Non-Banking Financial Companies: Notes | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
  
 
NON-BANKING 
FINANCIAL 
COMPANIES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Learn the definition of Non-Banking Financial Companies 
(NBFC) and their classification. 
? Comprehend the regulations governing NBFCs in India. 
? Familiarize with the requirements of the prudential accounting 
norms for NBFCs. 
 
CHAPTER 
9 
Page 2


 
LEARNING OUTCOMES 
  
 
NON-BANKING 
FINANCIAL 
COMPANIES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Learn the definition of Non-Banking Financial Companies 
(NBFC) and their classification. 
? Comprehend the regulations governing NBFCs in India. 
? Familiarize with the requirements of the prudential accounting 
norms for NBFCs. 
 
CHAPTER 
9 
 
 
9.2 
 
ADVANCED ACCOUNTING 
 
 
 
 1. INTRODUCTION 
Non-Banking Financial Companies (NBFC) play a crucial role in broadening access 
to financial services, enhancing competition and diversification of the financial 
sector. They are increasingly being recognized as complementary to the banking 
system, capable of absorbing shocks and spreading risks at times of financial 
distress. Simplified sanction procedures, orientation towards customers, attractive 
rates of return on deposits, flexibility and timeliness in meeting the credit needs of 
specified sectors (like equipment leasing and hire purchase), are some of the factors 
that enhanced the attractiveness of NBFCs. 
 2. DEFINITION OF NBFC 
A Non-Banking Financial Company (NBFC) (As per Reserve Bank of India (RBI) 
FAQ (Frequently Asked Questions) dated 10 January 2017) 
• is a company registered under the Companies Act, 1956 or 2013; 
• engaged in the business of loans and advances, acquisition of 
shares/stocks/bonds/debentures/securities issued by Government or local 
Definition of 
NBFC and  
classification
Distiction 
between 
NBFC and a 
Bank
Minimum Net 
Owned Fund and 
Liquid Asset 
Requirements
Income 
recognition 
norms
Asset 
classification ,  
provisioning 
and Asset 
liability 
Management 
Capital 
adequacy
 
Page 3


 
LEARNING OUTCOMES 
  
 
NON-BANKING 
FINANCIAL 
COMPANIES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Learn the definition of Non-Banking Financial Companies 
(NBFC) and their classification. 
? Comprehend the regulations governing NBFCs in India. 
? Familiarize with the requirements of the prudential accounting 
norms for NBFCs. 
 
CHAPTER 
9 
 
 
9.2 
 
ADVANCED ACCOUNTING 
 
 
 
 1. INTRODUCTION 
Non-Banking Financial Companies (NBFC) play a crucial role in broadening access 
to financial services, enhancing competition and diversification of the financial 
sector. They are increasingly being recognized as complementary to the banking 
system, capable of absorbing shocks and spreading risks at times of financial 
distress. Simplified sanction procedures, orientation towards customers, attractive 
rates of return on deposits, flexibility and timeliness in meeting the credit needs of 
specified sectors (like equipment leasing and hire purchase), are some of the factors 
that enhanced the attractiveness of NBFCs. 
 2. DEFINITION OF NBFC 
A Non-Banking Financial Company (NBFC) (As per Reserve Bank of India (RBI) 
FAQ (Frequently Asked Questions) dated 10 January 2017) 
• is a company registered under the Companies Act, 1956 or 2013; 
• engaged in the business of loans and advances, acquisition of 
shares/stocks/bonds/debentures/securities issued by Government or local 
Definition of 
NBFC and  
classification
Distiction 
between 
NBFC and a 
Bank
Minimum Net 
Owned Fund and 
Liquid Asset 
Requirements
Income 
recognition 
norms
Asset 
classification ,  
provisioning 
and Asset 
liability 
Management 
Capital 
adequacy
 
 
 
