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NBFC Salient Features. By : CA Anil Mathur at Jaipur Branch on Saturday, 22 nd June, 2013. I. Prominent features & Basic characteristics. What is NBFC:- A company registered under Companies Act, 1956 ; and

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nbfc salient features
NBFCSalient Features

By : CA Anil Mathur


Jaipur Branch


Saturday, 22nd June, 2013

i prominent features basic characteristics
I. Prominent features & Basic characteristics

What is NBFC:-

  • A company registered under Companies Act, 1956 ; and
  • Engaged in business of loan / advances, acquisition of shares / stock/ bond, debentures, security issued by Govt. or local authorities or other securities of marketable value, leasing , hire purchase, insurance business , chit fund
  • Does not include – any institution whose principal business is agricultural , industrial activity , sales & purchases of goods, or sales/ purchases/ construction of immovable property
  • A non banking institution which is a company & whose principal business is to receive deposit or lending is also NBFC (residuary )
registration requirement
Registration Requirement
  • Mandatory to be registered with RBI in terms of sec. 45-IA of the RBI Act to commence /carry on business
  • following categories of NBFC’s exempted to obviate dual registration
    • Venture capital fund/ merchant banking / stock brokering companies registered with SEBI
    • Insurance Companies registered with IRDA
    • Nidhi Companies as notified u/s 602 A of Com. Act.
    • Chit companies under Chit Fund Act.
    • Housing Finance Companies regulated by NHB
    • Stock Exchange or mutual benefit companies
requirement procedure of registration
Requirement / procedure of registration
  • It should be a company incorporated under Companies Act and intend to do business of NBFC as defined u/s 45- A (a) of the RBI Act.
  • Should have minimum NOF of 200 lacs (w.e.f. 21.04.1999) except as otherwise provided.
  • Application for registration to be made online at RBI site and will be allotted reference number
  • Hardcopy alongwith supporting documents to be filed to the concerned regional office of RBI
  • Certificate of registration (CoR) will be granted on satisfaction of conditions
different categories of nbfc
Different Categories of NBFC
  • Basis of categorization is acceptance of deposit / non- acceptance of deposit
  • Further classification depend upon size and kind of activity
  • Accordingly different types of NBFC ‘s based on latest notification of 08.03.2013 are as under :-

1. Asset Finance Company (AFC)

2. Investment Company (IC)

3. Loan Company (LC)

4. Infrastructure Finance Company (IFC)

5. Systemically Important Core Investment Company


6. Infrastructure Debt Fund - NBFC( IDF-NBFC)

7. NBFC- Micro Finance Institutions ( NBFC MFI)

8. NBFC – Factors

investment company ic
Investment Company (IC)
  • It means a company which is FI carrying on as its principal business the acquisition of securities

