A Non-Banking Financial Company (hereinafter referred to as NBFC) is an entity that provides banking and other lending services but does not come under the legal definition of a bank. An NBFC is incorporated under the Companies Act, 1956 or the Companies Act, 2013. All NBFC’s are necessitated to procure a ‘Commencement of Business’ certificate from the Reserve Bank of India (hereinafter referred to as RBI) as provided under the provision of Section 45-IA of the RBI Act, 1934. Further, they cannot commence any business as a Non-Banking Financial Institution without procuring a ‘Certificate of Registration’ from the RBI. The NBFC Registration and License may be obtained in 90-120 days.
The main motive of business of NBFC is to provide loans and advances, acquisition of shares, debentures and other stocks issued by the Government or other relevant authorities, insurance business, leasing, hire-purchase etc. Further, any other non-banking institution which is incorporated as a company under Companies Act, and its business is of receiving deposits under any scheme or arrangement in one lump sum or installment would also be grouped under NBFC.
Markedly, NBFC’s are diminishing the deficit of financial assistance provided to the unorganized sector of society.
Difference between Banks and NBFC
NBFC’s have similar functions as that of banks. But, a few differences can be made out between them, which are as follows:
- NBFC’s are more concentrated on unorganized Sector having low or no credit rating score.
- NBFC’s cannot accept demand deposits.
- NBFC’s cannot issue a cheque drawn on it.
Types of NBFC’s in India
While considering the ‘nature of activity’, NBFC’s are classified as following:
- Asset Finance Company.
- Investment Company.
- Loan Company.
- Infrastructure Finance Company.
- Core Investment Company.
- Micro Finance Company.
- Mortgage Guarantee Company.
- Housing Finance Company.
While considering the ‘holding of deposits’, NBFC’s are classified into two, which are:
- Non-Deposit accepting NBFCs.
While considering the ‘size or minimum capital requirement’, NBFC’s are again classified into two, which are:
- Systematically Important NBFCs.
- Non Deposit Holding NBFCs.
Process of Registration of NBFC’s
- Company Registration: The foremost step would be to form a new Company (Private or Public) under the Companies Act, 2013.
- Minimum Net Owned Fund: The Minimum Net Owned Fund must be Rupees Two Hundred lakhs after the incorporation of the new company in form of Equity Share Capital. The capital that is to be raised after the incorporation of the company must be Equity Share Capital instead of Preference Share Capital.
- Opening of Bank Account: The amount receives after incorporation of the new Company is to be deposited as a Fixed Deposit.
- Application for Business Operations: An application is made to RBI for Business Operations.
- Due Diligence: RBI is to conduct due diligence, after which issuance of Commencement of Business certificate is done.
The documents required from all Directors and Shareholders are as follows:
- Certified copy of most recent Memorandum of Association and Articles of Association of the Company.
- A Banker’s Report in a sealed envelope.
- An Auditor’s Report regarding receipt of minimum Net Owned Fund.
- Certificate of Chartered Accountant about information regarding group, associate, subsidiary, holding companies as well as information on investments in other NBFC’s as given in proforma Balance Sheet.
Advantages of NBFC’s
- It offers loans and credit facilities.
- It is a medium of trading money market instruments.
- It provides funds for education or business.
- Helps in wealth management.