What constitutes a Non- Banking Financial Company?

A Non-Banking Financial Company (“NBFC”) is a company registered under the Companies Act and engaged in the business of loans and advances, acquisition of shares/bonds/securities, leasing, insurance business, etc.

Typically NBFCs do not accept public deposits, however, upon procuring approval from Reserve Bank of India (“RBI”), they may accept public deposits. The Reserve Bank of India Act, 1934, (“Act”) defines “non-banking financial institution” (“NBFC”) as any one of the following entities:

1) Any financial institution which is incorporated under Companies Act. A financial institution is an entity (company, corporation or cooperative society) which carries on its business or part of business in any of the following activities:

1.1 Financing, whether by way of making loans or advances or otherwise, of any activity other than its own,

1.2 Acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature however, CESAT has ruled that a stockbroker buying or selling securities for or on behalf its customers is not a NBFC,

1.3 Letting or delivering of any goods to a hirer under a hire-purchase agreement,

1.4 Carrying on of any class of insurance business, however, under the exceptions insurance companies need to get registered with IRDA instead of RBI,

1.5 Managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any state, or any business, which is similar thereto,

1.6 Collecting monies in lumpsum or otherwise for any purpose or under any scheme or arrangement by way of subscription or by sale of units or other instruments or in any other manner and awarding prizes or gifts or disbursing monies to persons from whom monies are collected or to any other person. However, this does not include any institution carrying on its principal business in (i) agricultural operation, (ii) industrial activity, or (iii) purchase or sale of any goods (other than securities) or providing of any services;

2) A non-banking institution incorporated under Companies Act and having its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner. The RBI considers both the assets and the income pattern of the company to decide company’s principle business, i.e. the company will be treated as an NBFC is its financial assets are more than 50% of its total assets (netted off by intangible assets) and income from financial assets should be more than 50% of the gross income.; or

3) Such other non-banking institution or class of institutions, as RBI may, with previous approval of the Central Government and by notification in the official gazette, specify.

If an entity falls within the above-mentioned definition of NBFC, then, it must procure registration certificate from the RBI before continuing or commencing its operations and maintain a minimum net owned funds of INR 2 crores, except whenever a specific requirement has been prescribed by the RBI such as INR 5 crores for Factor NBFCs and Micro Finance Institution NBFCs, and INR 3 crores for Infrastructure Debt Fund NBFCs.