A Non-Banking Financial Company (NBFC) is a registered entity under the Companies Act, 2013, or preceding company laws, primarily engaged in financial activities such as loans, acquisitions of securities, leasing, hire-purchase, and insurance. Unlike banks, NBFCs are not classified as banks themselves and are subject to comparatively lesser regulatory oversight.

Regulation:

NBFCs fall under the regulatory purview of the Reserve Bank of India (RBI), and no entity can commence or conduct non-banking financial activities without obtaining registration from the RBI.

Criteria for NBFC Classification:

To determine if a company qualifies as an NBFC, the 50-50 test is applied. This test assesses whether the company's financial assets constitute more than 50% of its total assets and if income from financial assets constitutes more than 50% of its gross income.

Differences from Banks:

Although NBFCs engage in activities similar to banks, there are notable distinctions:

1. NBFCs cannot accept demand deposits.
2. They are not part of the payment and settlement system and cannot issue self-drawn cheques.
3. Deposit insurance from entities like the Deposit Insurance and Credit Guarantee Corporation is not available to NBFC depositors.

Categories of NBFCs:

NBFCs are classified based on liability types (deposit-taking or non-deposit-taking), size (systemically important or others), and the nature of their activities. Categories include Asset Finance Companies (AFCs), Investment Companies (ICs), Infrastructure Finance Companies (IFCs), Loan Companies (LCs), Core Investment Companies (CICs), Infrastructure Debt Funds (IDFs), Micro Finance Institutions (MFIs), NBFC-Factors, and Peer-to-Peer Lending Platforms (P2P).

Prerequisites for NBFC Registration:

To register as an NBFC in India, entities must adhere to RBI stipulations, including being a registered company under the Companies Act 2013 and maintaining a minimum net owned fund, among others.

Exemptions from RBI Act Provisions:

Certain NBFC categories are exempt from specific provisions of the RBI Act, 1934, to avoid regulatory overlaps. Housing Finance Companies, Merchant Banking Companies, and others fall under this category, subject to certain conditions.

Acceptance of Deposits:

Only authorized NBFCs with investment-grade ratings can accept public deposits up to a limit of 1.5 times their Net Owned Funds. Certain restrictions apply, such as limitations on deposits from NRIs.

Grievance Redressal Mechanism:

RBI has introduced a Fair Practices Code for NBFCs to enhance transparency in dealings. Additionally, an Ombudsman Scheme for NBFCs facilitates the resolution of customer complaints expeditiously and without cost.

In essence, NBFCs serve as vital entities in the financial ecosystem, offering diverse services while operating under RBI regulations and guidelines to ensure transparency, stability, and consumer protection.