Non-Banking Financial Company (NBFC)
In this post, we shall discuss Non-Banking Financial Company (NBFC) and how they are different from Banks. We shall discuss the most important points about NBFCs that are important from the exam point of view.
First, let’s understand what is the meaning of “Financial activity as principal business”
When is a financial activity considered as the “principle business” for any company?
A company should fulfill two criteria so that Financial activity may be considered as principal business for this company.
- when a company’s financial assets constitute more than 50% of the total assets, and
- income from financial assets constitutes more than 50% of the gross income.
A company that fulfills both these criteria will be registered as NBFC by RBI.
Non-Banking Financial Company (NBFC)
Non-Banking Financial Company (NBFC) is a company that is engaged in the business of:
- loans and advances,
- acquisition of shares/stocks/bonds/debentures/securities issued by the Government (or local authority)
- leasing,
- hire-purchase,
- insurance business,
- chit business.
Such companies are registered under the Companies Act, 1956.
What is not an NBFC?
NBFC does not include any institution whose principal business is that of:
- agriculture activity,
- industrial activity,
- purchase or sale of any goods (other than securities) or
- providing any services and sale/purchase/construction of an immovable property.
Residuary non-banking company
A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner is also a non-banking financial company and is termed as Residuary non-banking company.
Difference between banks & NBFCs
Banks and NBFCs have some common features like lending and making investments. But they are different in various aspects. Here are some differences between Banks and NBFCs
| NBFCs | Banks |
| NBFC cannot accept demand deposits | Banks can accept demand deposits |
| NBFCs are not part of the payment and settlement system and cannot issue cheques drawn on itself; | Banks are part of payment and settlement system |
| Insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs | it is present for banks (upto Rs 5 lakh) |
NBFCs and the RBI
No Non-banking Financial Company can start the business of a non-banking financial institution in India without obtaining a certificate of registration from the Reserve Bank of India. The requirements that NBFCs should fulfill for registration with RBI is as under:
- it should be a company registered under Section 3 of the Companies Act, 1956
- It should have a minimum net-owned fund of Rs 2 Crore.
Regulators of NBFCs
Who regulates NBFCs?- The Reserve Bank of India regulates most of the NBFCs. The category of NBFCs that are not regulated by RBI is mentioned below:
| Category of NBFC | Regulator |
| Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers | Securities and Exchange Board of India (SEBI) |
| Insurance companies | Insurance Regulatory and Development Authority (IRDAI) |
| Chit Fund Companies | respective State Governments |
| Nidhi Companies | Ministry of Corporate Affairs, Government of India |
Systemically important NBFCs
Any NBFC is considered to be systemically important NBFCs when its asset size is of ₹ 500 cr or more as per last audited balance sheet.
Attempt Quiz on NBFC
Read More Banking Awareness Topics
Attempt Banking Awareness Quiz