Executive Summary

Microfinance means providing very poor families with very small loans (micro credit) to
help them engage in productive activities /small businesses. Over time, microfinance has
come to include a broader range of services (credit, savings, insurance, etc.) as we have
come to realize that the poor and the very poor who lack access to traditional formal fi-
nancial institutions require a variety of financial products.

The Eleventh Five Year Plan aims at inclusive growth and faster reduction of poverty.
Micro Finance can contribute immensely to the financial inclusion of the poor without
which it will be difficult for them to come out of the vicious cycle of poverty. There is a
need to strengthen all the available channels of providing credit to the poor such as SHG-
Bank Linkage programmes, Micro Finance Institutions, Cooperative Banks, State finan-
cial corporations, Regional Rural Banks and Primary Agricultural Credit Societies. The
strength of the micro finance industry lies in its informality and flexibility which should
be protected and encouraged.

Landlords, local shopkeepers, traders, suppliers and professional money lenders, and
relatives are the informal sources of micro-credit for the poor, both in rural and urban ar-
eas.

The sector which is still in its infancy faces shortage of experienced consult-
ants/manpower/experts. There is a need to have good quality professionals, trained in best
practices in governance for effective corporate governance. A need-based capacity build-
ing programme to meet the requirements of all categories of Micro Finance Organisations
(MFOs) is essential to bring about sustainability in the sector. Some of the important are-
as where capacity building is needed are transformation, best practices, interest rate man-
agement, delivery management, managing growth, risk mitigation, product designing,
market research etc.
 Introduction
Non Banking Financial Institutions is defined as any activity that includes the provision
of financial services such as credit, savings, and insurance to low income individuals
which fall just above the nationally defined poverty line, and poor individuals which fall
below that poverty line, with the goal of creating social value. The creation of social val-
ue includes poverty alleviation and the broader impact of improving livelihood opportuni-
ties through the provision of capital for micro enterprise, and insurance and savings for
risk mitigation and consumption smoothing. A large variety of actors provide micro-
finance in India, using a range of microfinance delivery methods. Since the founding of
the Grameen Bank in Bangladesh, various actors have endeavoured to provide access to
financial services to the poor in creative ways. Governments have piloted national pro-
grams, NGOs have undertaken the activity of raising donor funds for on-lending, and
some banks have partnered with public organizations or made small inroads themselves
in providing such services. This has resulted in a rather broad definition of microfinance
as any activity that targets poor and low-income individuals for the provision of financial
services. The range of activities undertaken in microfinance include group lending, indi-
vidual lending, the provision of savings and insurance, capacity building, and agricultural
business development services. Whatever the form of activity however, the overarching
goal that unifies all actors in the provision of microfinance is the creation of social value.

Non Banking financial Institution Definition

A Non-Banking Financial Company (NBFC) is a company registered under the Compa-

nies Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or
other marketable securities of a like nature, leasing, hire-purchase, insurance business,
chit business but does not include any institution whose principal business is that of agri-
culture 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 instalments by way of contribu-
tions or in any other manner, is also a non-banking financial company (Residuary non-
banking company).
3.2 Microfinance Definition

According to International Labour Organization (ILO), Microfinance is an economic

development approach that involves providing financial services through institutions to
low income clients.

In India, Microfinance has been defined by The National Microfinance Taskforce,

1999 as provision of thrift, credit and other financial services and products of very
small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise
their income levels and improve living standards.

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a 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 companys 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 super-
vised 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.
NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a
few differences as given below:

i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to de-
positors of NBFCs, unlike in case of banks.

Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry
on business of a non-banking financial institution without a) obtaining a certificate of registration from the
Bank and without having a Net Owned Funds of Rs. 25 lakhs (Rs. Two crore since April 1999). However,
in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are
regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capi-
tal Fund/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, 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 Bene-
fit company.

