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Advanced Auditing

Notes Accordingly, the Reserve Bank issued directions to companies on acceptance of public deposits,
prudential norms like capital adequacy, income recognition, asset classification, provision for
bad and doubtful debts, exposure norms and other measures to monitor the financial solvency
and reporting by NBFCs. Directions were also issued to auditors to report non-compliance with
the RBI Act and regulations to the Reserve Bank, Board of directors and shareholders.

12.3.1 Classification of NBFCs

NBFCs normally fall into following categories:

1. Non-Banking Financial Company: In terms of the Section 45-I(f) read with Section
45-I(c) of the RBI Act, 1934, as amended in 1997, NBFC is one whose principal business is
that of receiving deposits or that of a financial institution, such as lending, investment in
securities, hire purchase finance or equipment leasing. Such companies may also be
categorised as under:

(a) Equipment leasing company engaged in equipment leasing or financing of such
activity.

(b) Hire purchase finance company engaged in hire-purchase transaction or financing
of such transactions.

(c) Investment company engaged in acquisition of securities and trading in such securities
to earn a profit.

(d) Loan company engaged in providing finance by making loans or advances, or
otherwise for any activity other than its own; excludes EL/HP/Housing Finance
Companies (HFCs).
(e) Residuary Non-Banking Company (RNBC) which receives deposits under any
scheme or arrangement, by whatever name called, in one lump-sum or in instalments
by way of contributions or subscriptions or by sale of units or certificates or other
instruments, or in any manner. These companies do not belong to any of the
categories as stated above.
2. Mutual Benefit Financial Company (MBFC) i.e. Nidhi Company: Any company which is
notified by the Central government under Section 620A of the Companies Act 1956 (1 of
1956).

3. Mutual Benefit Company (MBC), i.e., Potential Nidhi Company: A company notified
under section 620A of the Companies Act, 1956 and by the Central Government, having
minimum Net Owned Funds and Preferential Share Capital of 10 lakh, has applied to the
RBI for Certificate of Registration and also to Ministry of Company Affairs (MCA) for
declaration as Nidhi company and has not contravened directions/regulations of Reserve
Bank/MCA.

4. Miscellaneous Non-Banking Company (MNBC), i.e., Chit Fund Company: Managing,
conducting or supervising as a promoter, foreman or agent of any transaction or
arrangement by which the company enters into an agreement with a specified number of
subscribers that every one of them shall subscribe a certain sum in instalments over a
definite period and that every one of such subscribers shall in turn, as determined by lot
or by auction or by tender or in such manner as may be provided for in the arrangement,
be entitled to the prize amount.

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