Types of financial institutions

• : Banking and non-banking.

• Banking institutions include commercial banks, savings and loan
associations, and credit unions.
• Non-banking financial institutions include insurance companies,
pension funds, and hedge funds.
 Banking financial institutions
• Engaged in the business of taking deposits from the public and making
loans.
• In addition, they provide other services such as investment banking,
foreign exchange, and safe deposit boxes.
• These institutions are heavily regulated by governments to protect
consumers and ensure that the banking system is stable.
 Types of banking financial institutions
• There are two : depository and non-depository.
• Depository institutions include banks, savings and loans associations,
credit unions, and mutual savings banks
• Non-depository institutions include finance companies, insurance
companies, and pension funds
• Non-banking financial institutions (NBFCs) are companies that
provide financial services such as lending, insurance, and investment
banking but that are not regulated as banks.
• This means that they have a different set of rules and regulations to
follow.
 NON-BANKING FINANCIAL
COMPANIES
• A Non-banking Financial Company is a company registered under the Companies Act, 1956 or under
the Companies Act, 2013 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
• 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
1.Non-banking financial institutions are not regulated by the government like banks are.
This means that they are not subject to the same laws and regulations.
2.Non-banking financial institutions do not take deposits from customers. Instead, they
raise money by selling securities or borrowing money.
3.Non-banking financial institutions are not required to maintain a reserve ratio like banks
are. This ratio is the percentage of deposits that a bank must keep in reserve in case of
withdrawals.
4.Non-banking financial institutions are not subject to the same capital requirements as
banks. This means that they are not required to have a certain amount of money in the
reserve to protect against losses.
5.Finally, non-banking financial institutions are not subject to the same lending
restrictions as banks. This means that they can lend money to anyone they choose,
without having to follow the government’s guidelines.
• Meaning of Financial activity as principal business – 50-50 test
• For NBFC’s A 50/50 test means that –
• firm’s financial assets constitute more than 50% of the total assets;
• income from financial assets constitute more than 50% of the gross
income.
• A firm which fulfills both these criteria will be registered with the RBI
as an NBFC.
• If, after registration, a firm violates the 50/50 criteria then RBI has the
authority to penalize the NBFC.
• Registration under Companies Act, 2013
• Registration under section 45-IA of the RBI Act, 1934
• For carrying on business as NBFC, a non-banking financial institution –
a) must obtain a certificate of registration from the Reserve Bank and
b) must have a Net Owned Funds of Rupees 10 crore.
• Certain categories of NBFCs which are regulated by other regulators are
exempted from the requirement of registration with RBI
• Venture Capital Fund/Merchant Banking companies/Stock broking
companies registered with SEBI,
• Insurance Company holding a valid Certificate of Registration issued by
IRDA,
• Nidhi companies,
• Chit companies as defined in Section 2(b) of the Chit Funds Act, 1982,
• Housing Finance Companies regulated by National Housing Bank,
• Stock Exchange or a Mutual Benefit company.
 Cancelation of a Certificate of Registration
• – RBI may cancel a certificate of registration of NBFC if such NBFC –
• ceases to carry on the business of a non-banking financial institution in India; or
• has failed to comply with any condition subject to which the certificate of registration
had been issued to it;
• at any time fails to fulfil any of the conditions such as adequate capital structure and
earning prospects; public interest, monetary stability, and economic growth etc. or
• fails to comply with any direction issued by the Reserve Bank of India under the
provisions of Chapter III B of RBI Act; or
• e) fails to maintain accounts as per direction or order of RBI; or
• f) fails to submit or offer for inspection its books of account and other relevant
documents when so demanded by an inspecting authority of RBI; or
• g) has been prohibited from accepting deposit by an order made by the RBI for
minimum 3 months. If any person is aggrieved by the order for cancellation of
registration given by RBI then such aggrieved person may file and appeal within 30 days
• 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.
• Mortgage Guarantee Companies – 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
• 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 – - automobiles, - 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 aggregate 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
• Investment Company (IC) – IC means any company which is a financial
institution carrying on as its principal business the acquisition of
securities.
• Loan Company – 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
• Infrastructure Finance Company (IFC) – IFC is a non-banking finance
company which deploys at least 75% of its total assets in infrastructure
loans, has a minimum credit rating of ‘A’ or equivalent) and a CRAR
(Compounded Rate of Annual Return) of 15%.
• 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.
• f) It accepts public funds
• Systemically important non-deposit taking non-banking financial
company – It means a non-banking financial company not accepting /
holding public deposits

• Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) –

• a) IDF-NBFC is a company registered as NBFC to facilitate the flow of long
term debt into infrastructure projects.
• b) IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5 year maturity.
• c) Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
 Reserve Fund – Section 45-IC
• 1) Every NBFC shall create a reserve fund
• 2) Amount to be deposited in reserve fund = 20% of net profit every year (Profit
shall be as disclosed in the P&L Account and it should be before payment of any
dividend.
• 3) Reserve fund can only be used for such purpose as specified by RBI.
• 4) Whenever NBFC will withdraw any amount from reserve fund, it shall report to
the RBI within 21 days of withdrawal.
• 5) Period of 21 days can be extended by RBI if there is sufficient cause. CG has the
power to exempt any NBFC from the requirements of maintaining reserve fund.
But such exemption should be given only on the recommendation of RBI.
 Maintenance of Percentage of Assets – Section 45-IB
• A) Percentage of assets to be maintained – Every NBFC shall invest and maintain of
continuous basis minimum 5% and maximum 20% of the deposits outstanding at the close
of business on the last working day of the second preceding quarter.
• B) Where investments should be made –
a) Investment should be made in unencumbered approved securities.
b) “approved securities” means securities of any State Government or of the Central
Government or bonds which have full guarantee by CG or SG.
c) “unencumbered approved securities” includes the approved securities kept as security by
NBFC with another financial institution for securing loan
• C) Important points –
• a) If the amount invested by NBFC falls below the specified rate then such company shall
be liable to pay RBI a penal interest at a rate of 3% p.a. above the bank rate for the
shortfall.
• b) If the shortfall continues in the subsequent quarters then penal interest rate will be 5%
p.a. above the bank rate for the shortfall.
Power of Reserve Bank of India to Remove Directors from Office
• 1) If RBI thinks that it is necessary to remove director of any NBFC (other than
government owned NBFC) in the public interest or in the interest of deposit
holders or for any other reason then RBI may remove such director from the office.
• 2) Before removing an opportunity of being heard should be given to such director.
• 3) Where any order of removal is made in respect of a director of a company , he
shall cease to be a director of NBFC.
• 4) Once director is removed then he shall not act as director for any NBFC for such
time which will be specified by NBFC but it cannot be more than 5 years.
• 5) Director removed cannot claim any compensation for the loss or termination
from office. Appointment of director in place of removed director –
• a) RBI may appoint a suitable person in place of director so removed.
• b) Such director will hold office for maximum period of 3 years or such further
periods not exceeding three years at a time;
Supersession of Board of Directors of Non-Banking Financial
Company

