Non-Banking Financial Companies (NBFC)
Non-Banking Financial Companies (NBFC)
Non-Banking Financial Company or NBFC is an entity that is incorporated as per the Companies Act of 1956 and 2013. These companies have played an essential role in the financial system in India by bringing in diversity and efficiency into the financial sector. NBFCs have evolved over the years in various aspects such as operations, asset quality, heterogeneity, profitability, and regulatory architecture. Hence, customers tend to find these entities convenient as they make quick decisions, promptly provide services and expertise in niche segments. Moreover, they enhance the resilience of the country’s financial system by acting as backup institutions when banks come under stress. This article talks about Non-Banking Financial Companies (NBFC) and its various aspects.
As mentioned earlier, the Companies Act of 1956 and 2013 states the rules and regulations of the incorporation of Non-Banking Financial Companies (NBFC) function by engaging in the business of loans and advances. Additionally, they also deal with the acquisition of stocks, bonds and debentures that are issued by the Government of India or a Local Authority.
Banks vs. NBFCs
The activities that banks and NBFCs engage in are similar. However, there are certain significant differences between the two.
- NBFCs are not permitted to accept demand deposits.
- These entities do not form a part of the payment and settlement system in India. Therefore, they would not be able to issue cheques drawn on itself.
- Unlike banks, the facility of deposit insurance from the Deposit Insurance and Credit Guarantee Corporation is not accessible to the depositors of NBFCs.
- 100% FDI is permitted in NBFCs under the automatic route in particularly 18 activities, under minimum capitalisation norms.
Types of NBFCs
Given below are the different kinds of NBFCs that exist in India along with the activities they engage in.
- Asset Finance Company (AFC): Financing of physical assets supporting productive or economic activity that includes automobiles, tractors and generators.
- Investment Company (IC): Acquiring securities with the purpose of re-selling.
- Loan Company (LC): Provides finance by extending loans or for any activity than its own. However, this does not include an Asset Finance Company.
- Infrastructure Finance Company (NBFC-IFC): Provides loans for projects linked to infrastructure.
- Infrastructure Debt Fund (NBFC-IDF): Facilitates the flow of long-term debt into projects that deal with infrastructure.
- Systemically Important Core Investment Company (CIC-ND-SI): Acquires shares and securities for the investment in equity shares primarily.
- Micro Finance Institution (NBFC-MFI): Extends credit to the economically disadvantaged groups. Additionally, they extend their support to Micro, Small and Medium Enterprises (MSMEs).
- NBFC Non-Operative Financial Holding Company (NOFHC): Permits promoters or promoter groups to set up a new bank.
- Factor (NBFC-Factor): Engages in the business of acquiring receivable of an assignor or extending loans against the security interest of the receivables at a reduction.
- Mortgage Guarantee Company (MGC): Undertakes mortgage activities.
- Account Aggregator (NBFC-AA): Collects and offers information on a customer’s financial assets in a consolidated, organised and retrievable method to the customer or others as required by the customer.
- NBFC Peer to Peer Lending Platform (NBFC-P2P): Provides an online platform in order to bring lenders and borrowers together onto a single space to help mobilise unsecured finance.
Incorporation of NBFC
The process to incorporate a Non-Banking Financial Company is as follows.
- Initially, it should be ensured that the company is registered under the Companies Act of 1956/ 2013.
- The company should have a minimum of INR 2 crores as net owned funds.
- As a part of the company, there must be a minimum of one Director from an NBFC background or a Senior Banker as a full-time director in the company.
- It is essential that the CIBIL records of the company are acceptable.
- Once the pre-requisites mentioned above have been satisfied, an online application for the incorporation of the NBFC has to be filed on the official portal of the RBI. All the critical documents must be submitted along with the application as well.
- A relevant CARN Number would be generated.
- A hard copy of the application has to be sent to the regional branch of the RBI.
- The NBFC License would be offered to the company after the application is reviewed and adequately scrutinised.
Guidelines for NBFC Functioning
The following guidelines are to adhered by NBFCs once they obtain their licenses.
- NBFCs are not permitted to receive deposits that are payable on demand.
- The interests charged by an NBFC cannot exceed the threshold prescribed by the RBI.
- The public deposits that they can take must be for a minimum of 12 months and a maximum of 60 months.
- The RBI would not guarantee the repayment of any amount so taken by the NBFC.
- The deposits taken by the public would be unsecured.
- Every information about the company and the changes in the composition of the same has to be furnished to the RBI.
- It is essential that the company submits its audited balance sheet annually.
- Quarterly return on the company’s liquid assets has to be furnished.
- It is necessary that a statutory return on the deposits taken by an NBFC has to be furnished through Form NBS–1 annually.
- The auditors have to legally state that the NBFC is capable of paying back all the deposits or funds taken from the public.
- A credit rating of the company has to be taken every six months and submitted to the RBI.
- A half-yearly Asset Liability Management (ALM) return has to be given by the company which has a Public Deposit of Rs. 20 Crore and above or has assets worth Rs. 100 Crore and above. A company which has a public deposit of INR 20 Crores and more, or has assets worth INR 100 Crores and more, has to submit a half-yearly Asset Liability Management return.
- An NBFC is required to maintain a minimum level of 15% of the public deposits in terms of liquid assets.