9.3 
 
NON-BANKING FINANCIAL COMPANIES 
authority or other marketable securities of like nature, leasing, hire-purchase, 
insurance business, chit business; 
• but does not include any institution whose principal business is that of 
agriculture activity, industrial activity, purchase or sale of any goods (other 
than securities) or providing any services and sale/purchase/construction of 
immovable property.  
A non-banking institution which is a company and has principal business of 
receiving deposits under any scheme or arrangement in one lump sum or in 
installments by way of contributions or in any other manner, is also a non-banking 
financial company (Residuary non-banking company). 
What does conducting financial activity as “principal business” mean?  
Financial activity as principal business is when a company’s financial assets 
constitute more than 50 per cent of the total assets and income from financial 
assets constitute more than 50 per cent of the gross income. A company which 
fulfils both these criteria will be registered as NBFC by RBI. The term 'principal 
business' is not defined by the Reserve Bank of India Act.  The Reserve Bank has 
defined it so as to ensure that only companies predominantly engaged in financial 
activity get registered with it and are regulated and supervised by it.  Hence if there 
are companies engaged in agricultural operations, industrial activity, purchase and 
sale of goods, providing services or purchase, sale or construction of immovable 
property as their principal business and are doing some financial business in a small 
way, they will not be regulated by the Reserve Bank. Interestingly, this test is 
popularly known as 50-50 test and is applied to determine whether or not a 
company is into financial business. 
 3. REGISTRATION  
In terms of Section 45-IA of the RBI Act, 1934, no NBFC shall commence or carry 
on business of a non-banking financial institution without- 
a) obtaining a certificate of registration from the Reserve Bank of India (RBI); 
and 
b) having a Net Owned Funds (NOF) of ? 200  lakhs.  
They can apply to the RBI in prescribed form along with necessary documents for 
registration. The RBI issues Certificate of Registration after satisfying itself that the 
conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. 
Page 4


 
LEARNING OUTCOMES 
  
 
NON-BANKING 
FINANCIAL 
COMPANIES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Learn the definition of Non-Banking Financial Companies 
(NBFC) and their classification. 
? Comprehend the regulations governing NBFCs in India. 
? Familiarize with the requirements of the prudential accounting 
norms for NBFCs. 
 
CHAPTER 
9 
 
 
9.2 
 
ADVANCED ACCOUNTING 
 
 
 
 1. INTRODUCTION 
Non-Banking Financial Companies (NBFC) play a crucial role in broadening access 
to financial services, enhancing competition and diversification of the financial 
sector. They are increasingly being recognized as complementary to the banking 
system, capable of absorbing shocks and spreading risks at times of financial 
distress. Simplified sanction procedures, orientation towards customers, attractive 
rates of return on deposits, flexibility and timeliness in meeting the credit needs of 
specified sectors (like equipment leasing and hire purchase), are some of the factors 
that enhanced the attractiveness of NBFCs. 
 2. DEFINITION OF NBFC 
A Non-Banking Financial Company (NBFC) (As per Reserve Bank of India (RBI) 
FAQ (Frequently Asked Questions) dated 10 January 2017) 
• is a company registered under the Companies Act, 1956 or 2013; 
• engaged in the business of loans and advances, acquisition of 
shares/stocks/bonds/debentures/securities issued by Government or local 
Definition of 
NBFC and  
classification
Distiction 
between 
NBFC and a 
Bank
Minimum Net 
Owned Fund and 
Liquid Asset 
Requirements
Income 
recognition 
norms
Asset 
classification ,  
provisioning 
and Asset 
liability 
Management 
Capital 
adequacy
 
 
 
9.3 
 
NON-BANKING FINANCIAL COMPANIES 
authority or other marketable securities of like nature, leasing, hire-purchase, 
insurance business, chit business; 
• but does not include any institution whose principal business is that of 
agriculture activity, industrial activity, purchase or sale of any goods (other 
than securities) or providing any services and sale/purchase/construction of 
immovable property.  
A non-banking institution which is a company and has principal business of 
receiving deposits under any scheme or arrangement in one lump sum or in 
installments by way of contributions or in any other manner, is also a non-banking 
financial company (Residuary non-banking company). 
What does conducting financial activity as “principal business” mean?  
Financial activity as principal business is when a company’s financial assets 
constitute more than 50 per cent of the total assets and income from financial 
assets constitute more than 50 per cent of the gross income. A company which 
fulfils both these criteria will be registered as NBFC by RBI. The term 'principal 
business' is not defined by the Reserve Bank of India Act.  The Reserve Bank has 
defined it so as to ensure that only companies predominantly engaged in financial 
activity get registered with it and are regulated and supervised by it.  Hence if there 
are companies engaged in agricultural operations, industrial activity, purchase and 
sale of goods, providing services or purchase, sale or construction of immovable 
property as their principal business and are doing some financial business in a small 
way, they will not be regulated by the Reserve Bank. Interestingly, this test is 
popularly known as 50-50 test and is applied to determine whether or not a 
company is into financial business. 
 3. REGISTRATION  
In terms of Section 45-IA of the RBI Act, 1934, no NBFC shall commence or carry 
on business of a non-banking financial institution without- 
a) obtaining a certificate of registration from the Reserve Bank of India (RBI); 
and 
b) having a Net Owned Funds (NOF) of ? 200  lakhs.  
They can apply to the RBI in prescribed form along with necessary documents for 
registration. The RBI issues Certificate of Registration after satisfying itself that the 
conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. 
 
