What Are NBFCS?: Page - 1

WHAT ARE NBFCs?
 NBFC: Non-Banking Financial Corporations

 A NBFC is a company incorporated under the Companies Act of 2013 or 1956.
 According to section 45-I (c) of the RBI Act, “a Non–Banking Company carrying on the
business of a financial institution will be an NBFC.”
 Any non-banking institution whose principal business is to receive deposits under any
scheme or arrangement by any mode is also considered to be a non-banking financial
company (Residuary non-banking company).
 NBFC are intermediaries engaged primarily in the business of:
a. Loans & Advances,
b. Acquisition of shares/stocks/bonds/debentures/securities issued by government or
local authorities or other securities of marketable nature,
c. Leasing
d. Hire-purchase,
e. Insurance business,
f. Chit business
 The definition does not include businesses with principal business of:
a. Agricultural Activity
b. Industrial Activity
c. Purchase or sale of any goods excluding securities
d. Sale/purchase/construction of any immovable property
Principal Business:
The Reserve Bank of India brings clarity to the definition of which entities will be monitored
and regulated as NBFC under RBI Act. The criterion is known as 50-50 test.
50-50 Test:
a. The financial assets of the company must constitute 50% of the total assets.
b. The income from these financial assets must constitute 50% of the total income.
 NBFCs are governed by the Ministry of Corporate Affairs and the Reserve Bank of India.
 The License for operation is obtained from the RBI and it is incorporated as a company
under applicable laws of the land.
TYPES OF NBFCs
On the basis of liabilities and activities, these are classified as:
1. Asset Finance Company
2. Investment Company
3. Loan Company
4. Infrastructure Finance Company
5. Core Investment Company
6. Micro Finance Company
7. Housing Finance Company
8. Mortgage Guarantee Company
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HOW DO NBFCs & BANKS DIFFER?
 NBFC cannot accept demand deposits;

 NBFCs do not form part of the payment and settlement system and cannot issue
cheques drawn on itself,
 NBFC cannot issue Demand Drafts whereas banks can,
 They cannot accept public deposit for a minimum period of 12 months and
maximum of 60 months.
 Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation
is not available to depositors of NBFCs, unlike banks,
 Banks are incorporated under Banking Companies Act whereas NBFCs are incorporated
under Company Act of 1956.
 NBFCs cannot offer gifts/incentives or any other additional benefits to the depositors.
IMPACT OF GST ON BANKS & NBFCs

Due to the nature and volume of operations provided by banks and NBFCs vis a vis lease,
transactions, hire purchase, related to actionable claims, fund, and non-fund-based services
etc., GST compliance is pretty difficult to implement in these sectors. The framework of
GST Law does not provide much benefits or consideration to banks and NBFCs either.
Issues related to provisions of GST law
1. Due to widespread number of branches the registration becomes a hassle
Under GST, pan-India Banks/ NBFCs are required to obtain a separate registration for
each state where they operate. Adding to this, compliance burden related to filing of
returns in terms of the periodicity of returns, number of return formats and level of details
required in these returns has also increased substantially.
2. Input Tax Credit leveraged and de-leveraged
50% of the CENVAT credit available against inputs, input services, and capital goods
under pre-GST regime is reversed which leaves them with reduced credit of 50% on
capital goods resulting in increased cost of capital.
3. Assessment and Adjudication
The assessment of these institutions is done by respective state regulators under which the
respective branch is registered. Every registered branch must justify its position on
chargeability in respective state and reasons for utilizing input tax credit in different
states.
More than one adjudicating authority is involved & each authority may hold a different
opinion on the same issue. Any contradiction in opinion will protract the adjudication
process. Hence, clearing up and dealing with the difference of opinions would be
difficult.
Issues related to revenue recognition under GST
1. Account Linked Financial Services
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The place of supply is the location of the recipient of services on the records of the
supplier of services. Now, identifying the state of location of service recipient is a
difficult task. In cases where the service recipients like professionals, manufacturers,
traders, and other workers often shift from one place to other in search of better
opportunities, the service provider may have a different address i.e., permanent address,
current address, the address of communication and KYC address.
2. Non-Account Linked Financial Services
The place of supply of service here would be the location of the service provider. This
will again hit such companies which are widespread in remote locations to establish their
presence but operate and transact from a back office located in some other state.
3. Actionable Claims
Actionable claims are included in the definition of ‘supply of goods.’ Services provided
from bills discounted to securitization are taxed as an effect B2C and B2B.
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WHAT ARE NBFCs?

 NBFC: Non-Banking Financial Corporations

 NBFC cannot accept demand deposits;

IMPACT OF GST ON BANKS & NBFCs

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