All corporate entities can be broadly classified as

• Finance companies; and
• Non- Finance companies.

All finance companies can further be classified into

• Banking Company; and
• Non- Banking companies.

While Banking companies are regulated by the Banking Regulation Act, 1949, the legal framework of Non- banking companies is provided in Chapter III B, III C and Chapter V of the Reserve Bank of India Act, 1934.

Non-Banking Financial Company (NBFC) - Meaning
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company.

For this purpose, the definition of ‘Principal Business’ given, vide Press Release 1998-99/1269 dated April 8, 1999 may be followed:

“The company will be treated as a non-banking financial company (NBFC) if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.”

Types of NBFC

• Miscellaneous NBFC
• Residuary Non-Banking Companies i.e. companies which have as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors' funds. However, Prudential Norms Directions are applicable to these companies also

Pure NBFC ( other than the above mentioned)

• Asset Finance Company (AFC)
• Investment Company (IC)
• Loan Company (LC)

Note: Asset Finance Company is defined as any company which is a financial institution carrying on as its principal business of financing the physical assets supporting productive/economic activity such as automobiles, tractors, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/ physical assets supporting economic activity and income arising there from not less than 60 per cent of the total assets and total income, respectively.

Systemically important NBFCs
IMF has framed principles for regulation of the financial sector, where it suggests that institutions performing similar functions should be subject to similar regulations. Accordingly, All NBFCs–ND with an asset size of Rs.100 crore and more as per the last audited balance sheet are now considered as systemically important NBFCs–ND (NBFC-ND-SI). NBFCs–ND– SI are required to maintain a minimum CRAR of 10 per cent. No NBFC–ND–SI is allowed to (i) lend to any single borrower/group of borrowers exceeding 15 per cent / 25 per cent of its owned fund; (ii) invest in the shares of another company/ single group of companies exceeding 15 per cent / 25 per cent of its owned fund; and (iii) lend and invest (loans/investments taken together) exceeding 25 per cent of its owned fund to a single party and 40 per cent of its owned fund to a single group of parties.

This classification is in addition to the present classification of NBFCs into deposit-taking, and non-deposit-taking NBFCs. [RBI on Financial Regulation of Systemically Important NBFCs and Banks’ Relationship with them- dated 12.12.2006]

Differences between banks & NBFCs
NBFCs are doing functions akin to that of banks; however there are a few differences:
(i) No non-banking financial company shall accept or renew any public deposit whether accepted before or after January 31, 1998 unless such deposit is repayable after a period of twelve months but not later than sixty months from the date of acceptance or renewal thereof.
(ii) It is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and
(iii) Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

Acceptance of Public Deposits
All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits. The NBFCs accepting public deposits have to comply with the “Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998”.

1.  Reserve Bank of India
Governing Body: Department of Non-Banking Supervision of the Reserve Bank of India (DNBS-RBI)
Governing Laws: 
a. CHAPTER  IIIB, III-C and V of Reserve Bank of India (RBI) Act 1934; 
b. RBI Directions
c. RBI Circulars ; Notifications and Guidelines issued from time to time

a. CHAPTER IIIB OF RBI ACT 1934
Provisions relating to Non banking Institutions receiving deposits and Financial Institutions

45H : Chapter IIIB not to apply in certain cases
45 I : Definitions
45-IA : Requirement of Registration and Net owned Fund 
45-IB:  Maintenance of percentage of assets
45-IC:  Reserve Fund
45J:      Regulation by Bank on Prospectus
45JA:   Power of RBI to determine Policy and issue Directions
45K:    Power of RBI to collect information from NBI as to deposits and give Directions
45L:     Power of RBI to call information from FI and give Directions
45M:    Duty of NBI to furnish statements etc. required by Bank
45MA: Powers & Duties of Auditors
45MB:  Power of RBI to prohibit acceptance of deposit and alienation of assets
45MC:  Power of RBI to file winding up petition
45N:     Inspection
45NA:  Deposits not to be solicited by unauthorized person
45NB:  Disclosure of Information
45NC:  Power of Bank to exempt
45Q:    Chapter IIIB to override other laws
45QA:  Power of CLB to offer repayment of deposit
45QB: Nomination by Depositors

b. RBI Directions

i. Non Banking Financial Companies Acceptance of Public Deposits(Reserve Bank) Directions 1998
ii. Non Banking Financial (Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions 2007
iii. Non Banking Financial (Non Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions 2007
iv. Non-Banking Financial Companies Auditor's Report (Reserve Bank) Directions, 2008

v. Reserve Bank of India (Non Banking Financial Companies) Returns Specifications 1997
vi. Residuary Non Banking Companies (Reserve Bank) Directions 1987
vii. Miscellaneous Non Banking Companies (Reserve Bank) Directions 1977
viii. Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003

