The business of this NBFC is to advance loans and deal with the acquisition of market instruments like Shares/bonds/securities etc and other securities of similar nature. Governments, local authorities, or competent business houses issue these market instruments. However, it cannot include any organisation whose primary business is agricultural, industrial activity, the acquisition or sale of any goods (other than securities), the provision of any services, or the sale/buy/construction of an immovable property, according to RBI regulation. Further, as per RBI guidelines, any non-banking institution, registered as a company, and has a major business of receiving deposits under schemes it floats or has an arrangement in one lump sum or instalments by way of contributions, is also designated as a Non-Banking Financial Company. Thus, an NBFC is a company that conducts financial activity as its principal business.
Financial activity as a principal business can be understood as, a condition where the financial assets of the company, constitute more than 50% of the total assets as well as the income from financial assets must constitute more than 50% of the gross income. Fulfillment of both the criteria is necessary for a company to be designated as NBFC, by the RBI. As stated above, any company which deals with agricultural activities, industrial operations, transactions involving immovable property as their “principal business” and cater to financial activities as a minor operation, will not be identified as NBFC, and thus remain aloof from its regulatory authority and supervision. It is defined so by the RBI, to ensure that only financial companies get registered with it for regulation and supervision. Both the Ministry of Corporate Affairs and the Reserve Bank of India manage the functions of the NBFC.
What are the fundamental requirements to be registered as NBFC?
For the company to be registered as NBFC, the fundamental requirements are as follows:
- The company must be registered under the Companies Act, 1956.
- The company should either be a Limited Company (Ltd) or a Private Limited Company.
- The minimum net owned fund (NOF) of the company must be Rs. 2 crores.
What are the major categories of NBFC?
NBFC can be categorised into two streams.
- Based on the nature of the financial activity
It includes Asset Finance Company, Loan Company, Mortgage Guarantee Company, Investment Company, Core investment Company, Infrastructure Finance Company, Micro Finance Company, Housing Finance Company, etc
- Based on the nature of deposits
It includes Deposit accepting NBFC and Non Deposit Accepting NBFC.
Systemically important NBFCs have assets of $500 million or more as of the most recent audited balance sheet. The justification for this classification is that the activities of such NBFCs will have an impact on the general economy’s financial stability.
Many NBFC is operating out of India. Major NBFC operating in India include Power Finance Corporation Limited, Shriram Transport Finance Company Limited, Bajaj Finance Limited, Mahindra & Mahindra Financial Services Limited, Muthoot Finance Ltd, HDB Finance Services, Cholamandalam Finance, Tata Capital Financial Services Ltd. We hope you find the information provided above to be useful. Please visit our website pr contact our experts to learn more about India’s financial industries.