Loan Company

  • It means a company which is FI carrying on its principal business of providing of finance
  • Financing may be by making loans / advances or otherwise for any activity other than its own
  • It does not include AFC
nbfc micro finance institutions nbfc mfi
NBFC- Micro Finance Institutions ( NBFC MFI)
  • It can not take deposit
  • Not less than 85 % of its assets shall be in the nature of qualifying assets satisfying following criteria :-
    • loan disbursed to a borrower with house hold annual income not exceeding
        • Rural by Rs. 60000
        • Urban / semi –urban by Rs. 120000
    • Loan not to exceed by 35000 in first cycle & 50000 in subsequent cycles
    • Total loan ceiling Rs. 50000/-
nbfc mfi continues
( NBFC MFI) Continues……
  • Tenure of loan not less than 2 years for loan in excess of Rs. 15000/-. Prepayment without penalty allowed.
  • No collateral securities required
  • Aggregate amount of loan for income generation not less than 75 % of total loans given by MFI
  • Repayment on weekly / fortnightly / monthly installments at choice of borrower
nbfc factors
NBFC – Factors
  • Non deposit taking NBFC
  • Principal business of NBFC is factoring
  • Financial assets should constitute at least 75 % of total assets and income from this business not less than 75 % of gross income
  • Minimum NOF is 5 crore
  • Should be granted a certificate of registration by RBI under sec. 3 of Factoring Regulation Act, 2011
residuary non banking company rnbc
Residuary Non-Banking Company (RNBC)
  • A company which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company.
  • These companies are required to maintain investments as per directions of RBI, in addition to liquid assets.
  • The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions.
  • Prudential Norms Directions are applicable to these companies also.
rnbc continues
RNBC continues……….
  • There is no ceiling on raising of deposits by RNBCs but the amounts deposited and investments made by the company are not less than the aggregate amount of liabilities to the depositors.
  • Required to invest in a portfolio comprising of highly liquid and secure instruments viz. Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual Funds, etc to the extent of 100 per cent of their deposit liability.
deposit public deposits
Deposit / Public deposits
  • Defined u/s 45 I (bb) of the RBI Act, 1934 .
  • Deposit includes receipts of money by way of deposit / loan / other forms but does not includes :-
    • Share capital / partners capital
    • Amount received from bank including co- operative banks / SFC/ IDBI/ any other institutions specified by the RBI
    • Amount received in ordinary course of business by way of security deposits, dealership deposit, earnest money, advance against orders for goods/ properties / services
    • Amount received by a registered money lender other than a body corporate
    • Amount received by way of subscriptions in respect of a Chit
further exclusion as per para 2 1 xii of directions
Further exclusion as per para 2(1)(xii) of Directions :-
  • Amount received / guaranteed by Central/ State Govt. or received from local authority / foreign govt./ foreign authority / citizen/ person
  • Amount received from FI
  • Amount received as ICD
  • Application money received on shares/ deb. pending allotment and call in advance
  • Received from shareholders by Private Ltd.
  • Amount received from directors / relatives of the directors of NBFC
  • Received on bonds/ deb. Secured by mortgage of immovable properties / assets of the company
  • Unsecured loans by promoters
  • Amount received from mutual funds
  • Amount received as Hybrid / subordinate debt
  • Amount from issue of Commercial paper
  • Amount received by (CIC-ND- SI) by issue of Perpetual Debt Instrument
  • Amount raised by issue of Infrastructure Bond by IFC
deposits from nri
Deposits from NRI
  • W.e.f. 24.04.2004 NBFC’s can not accept deposits from NRI
  • Exception is to deposit by debit to NRO account of a NRI provided such account does not represent inward remittance / transfer from NRE / FCNR (B) account
  • Existing deposit however can be renewed
requirement of filling of returns
Requirement of filling of returns

I. NBFC’s accepting public deposits should furnish following returns :-

  • Audited financial statement with auditors report and report of Board of Directors
  • Statutory Qtly. Return on deposits- NBS 1
  • Auditor’s certificate that the company is in position to repay deposit as and when claims arise
  • Qtly. Return on prudential norms – NBS 2 (on line submission w.e.f. 30.06.2011)
  • Qtly. Return on liquid assets – NBS 3
  • Annual Return of critical parameters by a rejected company holding public deposits – NBS 4
  • Half - yearly ALM returns by companies having public deposits of Rs. 20 crore or asset size of Rs. 100 crore
  • Monthly return on exposure of capital market by NBFC with total assets of Rs. 100 crores & above- NBS- 6
  • A copy of the credit rating obtained once a year
requirement of filling of returns1
Requirement of filling of returns
  • NBFC’s having assets of Rs. 100 crore & above not accepting / holding public deposits should file :-
  • Qtly return of capital funds , risk weighted assets , risk asset ratio etc. - NBS 7
  • Monthly return on important financial parameters of the company
  • ALM returns
  • Statement of short term dynamic liquidity monthly – NBS –ALM1
  • Statement of structural liquidity on half yearly - NBS-ALM 2
  • Statement of interest rate sensitivity half yearly - NBS- ALM 3
requirement of liquid assets for deposit taking companies
Requirement of Liquid Assets for deposit taking companies
  • Minimum requirement is 15 % of public deposits outstanding on last working day of the second preceding quarter
  • Out of this 15 % required to invest not less than 10 % in approved securities (in dematerialised form in Govt. securities/ bonds ) & rest 5 % in unencumbered Term deposits with scheduled banks
  • Securities in dematerialised form should be kept at Registered office of the company and at other places only with the special permission of RBI in writing
  • Liquid assets are to be utilised for repayment of claims of depositors
ii acceptance of public deposits
II. Acceptance of Public Deposits

