBFCs
• Guidelines on the revised scale based regulatory framework for NBFCs have been issued by RBI
vide its notification no RBI/2021-22/112 dated 22nd October 202 1. Regulatory structure for NBFCs
shall comprise of four layers, based on their size, activity, and perceived riskiness. NBFCs in the
lowest layer shall be known as NBFC-Base Layer (NBFC-BL). NBFCs in middle layer and upper
layer shall be known as NBFC-Middle Layer (NBFC-ML) and NBFC-Upper Layer (NBFC-UL)
respectively. The Top Layer is ideally expected to be empty and will be known as NBFC-Top Layer
(NBFC-TL).

Categorisation of NBFCs carrying out specific activity.

• As the regulatory structure envisages scale based as well as activity-based regulation, the following
prescriptions shall apply in respect of the NBFCs

• NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will always
remain in the Base Layer of the regulatory structure.

• NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the Base
layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer.
• The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC),
Micro Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee
Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure
depending on the parameters of the scale based regulatory framework.

• Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as
the case may be. They will not be placed in the Upper Layer till further notice.

• Further details of the regulatory norms may be seen from the above-mentioned
notification dated 22nd October 2021 issued by RBI.