FUNCTION AND IMPORTANCE OF NON BANKING FINANCIAL COMPANIES.

1. Non Banking Financial
Companies
ALOK Singh(kanpur)

2. • A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act,
1956 engaged in the business of
• loans and advances, acquisition of
shares/stocks/bonds/debentures/securities
issued by Government or local authority
• Leasing, hire-purchase, insurance business,
chit business.

3. Historical Background
• The Reserve Bank of India Act, 1934 was
amended on 1st December, 1964 by the Reserve
Bank Amendment Act, 1963 to include provisions
relating to non-banking institutions receiving
deposits and financial institutions.
• With a view to review the existing framework and
address these shortcomings, various committees
were formed and reports were submitted by
them.

4. Regulations
• In terms of Section 45-IA of the RBI Act, 1934, it is
mandatory that every NBFC should be registered
with RBI to commence or carry on any business
of non-banking financial institution.
• However, to obviate dual regulation, certain
categories of NBFCs which are regulated by other
regulators are exempted from the requirement of
registration with RBI viz. Venture Capital
Fund/Merchant Banking companies/Stock
broking companies registered with SEBI.

5. • Should have a minimum net owned fund of Rs 25
lakh (raised to Rs 200 lakh wefApril 21, 1999).
• NBFC have to maintain 10 and 15 per cent of
their deposits in liquid assets effectively from
January 1 and April 1,1998, respectively.
• All NBFCs are not entitled to accept public
deposits. Only those NBFCs holding a valid
Certificate of Registration with authorization to
accept Public Deposits can accept/hold public
deposits.

6. • They have to create reserve fund and transfer not
less than 20 per cent of their net deposits to it
every year.
• The NBFCs are allowed to accept/renew public
deposits for a minimum period of 12 months and
maximum period of 60 months. They cannot
accept deposits repayable on demand.
• NBFCs cannot offer interest rates higher than the
ceiling rate prescribed by RBI from time to time.
The present ceiling is 11 per cent per annum.

7. • They have to obtain a minimum credit rating
from anyone of the three credit rating
agencies.
• NBFCs cannot offer gifts/incentives or any
other additional benefit to the depositors

8. Role of NBFCs
• Development of sectors like Transport &
Infrastructure
• Substantial employment generation Help &
increase wealth creation
• Broad base economic development
• Major thrust on semi-urban, rural areas & first
time buyers / user.
• To finance economically weaker sections

9. Importance
• In the present economic environment it is very
difficult to cater need of society by Banks alone
so role of Non Banking Finance Companies and
Micro Finance Companies become indispensable.
• The role of NBFCs as effective financial
intermediaries has been well recognised as they
have inherent ability to take quicker decisions,
assume greater risks, and customise their
services and charges more according to the needs
of the clients.

10. • At present, NBFCs in India have become
prominent in a wide range of activities like
hire-purchase finance, equipment lease
finance, loans, investments, Mutual funds etc.
• To help in developing the large number of
industries as well as entrepreneur in different
sectors of different areas.

11. Difference between NBFC and Banks
• (i)NBFC cannot accept demand deposits;
• ii. NBFCs do not form part of the payment and
settlement system and cannot issue cheques
drawn on itself;
• iii. deposit insurance facility of Deposit
Insurance and Credit Guarantee Corporation is
not available to depositors of NBFCs, unlike in
case of banks.