Public deposits defined in para 2(1)(xii) of NBFC Acceptance of Public Deposits (Reserve bank) Directions 1998, as exclusive definition

  • All NBFC’a are not allowed to accept public deposits
  • Only those NBFC’s whom RBI has given a specific authorisation are allowed to accept/ hold public deposit
  • Maximum rate of interest 12.5 %
  • It can be for a period from 12 months to 60 months
  • Can not accept deposits repayable on demand

Ceiling on acceptance of public deposits An NBFC maintaining required NOF/ Capital to Risk Assets Ratio (CRAR) and complying with the prudential norms can accept deposit as follows ;-

NBFC with NOF 200 lacs

  • AFC with CRAR of 15 % without Rating = 1.5 times of NOF or Rs. 10 crores whichever is less
  • AFC with CRAR of 15 % with minimum investment grade CR = 4 times of NOF
  • LC/IC with CRAR of 15 % & having minimum grade credit rating =1.5 times of NOF

NBFC with NOF less than 200 lacs

  • 1. AFC with CRAR of 15 % without Rating = Equal to NOF
  • AFC with CRAR of 15 % with minimum investment grade CR = 1.5 times of NOF
  • LC/IC with CRAR of 15 % & having minimum grade credit rating = Equal to NOF
necessity of rating
Necessity of Rating
  • An unrated NBFC except certain AFC cannot accept public deposit
  • NBFC can get registered by any of following rating agencies :-
      • CRISIL
      • ICRA
      • CARE
      • FITCH Ratings India Pvt. Ltd.
      • Brickwork Ratings India Pvt. Ltd.
    • In case of downgrading of rating , NBFC can not accept deposit . It has to report position within 15 days to RBI and within 3 years excess deposit be brought to NIL

Minimum Credit Rating

  • Credit rating to be obtained at least once a year & copy filed along with return on prudential norms with RBI
  • Any down or upgrading to be reported within 15 days to RBI
  • Separate provision for AFC

Rate of interest/ brokerage

a) Interest

  • Rate of interest on acceptance/renewal of public deposit w.e.f. 24.04.07 can not exceed 12.5% per annum.
  • Interest can be paid/compounded not shorter than monthly rests
  • Restriction from NRI w.e.f. 18.09.2003 for non acceptance/invite/renew repatriable deposit or rate exceeding by the rate specified by RBI for scheduled bank
  • Period of above deposit 1-3 years only

b) Brokerage

Not to exceed 2% of deposit collected w.e.f. 31.01.1998 and reimbursement of expenses upto 0.5% of such deposit subject to production of bills.



