What is Non- Banking Financial Company

Non-Banking financial companies(NBFCs) means only those non- banking institutions which are registered under the Companies Act, 2013 and is working in the section of loans business and advances, acquisition of shares/bonds/debentures/securities/stock issued by the government or non-government authorities. It is of marketable nature, leasing, hire-purchase, insurance business, chit business but doesn’t relate to such institutions that are engaging in the business activity of agriculture, industry or sale/purchase/construction of immovable property. This article focuses on the classification of NBFCs in India.

The principal business of Non- Banking financial company(NBFCs) is to receive deposits under any scheme or arrangement or any other way, or lending in any way. Under section 45-1A, it has been written that without obtaining a certificate of Registration issued as per the chapter- III B and not having a Net Owned Fund of rupees two hundred lakhs (200,00,000), no NBFC is entitled to commence or carry on the business of Non- Banking Financial Institution.

Types of Non- Banking Financial Company

The Non- Banking financial institutions (NBFCs) are mainly classified under the following categories:

  1. LOAN COMPANY: it includes a company which is not an asset finance company but a financial institution principally engaged in the business of lending funds (other than its own) by loans or advances, or otherwise for any activity.
  2. INVESTMENT COMPANY: it consists of those companies or institutions whose main business is to acquire and manage securities for investment purposes.
  3. ASSET FINANCE COMPANY: asset finance company are the financial institutions carrying on its business mainly in the financing of physical assets that correspond to productive/ economic activity for example- automobile, lathe machines, tractors, generator system, earth moving and material handling equipment moving on the power and general purpose industrial machines.
  4. INFRASTRUCTURE FINANCE COMPANY: it is the kind of financial institution principally engaged in providing infrastructure loans.
  5. MUTUAL BENEFITS FINANCIAL COMPANY: mutual benefit financial company refers to the financial institution which is notified by the central government under the companies act, 2013 whose primary aim is to enable its members to pool their money with a precalculated investment objectives. Its source of fund is share capital, deposits from its members and the general public.

The classification of NBFCs is a broad concept that needs to be studied as follows:

Classification of NBFCs

  • When it comes to a question of whether the company is a financial institution or not, then the RBI (Reserve Bank of India) shall decide such questions in consultation with the Central Government and its decision shall be final and be binding on all the parties concerned.
  • When it comes to a question of whether a particular financial company is a loan Company or an asset finance company, such question’s declaration shall be announced by the Reserve Bank of India (RBI) on the basis of principal business of a specific company and other relevant factors also. The decision of RBI shall be final and be binding on all the parties concerned. The classification of NBFCs is further sub-classified by RBI as follows.

Sub-Classification of NBFCs 

  • Deposit-taking Non- Banking Financial Company [NBFC- D]
  • Non- Deposit taking Non- Banking Financial Company[ NBFC_ND]
  • Systematically important Non- Banking Financial Company should have assets size of Rs. 100 Crores or more [NBFC-ND-S1]
  • These are Core investment Non-Deposit companies and systematically important who has already redistributed its 90% assets as an investment in shares or debts instruments or loan in group companies and out of 90%,  60% should be invested in equity shares or those instruments which can be compulsorily converted into equity shares. It accepts public funds also [CIC-ND-SI]

Registration of Non- Banking Financial Company:

No NBFC is entitled to carry forward its business until it satisfies the various conditions laid down under the chapter 45-1A of the RBI Act, 1934.

There are following steps that need to be followed:

  1. FORMATION OF A COMPANY: the first and foremost step is to register a new company name under the Companies Act, 2013 reflecting the characters of NBFC which should contain words such as Investment, Finance etc as a part of the name.
  2. MINIMUM NET OWNED FUND: the minimum paid-up capital on equity shares should be 2 crores.
  3. OPENING OF A BANK ACCOUNT: while considering the application for the grant of Certificate of registration, the RBI verifies that the company must have its own separate account free from all liens. Generally, funds are kept in Fixed Deposit Account.

For more information regarding Incorporation of NBFCs, RBI Guidelines you can visit Legal Raasta.

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