FAQs on NBFC

People often have few common questions about NBFCs, therefore here we are answering some Frequently Asked Questions (FAQs).

Q.1. Define a Non-Banking Financial Company (NBFC)?

Non-Banking Financial Companies are defined in the following pointers:

• A company which is registered under the Companies Act 2013;
• Involved in the business of insurance business, loans/advances, hire-purchase, acquisition of securities, leasing, chit business;
• Does not include an institution indulged in industrial activity, agricultural or sale/ purchase of any goods (other than securities) or sale/purchase/construction of immovable property;
• Includes a company receiving deposits under any scheme/arrangement, in lump sum/installments by contributions or any other manner. Such a company is classified as Residuary NBFC.

Q.2. What does "owned fund" and "net owned fund" mean?

Owned Fund:

• Total paid-up equity capital, preference shares (compulsorily convertible into equity), free reserves, share premium account balance, and capital reserves (surplus arising out of sale proceeds of the asset), 
• Exclude reserves formed by the revaluation of an asset, after deducting accumulated balance of loss, deferred revenue expenditure, and other intangible assets. 

Net Owned Fund:

• Owned funds minus the investments of such company in shares of its subsidiaries, same group companies, and all other NBFCs and the BV of debentures, bonds, outstanding loans, and advances including lease finance and hire purchase made to and deposits with subsidiaries and same group companies, to the extent it is more than 10% of the owned fund.

Q.3. What is the meaning of “Public Funds”?

• Public funds differ from public deposits. 
• Public funds include inter-corporate/public deposits, bank finances, and all funds received whether directly or indirectly from outside sources such as funds raised by the issue of Commercial Papers, debentures, etc. 

Note: CICs/CICs-ND-SI are not permitted to accept public deposits.

Q.4. What does indulging in financial activity as “principal business” mean?

Indulging in financial activity as “principal business” requires a company to fulfill both the criteria as mentioned below: 

• When the company's total assets of the company comprise more than 50% as financial assets, and
• Gross income comprises more than 50% of income earned from financial assets.

Q.5. Is every NBFC required to get itself registered with RBI?

Yes, every NBFC must maintain Net Owned Funds of rupees two crores and get itself registered with RBI in order to commence its business operations as an NBFC. 

Q. 6. How does a company become eligible to obtain an NBFC certificate from RBI?

The company must comply with the following criteria:

• Must be a company registered as per the Companies Act, 2013
• Must maintain a minimum net owned fund of rupees two crores.

Q.7. How do I obtain an NBFC certificate from RBI?

• The company must file an online application by selecting the “CLICK” option for Company Registration from the login page of the COSMOS Application.
• The application form will be displayed in excel format. The applicant company can download the appropriate application form and fill in all the necessary details.
• After putting in all the necessary details, upload such an application form.
• After successful submission of the online form, a Reference Number will be generated.
• Further, the applicant company must submit a physical copy of the application along with all the necessary documents to the Regional Office of RBI.
• Status of the application can be checked through online mode with the help of Reference Number

Q.8. Deposit-taking NBFCs are rated by whom in regards to acceptance of deposit?

NBFCs are required to get a rating from any of the following: 

• CRISIL, 
• CARE, 
• ICRA, 
• FITCH Ratings India Pvt. Ltd, 
• Brickwork Ratings India Pvt. Ltd. and 
• SMERA.

Q.9. Are all financial companies regulated by RBI?

No, not all financial companies are regulated by RBI. Such companies are:

• Housing Finance Companies, which are covered under the regulation of the National Housing Bank, 
• Merchant Bankers/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are covered under the regulation of SEBI, and 
• Insurance companies are covered under IRDA regulations, 
• Chit Fund Companies are covered under the regulation of respective State Governments and 
• Nidhi Companies are regulated by MCA. 

Q.10. What action does RBI take on companies/individuals who make a false claim of being regulated by the Reserve Bank?

Such companies/individuals shall be liable for penal action as per the Indian Penal Code. Information about such an incident shall be provided to the nearest office of the RBI and the Police.