NBFCs or Non-banking financial company as it is commonly known as in India is the financial institution that provides the banking services without any bank licenses.
They are allowed to perform some banking activities but they do not require any pre-banking licenses for such activity.
The NBFCs in India runs under the companies act which came into place in 1956. Services provided by NBFCs includes investment, hire purchase, and chit funds.
Non-Banking Financial Company
There are different types of Non-banking Finance companies in India such as loan companies, asset finance companies, and investment companies.
The main purpose of the loan companies is to provide loans and advances. Asset finance companies provide the finance the assets of a company like machines, equipment, etc.
While the investment companies mainly deal in securities. There are certain guidelines that RBI has mandated for Non-Banking Financial Company in India.
Browse more Topics under Financial Banking Institutions In India
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- Financial Institutions for Agriculture
- Financial Institutions for Industries
- Financial Institutions for Specific Areas
- Financial Inclusion
- Financial Stability and Development Council
- Co-operative Marketing
Guidelines by RBI for Non-Banking Financial Company in India
Creating the Reserve
It is mandatory for NBFCs to have a reserve of more than 5% but less than 25%. This is the percentage of deposits outstanding on the last working day when the business closes of the second preceding quarter.
Also, it is specified by RBI, that the NBFCs have to invest a certain amount of reserves into approved securities.
These securities should not have value at a price more than the current market price.
NBFCs do not require banking licenses but they do need to obtain a registration certificate from RBI so as to carry their business. To obtain the certificate, earlier the minimum net owned fun which is NOF was Rs. 25 lakh.
But this was changed to a minimum of Rs. 2 crores from April 1999. This is done because of the strengthening of the financial sector and technology in this sector.
The NOF of Rs. 2 crores to be achieved say for 2018 should be done in the following manner. Rs. 1 crore should be achieved by March 2017 while Rs. 2 crores to be achieved March 2018.
Creating the Reserve Fund
We discussed the need for reserves for NBFCs mandated by the RBI earlier. For this, NBFCs will also need to create the reserve fund.
The NBFCs will have to create a reserve fund of an amount which is more than 20% of their net profit.
This amount should be created before any dividend is declared.
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Here are the regulations related to the acceptance of deposits by the NBFCs.
- Deposit periods
- Investments in liquid assets
- Ceiling on public deposits
- For NBFCs, the period of deposits is up to 60 months.
- PNBFCs are allowed to accept the deposits between 12 to 84 months.
- For MNBFCs, the deposits are to be done between 6 to 36 months.
Investments in Liquid Assets
NBFCs are allowed to invest in liquid assets up to 15% in public deposit liabilities.
This can also be done at the last working day on the second preceding quarter.
This 15% should include approved securities of more than 10% and deposits with scheduled commercial banks of less than 5%.
Ceiling on Public Deposits
For rated AFC that is asset finance companies, which are complying to all the prudential rules are allowed to accept deposits till four times of their NOF.
But in 2014, to limit these deposits, the amount has been reduced to 1.5 times of NOF.
For unrated AFC, an NOF of Rs. 25 lakhs and more is accepted when it complying with all the prudential rules and regulations.
Furthermore, the capital adequacy ratio should be more than 15%. Public deposits in such cases are allowed to be 1.5 times that of NOF or Rs. 10 crores.
Whichever is less among the two?
Practice Questions on Non-banking Financial Company
Q. In how many working days should the customer notify the bank regarding any suspicious transactions from his/her bank account to avoid any liability?
A. 1 day B. 2 days C. 3 days D. 4 days
Answer: C. 3 days
Q. NBFCs are regulated by
A. SBI B. SEBI C. Finance ministry D. RBI
Answer: D. RBI