  • Written application to be made by depositor in form to be supplied by company containing particulars as specified in NBFC & miscellaneous NBFC( Advertisement) Rules, 1997 made u/s 88A of Companies Act. 1956.
  • Advertisement & statement in lieu of advertisement shall also comply with above guidelines
  • Additional conditions in form of band in case NBFC displays advertisement in electronic media.
  • Minimum lock in period of deposit in 3 months. However, repayment in case of death can be made to legal heir within lock in period.
  • In case of premature repayment of public deposit – no interest to be paid for period upto 6 months and 2% lower interest after 6 months
iii law relating to residuary non banking companies reserve bank directions 1987
III. Law Relating to Residuary Non Banking Companies (Reserve Bank) Directions 1987
  • These directions apply to every Residuary NBFC i.e. a NB institution being company which receive any deposit under any scheme or arrangement by whatever name called in one lump sum or in installments by way of contribution/subscription/sale of unit or certificate and which according to definition contained in NBFC (Acceptance of public deposit (Reserve Bank) Directions -1998 or miscellaneous NB FC (RB) directions is not
  • An equipment leasing company
  • A hire purchase finance company
  • A Housing finance company
  • An Insurance company
  • An investment company
  • A loan company
  • A mutual benefit financial company
  • A miscellaneous NBFC and
  • A mutual benefit company
acceptance of deposit
Acceptance of Deposit
  • W.e.f. 12.04.1993 no RNBFC shall receive any deposit repayable on demand/notice or renew for a period of less than 12 months or more than 84 months.
  • No RNBFC can change any processing or maintenance changes – However a sum not excluding Rs. 80 be charged towards cost of brochure, application or expenses of yearly subscription of deposit is not less than 500. In other cases it will be reduced on product basis.
  • Rate of Return
  • On and from 01.04.2003 ,rate of return shall not be less than 5% p.a. on lump sum or monthly or longer deposit and 3.5% on daily deposit scheme.
  • Lock in period
  • Minimum lock in period shall be 12 months from date of acceptance of deposit
  • Can be waived in case of death of deposit holder.
  • Premature Repayment
  • Can be made after12 months and before date of maturity
  • Interest payable shall be lower by 2 % on applicable rate specified for the period of deposit and if no rate specified for that period than 3 % lower than minimum rate at which deposit was accepted by the company
accetance renewal of deposit from nri
Accetance / renewal of Deposit from NRI
  • W.e.f. 19.2.2003, no RNBC shall invite , accept, renew repatriable deposit from NRI at the rate exceeding the rate specified by RBI for such deposit with scheduled banks
  • Period of deposit shall be not less than 1 year and not more than 3 years
iv miscellaneous non banking companies reserve bank directions 1977
IV. Miscellaneous Non Banking Companies(Reserve Bank) Directions, 1977
  • These direction shall apply w.e.f. 01.07.1977 to every FI which is a company and which carries on in any place in the state of J &K any of the business specified in sub para 1 to 4 of para 2 and to every other FI, which is a company and which carries on in any place in India any of the business specified in sub para 2 to 4 of para 2
  • Deposit may be accepted in joint name not exceeding three without any clause like EOS, AOR
acceptance of deposit1
Acceptance of deposit
  • W.e.f. 01.07.1977, no MNBFC shall renew any deposit repayable on demand/notice for a period less than 6 months & more than 36 months, or
  • Receive or renew any deposit from a shareholder if amount of such deposit already received and outstanding as on date of acceptance/renewal exceeds 15% of its NOF
  • Receive or renew any other deposit including NCD/NCB
  • Any deposit accepted from any person other shareholder to be repaid on maturity and not eligible for renewal.
ceiling on rate of interest brokerage
Ceiling on rate of interest/brokerage
  • On & from 24.04.2007, no MNBC shall invite/accept renew deposit on a rate of interest exceeding 12.5% p.a.
  • Interest may be paid/compounded on monthly or larger rest.
  • Brokerage depends upon period of deposit
    • upto 1 year - 1% of deposit
    • 1-2 year - 1.25% of deposit
    • exceeding 2 year - 1.50% of deposit
renewal of deposit before maturity
Renewal of deposit before maturity

A shareholder is permit to renew deposit before

maturity for availing higher interest rate provided :-

  • it is renew for a period longer than the original contract and
  • interest on expired portion is reduced by 1% on the original rate
non applicability of certain directions
Non Applicability of certain directions
  • Nothing contained in the directions shall apply to FI of type referred to in para 2 of the directions
  • Nothing contained in para 5 to 9B and 13 shall apply to types of deposits received by MNBC as referred to in sub para (i) to (ix) of para 4.
v foreign direct investment in nbfc
V. Foreign Direct Investment in NBFC
  • FDI IN NBFC is permitted under automatic route upto 100% in certain activity as specified in circular.
  • Some of activities covered under automatic route are as under :-

- Merchant Banking

- Underwriting

- P.M.S.

