NBFC is a Non-Banking Financial Company which the principal business of which is:
– lending money or
– investing in shares/stocks/bonds/debentures or
– leasing hire purchase, or
– doing insurance business, chit business or
– Receiving deposits under any scheme or arrangement.
Note: NBFC is regulated by Reserve Bank of India.

The following business cannot be registered as NBFC:
– Any institution whose principal business is of agriculture.
– Or any business who is engaged in industrial activity.
– Or any institution which is engaged in purchase or sale of any goods (other than securities).
– Or which is providing any services.
– Or which is engaged in sale/purchase/construction of the immovable property.
– Or any other company whose principal business is receiving deposits under any scheme or arrangement in one lump-sum or in installments by way of contributions or in any other manner.

Section 45-1A of the RBI Act, 1934, makes it mandatory for all NBFCs to be registered with the Reserve Bank of India for the purpose of commencing any business or carrying on the businesses defined in clause (a) of Section 45-1 of the Act of 1934. However, this comes with an exception.
Certain categories of NBFCs like Venture Capital fund, Chit funds, Housing Finance etc. are regulated by regulators like SEBI, State Governments, National Housing Banks etc. To eliminate the possibility of dual regulation, these categories of NBFCs are spared from the requirement of registering with RBI.

The NBFCs registered with RBI have been classified as:
– Asset Finance Company (AFC)
– Investment Company (IC)
– Loan Company (LC)
– Residuary Non-Banking Companies

Only NBFC’s which have special authorization from the Bank and have an investment-grade are allowed to accept and hold deposits up to 1.5 times of its Net Owned Funds. However, all NBFC’s are barred from accepting demand deposits that include savings and current account deposits.

Currently, the maximum interest rate at which an NBFC can accept deposits is 11%. Further, the interest can be compounded or paid at rests longer than monthly rests.

A time period has been provided regarding the maximum and minimum time limit for which NBFC can accept the deposit –
Minimum time period: 12 months
Maximum time period: 60 months

It is the discretion of deposit accepting NBFC that it can pay back the amount of deposit before its maturity period but such deposit cannot be paid back before 3 months from the date of its acceptance. If the deposit is paid back after 3 months but before 6 months of its acceptance no interest will be paid. But if the deposit is paid back after 6 months of its acceptance but before the maturity period then interest shall be paid but that interest shall be lower than 2% of the contracted rate.

Certain guidelines have been laid down by RBI that has to be complied with. Submission of Income Tax Returns, ROC Returns, Statutory Audit, Tax Audit, various NBS returns for Deposit accepting and non-deposit accepting companies are some of the most important statutory compliances.

The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.

The Reserve Bank’s overarching concern while supervising any financial entity is protection of depositors’ interest. Depositors place deposit with any entity on trust unlike an investor who invests in the shares of a company with the intention of sharing the risk as well as return with the promoters. Protection of depositors’ interest thus is supreme in financial regulation.

If an NBFC registered with the RBI fails to return depositor’s money, the depositor can complain against the NBFC to the nearest Regional Office of the Reserve Bank. Depositors can also approach the Company Law Board or a civil court or Consumer Disputes Redressal Forums for recovery of their money. Affected persons can complain to the State Police authorities/Economic Offences Wing of the State Police as well. Some States have passed the Protection of Interest of Depositors (in Financial Establishments) Act, which empowers the States to attach the assets of such entities and distribute the proceeds thereof to the depositors.

No. NBFCs which are exempted from the provisions of the RBI Act or its directions cannot hold/accept deposits from the public as not holding or accepting deposits is one of the conditions for granting them such exemption. HFCs can however accept deposits to the extent allowed by NHB.

RBI has issued detailed regulations on deposit acceptance, including the quantum of deposits that can be collected, mandatory credit rating, mandatory maintenance of liquid assets for repayment to depositors, manner of maintenance of its deposit books, prudential regulations including maintenance of adequate capital, limitations on exposures, and inspection of the NBFCs, besides others, to ensure that the NBFCs function on sound lines.

A 50/50 test means that a firm’s financial assets constitute more than 50% of the total assets and income from financial assets constitute more than 50% of the gross income. A firm which fulfils both these criteria will be registered with the RBI as an NBFC. If, after registration, a firm violates the 50/50 criteria then RBI has the authority to penalize the NBFC.

Compliance India can process NBFC Company registration process in 10-15 working days. The time taken for incorporation will depend on submission of relevant documents by the client and speed of Government Approvals. To ensure speedy incorporation, please choose a unique name for your Company and ensure you have all the required documents prior to starting the incorporation process.