Non-Banking Financial companies

C.7 Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies (NBFCs) are entities engaged in financial activities such as loans, investment, and insurance, but are not classified as banks.
They are regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934 and the Companies Act, 1956.
NBFCs are not part of the payment and settlement system and do not accept demand deposits.

Providing Credit: Offering loans and advances to individuals, businesses, and institutions.
Investment Activities: Investing in shares, debentures, bonds, and other securities.
Insurance and Pension Services: Some NBFCs offer insurance and pension services.
Portfolio Management Services (PMS): Managing investment portfolios for clients.
Leasing and Hire Purchase: Providing leasing and hire purchase services for equipment and machinery.

Credit Rating: Some NBFCs engage in credit rating of borrowers.
Financial Advisory Services: Offering advisory services on financial planning and investment.
Money Transfer Services: Facilitating money transfers and remittances.

Feature	Description
Regulation	Regulated by RBI under the Reserve Bank of India Act, 1934
Lending Activities	Engage in lending but are not part of the banking system
No Deposit Acceptance	Cannot accept demand deposits or issue cheques
Capital Requirements	Must maintain minimum capital as per RBI guidelines
Liquidity Management	Operate with limited liquidity compared to banks

Type	Description
Asset Finance Company (AFC)	Provides loans for purchasing assets like vehicles, machinery, etc.
Investment Company (IC)	Engages in investment in securities and shares
Loan Company (LC)	Primarily engaged in lending activities
Insurance Company (IC)	Provides insurance and pension services
Recovery Company (RC)	Specializes in recovery of bad debts
Micro Finance Institution (MFI)	Offers small loans to low-income individuals
Systemically Important NBFC (SINFC)	NBFCs with significant systemic risk and are subject to enhanced regulation

RBI Regulation: All NBFCs are registered with RBI and must comply with its regulations.
Registration: NBFCs must register with RBI under Section 4A of the RBI Act, 1934.
Minimum Capital Requirement: Varies based on the type of NBFC (e.g., Rs. 2 crore for loan companies).
Capital Adequacy Ratio (CAR): NBFCs must maintain a minimum CAR of 15%.
Liquidity Coverage Ratio (LCR): Applies to systemically important NBFCs to ensure liquidity.
KYC and AML Compliance: NBFCs must follow Know Your Customer (KYC) and Anti-Money Laundering (AML) norms.

1993: RBI introduced the concept of NBFCs under the Reserve Bank of India Act, 1934.
2002: RBI issued guidelines on capital adequacy for NBFCs.
2014: RBI introduced the Liquidity Coverage Ratio (LCR) for systemically important NBFCs.
2019: RBI introduced the Systemically Important NBFC (SINFC) framework.
2020: RBI issued guidelines on Digital Lending and Data Privacy for NBFCs.

NBFCs are not part of the payment and settlement system.
Minimum capital requirement varies by type (e.g., Rs. 2 crore for loan companies).
Systemically Important NBFCs (SINFCs) are subject to enhanced regulatory scrutiny.
KYC and AML norms apply to all NBFCs.
RBI regulates all NBFCs under the Reserve Bank of India Act, 1934.
NBFCs cannot issue cheques or accept demand deposits.