NBFC stands for Non-Banking Financial Company and is highly involved in financial activities such as secured & unsecured loans, marketplace lending, leasing, hire-purchase, insurance business, investments, information service providers, or other business purposes specified under Section 45-IA Of The RBI Act, 1934 & Companies Act, 2013. NBFCs are different from Commercial & Cooperative Banks and they don’t require a banking license but must follow the rules & regulations given by the Reserve Bank of India (RBI) from time to time.
The working and operations of NBFCs are regulated by the Reserve Bank of India within the framework of the Reserve Bank of India Act, 1934 (Chapter III-B) and the directions issued by it. NBFCs cannot outsource core management functions like internal audit, management of investment portfolio, strategic and compliance functions for knowing your customer (KYC) norms and sanction of loans. The staff of service providers should have access to customer information only up to an extent that is required to perform the outsourced function. Boards of NBFCs should approve a code of conduct for direct sales and recovery agents. For debt collection, NBFCs and their outsourced agents should not resort to intimidation or harassment of any kind. All NBFCs’ have been directed to set up a grievance redressal machinery, which will also deal with the issues relating to services provided by the outsourced agency.
Principal Business Requirement For NBFC
The principal business of NBFCs is to provide financial services which involve lending, investments in shares, stocks, bonds, debentures, leasing, hire-purchase, P2P Market Place lending business, financial information service provider (NBFC-AA) insurance business, chit business, or involved in the receiving of deposits under any scheme or arrangement. Besides this, the following below-mentioned conditions must be fulfilled to continue NBFC License:
- Total Assets comprise more than 50% of financial assets
- More than 50% of the gross income should be generated from financial assets
Restricted Activities
- Agricultural Activity
- Industrial Activity
- Sale or Purchase of Goods and Services
- Sale or Purchase of construction of an immovable property
Another way of starting a finance business is to take over an existing NBFC however it is always advisable to go for fresh NBFC registration.
Difference Between NBFC and Banks
| Comparison | NBFCs | Banks |
| Meaning | NBFCs provide banking services to people without holding a Bank license | The bank is a government-authorized financial intermediary which aims at providing banking services to the public. |
| Regulated Authority | Companies Act 2013 & RBI Act, 1934 | Banking Regulation Act 1949 |
| Demand Deposit | They cannot accept demand deposits | They can accept demand deposits |
| Foreign Investment | In the case of NBFCs, foreign investment is 100% allowed | Foreign investment is allowed up to 74% for private sector banks |
| Payment & Settlement System | Not a part of the system | An integral part of the system |
| Maintenance Of Reserve Ratios | Not required in the case of NBFCs | Banks have to maintain reserve ratios |
| Deposit Insurance Facility | Not Available | Available |
| Credit Creation | They do not create credit. | Banks create credit |
| Transaction Services | NBFCs cannot provide transactions services | Banks provide transaction services |