B.

Voc Sem III Paper Code BVB 302 Unit IV

Non-Banking Financial Institutions(NBFIs)
Non-Banking Financial Companies (NBFCs)
By Dr. Jivan Kumar Chowdhury
NBFIs
• A financial institution is an institution which collects funds from the public,
and places them in financial assets, such as deposits, loans and bonds rather
than tangible property.
• NON BANKING FINANCIAL INSTITUTION: A non-bank financial institution
(NBFI) is a financial institution that does not have a full banking license or is
not supervised by a national or international banking regulatory agency.
• Non-banking financial institutions, are financial institutions that provide
banking services, but do not hold a banking license. These institutions are
not allowed to take deposits from the public.
• Definition: Banking is acceptance of deposits withdraw able by cheque or demand;
• NBFI cannot accept demand deposits NBFI are companies carrying financial business
• Scope of business: Scope of business of the bank is limited. There is a various types
of business regarding financial activities.
• Major limitation on Business: No non banking activity are carried. Cannot provide
checking facilities.
• Need for a license: License norms are tightly controlled and generally it is perceived
to be quite difficult to get a license for a bank.
• It is comparatively much easier to get a registration as an NBFI.
• Regulations: BR Act and RBI Act lay down the stringent control over the bank. Much
lesser control over NBFI
• IMPORTANCE: Non banking financial institutions have the following importance in Indian
economy.
• Greater reach.
• Flexibility in tapping resources.
• Retail services to small and medium business.
• Important component of financial market.
• Role of NBFIs Development of sectors like Transport & Infrastructure
• Substantial employment generation
• Help & increase wealth creation  Broad base economic development
• To finance economically weaker sections
• FUNCTIONS Brokers of loanable funds.
• Mobilization of savings. Channelization of funds into investment,
• Stabilize the capital market,
• REGULATIONS RBI Act, 1934, it is mandatory that every NBFI should be registered
with RBI to commence or carry on any business of non-banking financial institution.
• NBFI have improved their operations and strategies. Industry experts opine that they
are much more mature today than they were during the last decade. In fact,
aggressive strategies helped LIC housing finance to grab new customers and increase
its market share in national mortgage market. The segment which was hit hardest
was vehicle financing. Fortunately, since vehicle finance is asset based business, their
asset quality did not suffer as against other consumer financing business.
• CONCLUSION Strengthening the professionalism of NBFC sector through education
and training, making them more organised. RBI needs to educate people about NBFC.
The credit delivery mechanism needs to be more transparent and hassle free. There
should be more stringent norms for the defaulters.
Non-Banking Financial Company(NBFCs)
• A Non-Banking financial Company is a company registered under the Company Act engaged in acquisition of
shares/stocks/bonds/debentures/securities issued by government or local authority or other insurance
business, chit business security, leasing, leasing, hire-purchase but does not include any institution whose
principal business is that of agriculture activity, industrial activity, purchase/sale of any goods(other than
security) or providing any services and sale/purchase/construction of immovable property.
• NBFCs are doing functions similar to banks.
• Difference between banks and NBFCs –
• NBFCs lend and make investments and hence their activities are akin to that banks, however there are a few
difference as given below-
• i) NBFCs can not accept demand deposits
• ii) NBFCs do not form part of the payment and settlement system and can not issue
• cheques
• Iii) Deposit insurance facility of deposit Insurance and Credit Guarantee Corporation is not
• available to depositor of NBFCs, unlike in case of banks.
• Registered with Reserve Bank of India –
• In term of Sec 45 – IA of the RBI Act, 1934, no NBFC can commence or carry on
business of a non-banking financial institution without –
• a) obtaining a certificate of registration from the bank and without having a Net
owned funds of Rs. 25 lacks (Rs. Two crores since April 1999).
• b) Some of the NBFCs are exempted from the requirement of registration with
RBI.
• > Housing Finance companies are regulated by National Housing Bank.
• > Stock exchange Company by securities and exchange Board of India,
• > Insurance Company are regulated by Insurance Regulatory and Development
Authority ( IRDA).
• NBFC Ombudsman- If there is a complain against any NBFC, one can go to
Ombudsman for the redressal of the complain - The Ombudsman Scheme for
NBFC, 2018.
• What are the requirement for Registration with RBI?
• A Company incorporated under the Company Act, 1956 and desirous of
commencing business of non-banking financial institution as defined under 45I(A)
of the RBI Act, 1934 should comply with the following:
• 1. It should be a company registered under Sec 3 of the Company Act, 1956.
• 2. It should have a minimum net owned fund of Rs. 200 lakh required for
specialized NBFCs like NBFC – MFI.
• Systematically Important NBFCs-
• NBFCs whose asset size is of Rs. 500 Cr. Or more as per last audited balance are
considered as systematically important NBFCs.
• Bank provides a variety of transaction services.
• NBFC does not facilitate transaction services.
• Net Owned fund: Net owned fund in respect of NBFCs 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.
• Non deposit – Taking (NBFC-ND) companies Directions, 2016:
• The RBI (i) in public interest, (ii) and to regulate the financial system to the advantages of the
country
• (iii) and to prevent the affair of any NBFC-ND from being conducted in any manner detrimental
prejudicial to their interest, has been issuing directions in exercise of its powers under the RBI Act
and the Factoring Regulation Act. These were comprehensively revised in 2016.
• The provisions of these directions are applicable to:
• (a) NBFCs not accepting holding public deposits which are not systemically important, that is,
having minimum total asset of Rs. 5oo crore;
• (b) NBFC-Factor registered with the RBI under the Factoring regulation Act having an asset size
• NBFC – Micro – Finance Institution ( NBFC – MFI) registered under the RBI Act, having an asset
size below Rs. 500 crore. It is a non-deposit taking NBFC, having a minimum net owned fund of
Rs. 5 crore and not less than 85% of its net assets are in the nature of qualifying assets.
• NBFC Infrastructure Finance Company (NBFC – IFC) registered with the RBI having an asset size
below Rs. 500 crore. A minimum of 75% of its total assets should be deployed in infrastructure
loans.
• The auditors have to report whether the NBFC
• > Is engaged in the business of a NBFI in terms of the specified principal business criteria
(financial assets/income pattern) and has obtained a certificate of registration (CoR) from the RBI.
• Is entitled to hold the CoR in terms of its financial asset/income pattern.
• Every NBFC should submit a certificate from its statutory auditor that is engaged in their business
of NBFI requiring it in hold a CoR and is eligible to hold it within one month from the date of
finalization of the balance sheet and in any case before December, 30 of that year.
• Mandatory provisions of NBFCs: The NBFC has complied with the prescribed
prudential norms on income recognition, accounting standards, asset classification,
provisioning and concentration of credit / investments:
• The NBFC has complied with the liquid asset requirement prescribed by the RBI and
the details of the designated bank in which the approved securities are held a
communicated to the RBI.
• It has furnished to the RBI, within the stipulated period, the (i) return on deposits,
and (ii) quarterly return on prudential norms; and
• It has complied with the requirements relating to the opening on new
branches/offices to collect deposits or closure of existing branches / offices or
appointment of agents.
*****