c. RBI Circulars issued on July 01, 2009

1. “Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007”
2. “Non-Banking Financial (Non - Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007”
3. Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008”
4. “Reserve Bank of India (Non-Banking Financial Companies) Returns Specifications 1997”
5. Exemptions from the provisions of RBI Act, 1934
6. Frauds – Future approach towards monitoring of frauds in NBFCs
7. “Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977”
8. Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards
9. Prevention of Money Laundering Act, 2002 - Obligations of NBFCs in terms of Rules notified thereunder’
10. Residuary Non-Banking Companies
11. The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003
12. Directions/instructions issued to the Securitisation Companies/ Reconstruction Companies
13. Mortgage Guarantee Companies
14. Air Practices Code
15. Allied activities- entry into insurance business, issue of credit card and marketing and distribution of certain products
16. Corporate Governance
17. Miscellaneous instructions to NBFC- ND-SI
18. Miscellaneous instructions to Non-Banking Financial Companies
19. Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998

a. Tamil Nadu Protection of Interest of Depositor's (Financial Establishments) Act 1997  [Tamil Nadu is the first state to enact such an act in the country]
b. Maharshtra Protection of Interests of Depositors (In Financial Establishments) Act 1999
c. The Delhi Protection Of Interests Of Depositors (In Financial Establishments) Act, 2001
d. Bihar Protection of Interests of Depositors (In Financial Establishments) Act 2002
e. Gujarat Protection of Interests of Depositors (In Financial Establishments) Act 2003
f. The Madhya Pradesh protection of Depositor’s Interest Act 2000

3. The Companies Act 1956

Applicable sections include:
Section 3 : Definitions of “Company”; “existing company”; “private company”; and “public company”
Section 4: Meaning of “holding company” and “subsidiary”
Section 4A: Public Financial Institutions
Section 43A: Private Company to become public company in certain cases
Section 58A: Deposits not to be invited without issuing an advertisement
Section 58AA: Small Depositors
Section 58AAA: Default in acceptance or refund of deposits to be cognizable
Section 209(1): Books of Accounts to be kept by company
Section 217(1) : Director’s Report
Section 227: Powers and Duties of Auditors
Section 252: Minimum Number of Directors
Section 292A: Audit Committee
Section 370(1B): Loans etc. to companies under the same management
Section 372 (11) : Purchase by company of shares etc. of other companies
Section 620A: Power to modify Act in its application to Nidhis etc.
Section 637A: Power of Central Government or Tribunal to accord approval etc. subject to conditions and to prescribe fees on applications

4.Companies Rules

i. Companies (Acceptance of Deposit) Rules, 1975
ii. Companies (Acceptance of Deposits Amendment) Rules, 1997
iii. Companies (Application for Extension of time or Exemption under sub-section (8) of section 58A) Rules, 1979

5. Foreign Exchange Regulations

i. Foreign Exchange Management (Deposit) Regulations 2000
ii. Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000

6. Securities Contracts (Regulation) Act 1956
Some applicable sections include:
   Section 2(h): Definition of “Securities”
   Section 2(j): Definition of “Stock Exchange”
  Section 4: Grant of Recognition to Stock Exchanges

7. Housing Finance Companies

   The Housing Finance Companies (NHB) Directions 2001

8. Mortgage Guarantee Companies 

Mortgage Guarantee Companies Investment (Reserve Bank) Directions, 2008
Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008
Notification No. DNBS (MGC)1/CGM(PK) -2008 dated January 15, 2008 Notification No. DNBS (MGC) 2 /CGM(PK) -2008 dated January 15, 2008

9. Securitisation Companies and Reconstruction Companies

i. The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003
ii. Exemption to Securitisation or Reconstruction Companies from RBI Act- August 28, 2003
iii. Quarterly Statement to be submitted by Securitisation Companies/ Reconstruction Companies registered with the Reserve Bank of India under Section 3(4) of the SARFAESI Act – September 26,2008
iv. Guidelines on declaration of Net Asset Value of Security Receipts issued by Securitisation Company/ Reconstruction Company- May 28, 2007
v. Regulation of SCs/RCs-submission of returns and audited balance sheet by SCs/RCs - March 5, 2008

    10. Miscellaneous Non-Banking Companies

i. Non-banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977.
ii. Miscellaneous Non Banking Companies (Reserve Bank) Directions, 1977
iii. Chit Funds Act,1982

11. Residuary Non Banking Companies

       Residuary Non Banking Companies (Reserve Bank) Directions, 1987

12. Micro Financial Sector (Development and Regulation) Bill, 2007

13. Reports on Money Lending and Nidhis

Professional Opportunities

1. Statutory audit
2. Internal audit
3. Compliance audit of various regulations

Related websites: http://www.rbi.org.in/home.aspx