- Financial Consultancy

- Stock Broking

- Asset Management

- Venture Capital

- Credit Rating Agency

- Housing Finance

- Credit card business

- Leasing & Finance

- Money changing


Conditions to be complied for FDI in terms of minimum capitalization norms

Foreign Capitalupfront amount

upto 51% 0.5 Mn US$

51 to 75% 5.00 Mn. US$

More than 75% 50 Mn US$

(of which 7.5 Mn. Upfront & balance in 24 months)

  • 100% foreign owned NBFC and with Min. capitalization of 50 Mn. US$ can set up step down subsidiary for specific NBFC activity without restriction on no. of subsidiary & without additional capital.
  • Joint venture operating NBFC that have 75% or less than 75% FDI can also set up subsidiary for undertaking other NBFC activities subject to some condition

Non Fund based activities

    • US $ 0.5 Mn. to be brought up front for all permitted activity irrespective of level of FDI
    • No subsidiary allowed.
    • Following activity classified as non -fund based activity
      • Investment advisory service
      • Financial consultancy
      • Forex broking
      • Money changing business
      • Credit rating agency
    • This will be subject to compliance with RBI guide lines.
vi bank finance to nbfc
VI. Bank finance to NBFC
  • Governed by master circular dated 01.07.2012 and its amendment
  • Applies to all scheduled commercial bank except RRBs
  • In terms of section 45-1A, all NBFC have to mandatory register with RBI from January 1997.
  • Although credit matters of banks have been deregulated by RBI, but in view of sensitively of matter of certain activity of NBFC, restriction have been imposed.
bank finance to nbfc registered with rbi
Bank Finance to NBFC registered with RBI
  • Ceiling on credit linked to NOF withdrawn for NBFC engaged in Asset Finance, Loan factoring & investment activities
  • Accordingly bank may extend need based WC and TL to NBFC engaged infrastructure financing, equipment leasing, hire purchase, loan factoring & investment activities. Second hand assets may also be financed
  • share & debenture can not be accepted as collateral security
prudential ceiling for exposure of banks
Prudential ceiling for exposure of banks
  • These have been amended as on 18.05.2012
  • The exposure of a bank to a single NBFC/AFC which is not predominantly engaged in lending against goods jewellery should not exceed 10% / 15% respectively of the bank capital funds as per its last audited balance sheet.
  • The limit can be increased to 15% / 20% of funds when lent by NBFC to infrastructure sector.
  • Exposure to NBFC-IFC should not exceed 15% / 20% of capital fund or 20% as case may be
  • Bank may fix internal limit for aggregate exposure to NBFC sector.

Exposure to single NBFC lending against collateral of gold jewellery (50% or more loan) should not exceed 7.5 % of banks capital fund

  • Can be extended by 5% if finance is to infrastructure sector.
  • Excess exposure than above limit as on 18.05.2012 is to be reduced by 17.11.2012
  • Bank shall not invest in zero coupon issued by NBFC under issuer NBFC build up sinking fund for interest and keep it invested in liquid investment Govt./ Govt. Security.
  • Bank may invest in NCD of NBFC subject to prudential guidelines.
vii nbfc s auditors report reserve bank directions 2008
VII. NBFC’s Auditors Report (Reserve Bank) Directions 2008
  • Issued by notifications dated 18.09.2008
  • Applies to every auditor of NBFC as defined in section 45 I (f) of RBI Act 1934
  • In addition to report u/s 227 of the Companies Act. 1956 on the accounts of a NBFC examined by him, the Auditor shall also make a separate report to the Board of Directors of the Company on the matters specified in paragraphs 3 and 4 of these directions
para 3 matters to be included in the auditor s report
Para 3. Matters to be included in the auditor’s report

Auditor’s report shall include a statement on the following matters


I. Whether the company is engaged in the business of NBFI and whether it has obtained a CoR from RBI

II. In the case of a company holding CoR issued by the RBI, whether that company is entitled to continue to hold such CoR in terms of its asset / income pattern as on March 31,…

III. For classification of NBFCs as asset Finance Company (AFC) whether the NBFC has been correctly classified as AFC

iv. For NBFC-MFI whether the NBFC has been correctly classified as NBFC –MFI as defined in the said directions with reference to the business carried on by it during the applicable F. Y.

para 3 continues
Para 3. Continues…..


Apart from (A) above , following matters to be further stated :-

(i) whether the public deposits accepted by the company together with other borrowings viz..,

(a) from public by issue of unsecured non- convertible debentures/bonds

(b) from its share holders by a public limited company

(c) any other type of deposit which has not been excluded from the definition of “public deposit”

are within the limits admissible to the company

para 3 continues1
Para 3. Continues…..

