What is a NBFC?
An NBFC or a Non-Banking Financial Company is that kind of financial institution which provides various financial and non-financial services to individuals, business enterprises, entrepreneurs, etc. They are different from the Cooperative and Commercial Banks, They do not need to hold a banking license but must strictly follow the rules and regulations provided by RBI from time to time.
NBFCs, most commonly, operate in the field of industrial and commercial loans and advances, deposit’s, leasing, hire-purchasing, investment funds, chit fund business, insurance business, instruments of the capital & money markets such as stocks, debentures, bonds, and many other similar activities.
India’s financial sector has shown consistent growth for the past two decades. The NBFC part of this sector has transformed tremendously over the past few years. And NBFCs have been at the forefront in driving new credit disbursals for the country’s underserved retail and MSME market.
NBFC License must be taken from RBI u/s 45-IA of the RBI Act of 1934. A financial institution wishing to be registered as an NBFC must, be duly registered either as per the Companies Act of 2013, or earlier Act of 1956.
RBI strictly regulates and ensures that the NBFCs are complying with the provisions and regulations provided in Chapter III B of the RBI Act.
The principal business activity of an NBFCs is to raise capital from the public depositors & investors and lend these further to the borrowers.
NBFCs are the bridges that link the investors or depositors with the borrowers. They have become a better alternative to the banking and financial sector by providing financial solutions to the unorganized segments of society.
The precise meaning of a “Principle business” has not been defined by the RBI Act. Therefore, RBI, in an attempt to bring clarity, has defined financial activity. It has defined that the principal business will be considered as a financial activity only, if the company fulfills the following conditions:
• Its Total Assets comprise of more than 50% financial assets.
• Income from financial assets constitutes more than 50% of the gross income.
This is also known as 50-50 criteria.
But below activities are not considered of being financial in nature:
• agricultural activity,
• industrial activity,
• purchase/sale of any goods and services (excluding securities), and
• Sale/purchase/construction of immovable property.