A non-banking financial company (NBFC) is defined as a company registered under the Companies Act, 1956 and indulges in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the government or any local authority or other securities of marketable nature, leasing, hire-purchase, insurance business, and chit business. However, it does not include any institution whose principal business is that of agricultural activity, industrial activity, and sale/purchase/construction of immovable property. An NBFC basically does work similar to that of a bank without actually meeting the legal definition of a bank.
So, if NBFCs function in a way similar to a bank, then how are they any different? Heres a list of their different aspects:
(i) NBFCs cannot accept demand deposits, which are funds deposited at a depository institution that are payable on demand, much like your current or savings bank accounts.
(ii) Deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation) is not available for NBFC depositors, which is not in the case of a bank.
It is mandatory under Section 45-IA RBI, 1934 for every NBFC to register with the RBI as it regulates the working and operations of NBFC within the framework of the RBI Act, 1934 and the directions issued under this Act. A company that registers as an NBFC under the RBI should have a minimum net owned fund of Rs. 2 crore. Registering with the RBI involves the submission of an application by the company in the prescribed format along with necessary compulsory documents. If and when the bank is satisfied that the conditions are fulfilled, it issues a Certificate of Registration to the company. Once an NBFC holds a valid Certificate of Registration, it can hold public deposits. However, the NBFCs that accept public deposits should comply with the Non-Banking Financial Companies Acceptance of Public Deposits Directions, 1998, as issued by the Bank.
There are four different types of NBFCs, each having different functions:
Equipment leasing companies
Hire-purchase companies
Loan companies
Investment companies
Rules and regulations are part of every firm and deal. It is always important to read the fine print of any document before signing it. NBFCs have their own set of regulations. The following regulations are considered important to the depositor at the time of investment.
NBFCs are allowed to accept or renew public deposits for a minimum period of 12 months and a maximum period of 60 months. They cannot accept deposits repayable on demand.
NBFCs are not allowed to offer gifts/incentives or any other additional benefits to the depositors.
Deposits with NBFCs are not insured.
The repayment of deposits by NBFCs is not guaranteed by the RBI.