(ii) Whether excess deposits are regularised in the prescribed manner

(iii) Whether the NBFC is accepting Public Deposits without minimum investment grade credit rating from an approved credit rating agency.

  • whether the credit rating for each of fixed deposits schemes assigned by the Credit Rating Agency
      • is in force and
      • whether the aggregate amount of deposit outstanding as at any point during the year has exceeded the limit specified by the Agency.
para 3 continues2
Para 3. Continues…..

(v) Whether compliance of Notification No. DNBS.199/CGM(PK)-2008 dated June 17, 2008- for NBFC having less than Rs. 200 lakh NOF who were required to freeze their public deposits at the existing level and required to bring down these deposits to the level of revised ceiling has been made .

(vi) Whether the company has defaulted in paying to its depositors the interest / principal amount of the deposits after they are due.

para 3 continues3
Para 3. Continues…..

(vii) whether the company has complied with the specified prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts and concentration of credit/investment norms as per Prudential Norms Directions (as applicable to Deposit accepting/holding NBFCs).

(viii) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank has been correctly determined and whether such ratio is in compliance with minimum Capital to Risk Asset Ratio prescribed for Deposit accepting / holding NBFCs

para 3 continues4
Para 3. Continues…..

(ix) whether the company has complied with prescribed liquidity requirement and kept the approved securities with a designated bank ( now the securities are to be held in dematerialized form.

(x) Whether the company has furnished to RBI within the stipulated period the return on deposits in NBS-1 statement ( ref. Public Deposit Directions)

(xi) Whether the company has furnished to RBI within the stipulated period the half-yearly return on prudential norms( Prudential Norms Directions)

para 3 continues5
Para 3. Continues…..

(xii) Whether the company has complied with the directions in respect of opening and closing of branches.


In addition to aspects in (A)

(i) whether the Board of Directors has passed a resolution for the non-acceptance of any public deposits.

(ii) whether the company has accepted any public deposits during the relevant period/ year

(iii) whether the company has complied with the applicable prudential norms

para 3 continues6
Para 3. Continues…..
  • In respect of Systemically Important Non - deposit taking NBFCs ( NBFC-ND-SI) :
  • Whether the capital adequacy ratio as disclosed in the return submitted to RBI in form NBS-7 has been correctly arrived at and was in compliance with the minimum CRAR prescribed by the Bank.
  • Whether the company has furnished to the Bank the annual statement of capital funds, risk assets/exposures and risk assets ratio (NBS-7) within the stipulated period.
para 3 continues7
Para 3. Continues…..

(D)in case of a NBFC which is not required to hold CoR subject to certain conditions, the auditor shall include a statement as to whether the company has obtained a specific advice from the RBI that it is not required to hold CoR from the Bank and whether the company is complying with the conditions stipulated as advised by the Bank.

para 4 reasons for unfavourable or qualified statements to be stated
Para 4. Reasons for unfavourable or qualified statements to be stated
  • Where in the auditor’s report, the statement regarding any of the items referred in paragraph 3 is unfavourable or qualified, the auditor’s report shall also state the reasons for such unfavourable or qualified statement..
  • Where the auditor is unable to express any opinion on any of the items, his report shall indicate such fact together with reasons therefor.
para 5 obligation of the auditor to submit exception report to rbi
Para 5. Obligation of the auditor to submit exception report to RBI

(I) It shall be the obligation of the auditor to make a report to RBI of unfavourable or qualified statements and/ or non-compliance to the concerned Regional office of DNBS in respect of statement in regard to any of the items referred to in paragraph 3 above or if the company has not complied with the provisions of Deposit Directions and Prudential Norms Directions to the extent applicable and provisions of Chapter III B of the RBI Act, 1934.

para 5 continues
Para 5 continues…..

(II) Exception Report should include only the contraventions of the provisions of RBI Act, 1934 and Directions, Guidelines, instructions referred to in sub-paragraph (I) and such report shall not contain any statement with respect to compliance of any of those provisions.