 
9.4 
 
ADVANCED ACCOUNTING 
However, in terms of the powers given to the RBI, to obviate dual regulation, certain 
categories of NBFCs which are regulated by other regulators are exempted from 
the requirement of registration with RBI viz. Merchant Banking companies/Stock 
broking companies registered with SEBI, Insurance Company holding a valid 
Certificate of Registration issued by IRDA, Nidhi companies as notified under 
Section 620A of the Companies Act, 1956/Sec 406 of Companies Act, 2013, Chit 
companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982, Housing 
Finance Companies regulated by National Housing Bank, Stock Exchange or a 
Mutual Benefit company. 
 4. DISTINCTION BETWEEN AN NBFC AND A 
BANK 
NBFCs perform functions similar to that of banks.  However, there are following few 
differences: 
S.No. NBFC Bank 
1. An NBFC cannot accept 
demand deposits. 
A Bank can accept demand deposits. 
2. An NBFC is not a part of the 
payment and settlement 
system. 
A Bank is a part of the payment and 
settlement system. 
3. An NBFC cannot issue cheques 
drawn on itself. 
A Bank can issue cheques drawn on 
itself. 
4. Deposit insurance facility of 
the Deposit Insurance and 
Credit Guarantee Corporation 
(DICGC) is not available for 
NBFC depositors. 
Deposit insurance facility of the 
Deposit Insurance and Credit 
Guarantee Corporation (DICGC) is 
available for depositors of banks. 
 
 5. CLASSIFICATION OF NBFC  
A.  Companies exempted from registration under RBI 
Companies that do financial business but are regulated by other regulators are 
given specific exemption by the Reserve Bank from its regulatory requirements for 
Page 5


 
LEARNING OUTCOMES 
  
 
NON-BANKING 
FINANCIAL 
COMPANIES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Learn the definition of Non-Banking Financial Companies 
(NBFC) and their classification. 
? Comprehend the regulations governing NBFCs in India. 
? Familiarize with the requirements of the prudential accounting 
norms for NBFCs. 
 
CHAPTER 
9 
 
 
9.2 
 
ADVANCED ACCOUNTING 
 
 
 
 1. INTRODUCTION 
Non-Banking Financial Companies (NBFC) play a crucial role in broadening access 
to financial services, enhancing competition and diversification of the financial 
sector. They are increasingly being recognized as complementary to the banking 
system, capable of absorbing shocks and spreading risks at times of financial 
distress. Simplified sanction procedures, orientation towards customers, attractive 
rates of return on deposits, flexibility and timeliness in meeting the credit needs of 
specified sectors (like equipment leasing and hire purchase), are some of the factors 
that enhanced the attractiveness of NBFCs. 
 2. DEFINITION OF NBFC 
A Non-Banking Financial Company (NBFC) (As per Reserve Bank of India (RBI) 
FAQ (Frequently Asked Questions) dated 10 January 2017) 
• is a company registered under the Companies Act, 1956 or 2013; 
• engaged in the business of loans and advances, acquisition of 
shares/stocks/bonds/debentures/securities issued by Government or local 
Definition of 
NBFC and  
classification
Distiction 
between 
NBFC and a 
Bank
Minimum Net 
Owned Fund and 
Liquid Asset 
Requirements
Income 
recognition 
norms
Asset 
classification ,  
provisioning 
and Asset 
liability 
Management 
Capital 
adequacy
 
 
 
