Non-Banking Financial Companies (NBFCs) Explained

Financial organization which receives deposits and provide credit like banks are called Non-Banking Financial Companies (NBFCs).

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Definition of Non-Banking Financial Companies (NBFCs)

A NBFC is a company registered under 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 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.

Services offered by Non-Banking Financial Companies (NBFCs)

The services offered by NBFCs are:

Personal Loans
Vehicle Loans
Home Loans
Gold Loans
Credit Card services
Microfinance
Insurance Services
Services related to leasing and hire purchase
Services related to investment and asset management

Role of NBFC in Indian Financial Sector

NBFC are involved in the activity of getting the saving and investing.
NBFC acts as supplements to banks by providing access of financial products and services to unserved population of India.
NBFC’s like Micro Financial Institutions and Asset Finance Companies provide supporting role to financial inclusion agenda of government of India.
Infrastructure finance companies give boost to growth and development of infrastructure.

Difference between NBFC and Bank

NBFCs cannot accept demand deposits.
NBFCs is no a part of the payment and settlement system
NBFCs cannot issue cheques drawn on itself
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs

Registration of Non-Banking Financial Companies (NBFCs)

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:

it should be a company registered under Section 3 of the companies Act, 1956
It should have a minimum net owned fund of ₹ 200 lakh.

Types of NBFC regulated by RBI

The different types of NBFCs are:

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 equipment, 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): 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
1. which deploys at least 75 per cent of its total assets in infrastructure loans
2. has a minimum Net Owned Funds of ₹ 300 crore
3. has a minimum credit rating of ‘A ‘or equivalent
4. and a CRAR 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:
1. 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
2. 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
3. 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
4. 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.
5. Its asset size is ₹ 100 crore or above and
6. It accepts public funds
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 resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs
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:
1. 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;
2. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;
3. total indebtedness of the borrower does not exceed ₹ 1,00,000;
4. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;
5. loan to be extended without collateral;
6. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
7. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
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.
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.
NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

NBFCs not regulated by RBI

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 registration 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
Insurance companies are regulated by Insurance Regulatory and Development Authority
Chit Fund Companies are regulated by the respective State Governments
Nidhi Companies are regulated by Ministry of Corporate Affairs

What are systemically important NBFCs?

NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.

Acceptance of Deposit from Public

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Reserve Bank of India had given a specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds.

Since 1997, RBI has not issued any Certificate of Registration (CoR) to new NBFCs for acceptance of public deposits. Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

Residuary Non-Banking Company (RNBC)

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors’ funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.

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