• 1) If RBI thinks that it is necessary to supersede board of directors of any

NBFC (other than government owned NBFC) in the public interest or in the
interest of deposit holders or for any other reason then, RBI may supersede
the BOD of such NBFC.
• 2) Maximum time for which BOD can be superseded = Maximum 5 years.
• 3) After supersession of the BOD, RBI may appoint a suitable person as the
Administrator.
• 4) Administrator will work as per the orders and directions of RBI.
• 5) Whenever RBI orders supersession of BOD of NBFC then the chairman,
managing director and other directors should vacate their office and all the
powers to manage NBFC gets transferred to RBI’s Administrator.
Reserve Bank to Regulate or Prohibit Issue Of Prospectus or
Advertisement Soliciting Deposits of Money – Section 45J
• RBI has the power to –
• a) Regulate or prohibit the issue of any prospectus or advertisement soliciting
deposits of money from the public by NBFCs; and
• b) specify the conditions for issuing prospectus or advertisements. Power of Bank
to Determine Policy and Issue Directions – Section 45JA If RBI thinks that it is
necessary in the public interest or in the interest of deposit holders or for any
other reason then, RBI will make policies and may issue directions with to NBFCs
for aspects relating to –
•  income recognition,
•  accounting standards
•  provision for bad and doubtful debts,
•  capital adequacy,  deployment of funds, etc
Power of Bank to Collect Information from Non-Banking Institutions as
to Deposits and to Give Directions – Section 45K
• 1) RBI has the power to direct anytime that every NBFC shall furnish to RBI statements
information or details relating to the deposits received by the NBFCs. 2) The details to be
called by RBI may include –
• a) The amount of deposit;
• b) Purpose of accepting deposit;
• c) Tenure of deposits;
• d) Rate of interest; etc.
• 3) RBI also has the power to issue directions to NBFCs for the matters relating to –
• The amount of deposit;
• Purpose of accepting deposit;
• Tenure of deposits;
• Rate of interest; etc.
If any NBFC fails to follow the order or directions of RBI then RBI may prohibit the
Power of Bank to Call for Information from Financial Institutions and to
Give Directions
• – If RBI thinks that for the purpose of enabling RBI to regulate the credit system
of the country to its advantage it is necessary to do so, RBI may –
• a) Require any NBFC or all NBFCs to submit such information as may be
considered necessary by RBI and specified in the order of RBI.
• b) Give directions to and NBFC or all NBFCs relating to the conduct of business by
them.
Power of Bank to Prohibit Acceptance of Deposit and Alienation of Assets
• – 1) If any NBFC violates the provisions of any section or fails to comply with any
direction or order given by the RBI then RBI may prohibit the NBFC from
accepting any deposit.
• 2) If RBI thinks that it is necessary in the public interest or in the interest of
deposit holders then RBI may order to the NBFC against whom an order for
prohibition to accept deposit has already been passed that such NBFC shall not
sell, transfer or create charge or mortgage on the property or assets of the NBFC
without prior permission of RBI and such order will be valid for maximum 6
months.
 Resolution of NBFC
• – If RBI thinks that it is necessary in the public interest or in the interest of
deposit holders or for any other reason then, RBI will order –
• a) Amalgamation of two or more NBFCs
• b) reconstruction of the NBFCs
• c) splitting the NBFC in different units.
• RBI can also order for establishment of Bridge institutions.
• Now, what is Bridge institutions? “Bridge Institutions” mean temporary
institutional arrangement made under the scheme to preserve the continuity of
the activities of a NBFC that are critical to the functioning of the financial system.
• RBI may also provide for –
• 1) reduction of the pay and allowances of the chief executive officer,
managing director, chairman or any officer in the senior management
of the NBFC;
• 2) cancellation of all or some of the shares of the non-banking
financial company held by the chief executive officer, managing
director, chairman or any officer in the senior management of the
nonbanking financial company or their relatives;
• 3) sale of any of the assets of the NBFC
Power of Reserve Bank to File Winding Up Petition – Section 45MC

• If the RBI is satisfied that an NBFC –

• is unable to pay its debt; or
• has become disqualified to carry on the business of a nonbanking financial
institution; or
• has been prohibited by the Reserve Bank from receiving deposit for minimum 3
months; or
• the continuance of the NBFC will be against the public interest. Then RBI will file an
application for winding up of such NBFC under Companies Act.

Note – A NBFC will deemed to be unable to pay its debt if it has refused or has failed to
meet within five working days any lawful demand made and the RBI certifies in writing
that such company is unable to pay its debt