What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-
banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the
following:

i. it should be a company registered under Section 3 of the companies Act, 1956

ii. It should have a minimum net owned fund of Rs. 200 lakh. (The minimum net owned fund (NOF) re-
quired for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the FAQs on
specialized NBFCs)

The procedure for application to the Reserve Bank for Registration.

The applicant company is required to apply online and submit a physical copy of the application along with
the necessary documents to the Regional Office of the Reserve Bank of India. The application can be sub-
mitted online by accessing RBIs secured website https://cosmos.rbi.org.in . At this stage, the applicant
company will not need to log on to the COSMOS application and hence user ids are not required. The com-
pany can click on CLICK for Company Registration on the login page of the COSMOS Application. A
window showing the Excel application form available for download would be displayed. The company can
then download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and
upload the application form. The company may note to indicate the correct name of the Regional Office in
the field C-8 of the Annex-I dentification Particulars in the Excel application form. The company would
then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the
company has to submit the hard copy of the application form (indicating the online Company Application
Reference Number, along with the supporting documents, to the concerned Regional Office. The company
can then check the status of the application from the above mentioned secure address, by keying in the
acknowledgement number.
Does the Reserve Bank regulate all financial companies

No. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in
the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance
companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of reg-
istration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital
Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board
of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Simi-
larly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are
regulated by Ministry of Corporate Affairs, Government of India. Companies that do financial business but
are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory re-
quirements for avoiding duality of regulation.

It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking Financial
Companies under Section 45 I(f)(iii) of the RBI Act, 1934. Core Investment Companies with asset size of
less than Rs. 100 crore, and those with asset size of Rs. 100 crore and above but not accessing public funds
are exempted from registration with the RBI.

Where can one find list of Registered NBFCs and instructions issued to NBFCs?

The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed
at www.rbi.org.in Sitemap NBFC List. The instructions issued to NBFCs from time to time are also
hosted at www.rbi.org.in Notifications Master Circulars Non-banking, besides, being issued
through Official Gazette notifications and press releases.
Different types/categories of NBFCs registered with RBI

NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding com-
panies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within this broad catego-
rization the different types of NBFCs are as follows:

I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its
principal business the financing of physical assets supporting productive/economic activity, such as automo-
biles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on
own power and general purpose industrial machines. Principal business for this purpose is defined as aggre-
gate of financing real/physical assets supporting economic activity and income arising therefrom is not less
than 60% of its total assets and total income respectively.

II. Investment Company (IC) : IC means any company which is a financial institution carrying on as its
principal business the acquisition of securities,

III. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal
business the providing of finance whether by making loans or advances or otherwise for any activity other
than its own but does not include an Asset Finance Company.

IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least
75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of 300 crore, c)
has a minimum credit rating of A or equivalent d) and a CRAR of 15%.

V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on

the business of acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference
shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares
within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than
60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale
for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act,
1934 except investment in bank deposits, money market instruments, government securities, loans to and
investments in debt issuances of group companies or guarantees issued on behalf of group companies.

(e) Its asset size is 100 crore or above and

(f) It accepts public funds

VI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company
registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise re-
sources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastruc-
ture Finance Companies (IFC) can sponsor IDF-NBFCs.
VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-
deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy
the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding
1,00,000 or urban and semi-urban household income not exceeding 1,60,000;

b. loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;

c. total indebtedness of the borrower does not exceed 1,00,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment
without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans giv-
en by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

VIII. Non-Banking Financial Company Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking

NBFC engaged in the principal business of factoring. The financial assets in the factoring business should
constitute at least 50 percent of its total assets and its income derived from factoring business should not be
less than 50 percent of its gross income.

IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least 90% of the
business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage
guarantee business and net owned fund is 100 crore.

X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which
promoter / promoter groups will be permitted to set up a new bank .Its a wholly-owned Non-Operative Fi-
nancial Holding Company (NOFHC) which will hold the bank as well as all other financial services compa-
nies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable reg-
ulatory prescriptions.