1.
Non Banking Finance
Companies (NBFCs)- MEANING
AND ITS CLASSIFICATION

2.
NBFC’s Versus Bank’s
BANKS NBFCS
Definition Banking is acceptance of
deposits withdraw able by
cheque or demand; NBFC
cannot accept demand deposits
NBFC are companies
carrying financial
business
Scope of
business
Scope of business of the bank
is limited by sec 16(1) of BR
Act.
There is no bar on NBFC
carrying activity other
then financial activity.
Major limitation
on Business
No non banking activity are
carried.
Cannot provide checking
facilities.
Foreign
investment
Up to 74% is allowed to private
sector bank
Up to 100% is allowed
Need for a
license
License norms are tightly
controlled and generally it is
perceived to be quite difficult to
get a license for a bank
It is comparatively much
easier to get a
registration as an NBFC.
Regulations Banking Regulation Act and Much lesser control over

3.
Categorization of Companies:
For the purpose of the new regulations, NBFCs have been
divided into three broad categories an indicated below:
(a) NBFCs accepting public deposits.
(b) NBFCs not accepting public deposits are engaged in loan,
investment, hire purchase finance and equipment leasing
activities.
(c) NBFCs not accepting public deposits and has acquired
shares/securities in their own group/ holding/subsidiary
companies of not less than 90 percent of their total assets
and are not trading in these shares/securities.
While NBFCs accepting public deposits will be subjected to all
the provisions of the Directors, those which do not accept
public deposits will be supervised in a limited manner.

4.
 If they are non-deposit taking, ND is
suffixed to their name ( NBFC-ND).
The NBFCs which have asset size of
Rs.100 Crore or more are known as
Systematically Important NBFC. They
have been classified so because they
can have bearing on financial stability
of the country. The Non-deposit
taking NBFCs are denoted as NBFC-
NDSI.

5.
 Asset Finance Company (AFC) : An AFC is a company
which is a financial institution carrying on as its principal
business the financing of physical assets supporting
productive/economic activity, such as automobiles,
tractors, lathe machines, generator sets, earth moving
and material handling equipments, moving on own power
and general purpose industrial machines.
 Investment Company (IC) : IC means any company
which is a financial institution carrying on as its principal
business the acquisition of securities, It is a company
whose main business is holding securities of other
companies purely for investment purposes. The
investment company invests money on behalf of its
shareholders who in turn share in the profits and losses

6.
 Loan Company (LC) : LC means any company which is
a financial institution carrying on as its principal business
the providing of finance whether by making loans or
advances or otherwise for any activity other than its own
but does not include an Asset Finance Company.
A loan is a type of debt. Like all debt instruments, a loan
entails the redistribution of financial assets over time,
between the lender and the borrower.

7.
 Infrastructure Finance Company (IFC) : IFC is a non-
banking finance company
a) which deploys at least 75 per cent of its total assets
in infrastructure loans,
b) has a minimum Net Owned Funds of Rs. 300 crore,
c) has a minimum credit rating of ‘A ‘or equivalent
d) and a CRAR(Capital to Risk (Weighted) Assets
Ratio) of 15%.
 Infrastructure Debt Fund: Non- Banking Financial
Company (IDF-NBFC) : IDF-NBFC is a company
registered as NBFC to facilitate the flow of long term
debt into infrastructure projects. IDF-NBFC raise
resources through issue of Rupee or Dollar denominated
bonds of minimum 5 year maturity. Only Infrastructure
Finanace Companies (IFC) can sponsor IDF-NBFCs.

8.
 Systemically Important Core Investment Company
(CIC-ND-SI) : CIC-ND-SI is an NBFC carrying on the business of
acquisition of shares and securities which satisfies the following
conditions:-
a. it holds not less than 90% of its Total Assets in the form of investment
in equity shares, preference shares, debt or loans in group
companies;
b. its investments in the equity shares (including instruments
compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue) in group companies
constitutes not less than 60% of its Total Assets;
c. it does not trade in its investments in shares, debt or loans in group
companies except through block sale for the purpose of dilution or
disinvestment;
d. it does not carry on any other financial activity referred to in Section
45I(c) and 45I(f) of the RBI act, 1934 except investment in bank
deposits, money market instruments, government securities, loans to
and investments in debt issuances of group companies or guarantees
issued on behalf of group companies.

9.
 Non-Banking Financial Company - Micro Finance
Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking
NBFC having not less than 85% of its assets in the nature of
qualifying assets which satisfy the following criteria:
a. loan disbursed by an NBFC-MFI to a borrower with a rural
household annual income not exceeding Rs. 60,000 or urban
and semi-urban household income not exceeding Rs.
1,20,000;
b. loan amount does not exceed Rs. 35,000 in the first cycle and
Rs. 50,000 in subsequent cycles;
c. total indebtedness of the borrower does not exceed Rs.
50,000;
d. tenure of the loan not to be less than 24 months for loan
amount in excess of Rs. 15,000 with prepayment without
penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not
less than 75 per cent of the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments
at the choice of the borrower

10.
 Mutual Benefit Finance Companies
(MBFC's), (NIDHI NOTIFIED)
Nidhis or Mutual Benefit Finance Companies
are one of the oldest forms of non-financial
companies. It is a company structure in which
the company's owners are also its clients.
 That is, the mutual company's profits are
distributed to its participating customers each
year in proportion to their individual
exposures to the company.
 Many insurance companies are structured as
mutual companies.

11.
 Some of the important objectives of Nidhis are to
enable the members to save money, to invest their
savings and to secure loans at favorable rates of
interest.
 They work on the principles of complete mutuality
of interest and are generally well-managed.
 The Government has granted certain concessions
under Section 620A of the Companies Act, 1956.
 Primarily regulated by Department of Company
Affairs (DCA) under the directions / guidelines
issued by them under Section 637 A of the
Companies Act, 1956.
 The Government of India constituted an Expert
Committee in March 2000 (Chairman: Shri
P.Sabanayagam)

12.
 Leasing Services :
A lease or tenancy is a contract that transfers the right to
possess specific property. Leasing service includes the
leasing of assets to other companies either on operating
lease or finance lease. An NBFC may obtain license to
commence leasing services subject to , they shall not hold,
deal or trade in real estate business and shall not fix the
period of lease for less than 3 years in the case of any
finance lease agreement except in case of computers and
other IT accessories
 Hire Purchase Services :
Hire purchase the legal term for a conditional sale contract
with an intention to finance consumers towards vehicles,
white goods etc. If a buyer cannot afford to pay the price as a
lump sum but can afford to pay a percentage as a deposit, the
contract allows the buyer to hire the goods for a monthly rent.
If the buyer defaults in paying the installments, the owner can
repossess the goods.