NBFC

Non-Banking Financial Corporation (NBFC) explained.

A Non-Banking Financial Corporation (NBFC) is a company incorporated under the Companies Act of 2013 or 1956. As defined by the Reserve Bank of India (RBI) Act, a Non-Banking Company engaged in financial activities is considered an NBFC. This includes businesses involved in loans, advances, acquisitions of stocks, equities, debt, and other marketable securities issued by the government or local authorities.

Additionally, a company that receives deposits under any scheme or arrangement, regardless of the mode, is categorized as a Residuary non-banking company.

Exclusions from the definition of NBFC include businesses primarily involved in agricultural or industrial activities, purchase or sale of goods (excluding securities), sale/purchase/construction of immovable property, or providing services.

The Reserve Bank of India applies the 50-50 test to determine if a company's principal business is financial in nature and thus regulated as an NBFC. According to this criteria, the company's financial assets must constitute at least 50% of its total assets, while income from financial assets must account for at least 50% of its total income. NBFCs are regulated by the Ministry of Corporate Affairs and the RBI, and they require a license from the RBI to operate. Incorporation is done under the relevant laws of the land.

There are different types of NBFCs categorized based on liabilities and activities. Certain NBFCs are exempted from obtaining registration with the RBI as they are regulated by other authorities, including Core Investment Companies, Merchant Banking Companies, Stock-broking Companies, Housing Finance Companies, Venture Capital Companies, Insurance companies holding IRDA registration, Chit Fund Companies, and Nidhi Companies.

To incorporate an NBFC, the company must be registered under the Companies Act of 2013 or 1956 as a Private Limited or Public Limited Company. It should possess a minimum net owned fund of Rs. 2 Crore, and at least one-third of the directors must possess finance experience. The company must have a clean CIBIL record, a detailed five-year business plan, and comply with capital compliance and FEMA requirements. After fulfilling these conditions, an online application should be submitted on the RBI website along with the required documents. A CARN Number will be generated, and a hard copy of the application must also be sent to the regional branch of the RBI. Once the application is scrutinized, the Company will be granted a license.

NBFCs need to adhere to guidelines after obtaining a valid license, such as not accepting deposits payable on demand. Public deposits can be taken for a minimum of 12 months and a maximum of 60 months, with interest rates within the prescribed limits set by the RBI. Repayment of amounts taken by the Company will not be guaranteed by the RBI. Regular reporting to the RBI, submission of audited balance sheets, and statutory returns on deposits and liquid assets are mandatory. Maintaining a minimum level of 15% of public deposits in liquid assets, conducting credit rating assessments, and meeting consumer protection requirements are also part of the guidelines.

In the event of a default, consumers can seek legal recourse through the National Company Law Tribunal or Consumer Forums.