9.3 
 
NON-BANKING FINANCIAL COMPANIES 
authority or other marketable securities of like nature, leasing, hire-purchase, 
insurance business, chit business; 
• but does not include any institution whose principal business is that of 
agriculture activity, industrial activity, purchase or sale of any goods (other 
than securities) or providing any services and sale/purchase/construction of 
immovable property.  
A non-banking institution which is a company and has principal business of 
receiving deposits under any scheme or arrangement in one lump sum or in 
installments by way of contributions or in any other manner, is also a non-banking 
financial company (Residuary non-banking company). 
What does conducting financial activity as “principal business” mean?  
Financial activity as principal business is when a company’s financial assets 
constitute more than 50 per cent of the total assets and income from financial 
assets constitute more than 50 per cent of the gross income. A company which 
fulfils both these criteria will be registered as NBFC by RBI. The term 'principal 
business' is not defined by the Reserve Bank of India Act.  The Reserve Bank has 
defined it so as to ensure that only companies predominantly engaged in financial 
activity get registered with it and are regulated and supervised by it.  Hence if there 
are companies engaged in agricultural operations, industrial activity, purchase and 
sale of goods, providing services or purchase, sale or construction of immovable 
property as their principal business and are doing some financial business in a small 
way, they will not be regulated by the Reserve Bank. Interestingly, this test is 
popularly known as 50-50 test and is applied to determine whether or not a 
company is into financial business. 
 3. REGISTRATION  
In terms of Section 45-IA of the RBI Act, 1934, no NBFC shall commence or carry 
on business of a non-banking financial institution without- 
a) obtaining a certificate of registration from the Reserve Bank of India (RBI); 
and 
b) having a Net Owned Funds (NOF) of ? 200  lakhs.  
They can apply to the RBI in prescribed form along with necessary documents for 
registration. The RBI issues Certificate of Registration after satisfying itself that the 
conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. 
 
 
9.4 
 
ADVANCED ACCOUNTING 
However, in terms of the powers given to the RBI, to obviate dual regulation, certain 
categories of NBFCs which are regulated by other regulators are exempted from 
the requirement of registration with RBI viz. Merchant Banking companies/Stock 
broking companies registered with SEBI, Insurance Company holding a valid 
Certificate of Registration issued by IRDA, Nidhi companies as notified under 
Section 620A of the Companies Act, 1956/Sec 406 of Companies Act, 2013, Chit 
companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982, Housing 
Finance Companies regulated by National Housing Bank, Stock Exchange or a 
Mutual Benefit company. 
 4. DISTINCTION BETWEEN AN NBFC AND A 
BANK 
NBFCs perform functions similar to that of banks.  However, there are following few 
differences: 
S.No. NBFC Bank 
1. An NBFC cannot accept 
demand deposits. 
A Bank can accept demand deposits. 
2. An NBFC is not a part of the 
payment and settlement 
system. 
A Bank is a part of the payment and 
settlement system. 
3. An NBFC cannot issue cheques 
drawn on itself. 
A Bank can issue cheques drawn on 
itself. 
4. Deposit insurance facility of 
the Deposit Insurance and 
Credit Guarantee Corporation 
(DICGC) is not available for 
NBFC depositors. 
Deposit insurance facility of the 
Deposit Insurance and Credit 
Guarantee Corporation (DICGC) is 
available for depositors of banks. 
 
 5. CLASSIFICATION OF NBFC  
A.  Companies exempted from registration under RBI 
Companies that do financial business but are regulated by other regulators are 
given specific exemption by the Reserve Bank from its regulatory requirements for 
 
 
9.5 
 
NON-BANKING FINANCIAL COMPANIES 
avoiding duality of regulation. Following NBFCs have been exempted from the 
requirement of registration under Section 45-IA of the RBI Act, 1934 subject to 
certain conditions. 
? Housing Finance Institutions (regulated by National Housing Bank); 
? Merchant Banking Companies (regulated by Securities and Exchange Board 
of India);  
? Stock Exchanges (regulated by Securities and Exchange Board of India); 
? stock-brokers/sub-brokers (regulated by Securities and Exchange Board of 
India); 
? Nidhi Companies (regulated by Ministry of Corporate Affairs, Government of 
India); 
? Insurance companies (regulated by Insurance Regulatory and Development 
Authority of India);  
? Chit Companies as defined in clause (b) of section 2 of the Chit Funds Act, 
1982 (Act 40 of 1982); 
? Micro Finance Companies; 
? Securitization and Reconstruction Companies; 
? Mutual Benefit Companies; 
? Mortgage Guarantee Companies; 
? Core Investment Companies i.e. a non-banking financial company referred to 
in the Core Investment Companies (Reserve Bank) Directions, 2016, which is 
not a Systemically Important Core Investment Company (total assets of not 
less than `100 crs and which raises or holds public funds), as defined in sub-
paragraph (xxv) of paragraph 3 of the Core Investment Companies (Reserve 
Bank) Directions, 2016. 
? Alternative Investment Fund (AIF) Companies.