Non-banking financial companies (NBFCs) are a vital part of the Indian financial service system. NBFC’s have multiplied in large numbers and serving the public at large to support the financial inclusion program with affordable credit at home. NBFCs are playing a key role in meeting the credit demands unmet by the traditional banks, specifically focusing on peer to peer lending.
It is a Company registered under the Companies Act engaged in the business(es) of providing financial services including loans & advances, leasing, hire purchase etc. They provide loans and advances and other credit facilities to business people or budding entrepreneur where Bank/Financial Institution are not comfortable, or say it is an alternative source of finance to businessman. Thus, they have widened the spectrum and array of products and services offered by the financial sector. Progressively, NBFC’s are gaining increasing recognition due to their customer-oriented services; flexible products, abridged procedures; flexibility and timeliness in meeting the credit needs of the seekers of credit; etc.
NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Chapter IIIB of the Reserve Bank of India Act, 1934 and any rules made thereunder or any directions issued by it under the Act. It is prima facie that the NBFC can be Companies registered under the Companies Act, 1956/2013 with the object clause of financial activity and the same need to take approval from Regulator Reserve Bank of India RBI) before commence the business of finance. Upon approval of RBI, Company can start the financial business and the entity should maintain the Principal Business Criteria (PBC) regularly.
FINANCIAL ACTIVITY as “Principal Business” implies that financial assets of the Company shall constitute more than 50% of the total assets of the Company and income from such financial assets shall constitute more than 50% of the gross revenue of the Company, is termed as “PBC”.
Types of Non- Banking Financial Company (NBFC) in India
1) INVESTMENT AND CREDIT COMPANY (NBFC-ICC): Any company with its principal business- asset finance, providing the finance for any activity other than its own and the acquisition of securities; also not in any other category of NBFC is called Investment and Credit Company.
2) INFRASTRUCTURE FINANCE COMPANY (NBFC-IFC): The Infrastructure Finance Company is the kind of financial institution principally engaged in providing infrastructure loans. Such companies can issue the credit facility (term loans, project loans, etc.). A minimum of 75% total assets of the company should be invested in the infrastructure loans.
3) INFRASTRUCTURE DEBT FUND (IDF)-NBFC: IDFs NBFC channelize investment into the infrastructure sector, under this domestic/offshore institutional investors, especially insurance and pension funds can invest through units and bonds issued by the IDFs.
4) MORTGAGE GUARANTEE COMPANY (MGC)-NBFC: NGC company' has a principle objective of providing mortgage guarantee. Such companies shall comply with at least 90% of the business turnover form mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business
5) NBFC-NON OPERATIVE FINANCIAL HOLDING COMPANY [NOFHC]: A NOFHC is financial business entity through which Entities/groups will be allowed to set up a new bank, which will hold the bank and all other financial services companies regulated by RBI or other financial sector regulators,
6) Non-Banking Financial Company (NBFC): Micro Finance Institution (NBFC-MFI) are the non-deposit taking the financial company with Minimum Net Owned Funds of Rs.5 crore and above (for North Eastern Region of india, it will be Rs. 2 crore). NBFC-MFI covers a wide range of services like credit, insurance, savings, remittance and also non-financial services like training, counseling etc.
7) NBFC – FACTORS (NBFC-FACTORS): NBFC-Factors to financial institution with minimum net worth of the Company Rs 5 Crores, having the principal business of acquisition of receivables on discount or financing against such receivables by way of loans or advances or by the creation of security interest over such receivables but excludes normal lending by a bank.
8) Systemically Important Core Investment Company (NBFC - CIC-ND-SI): CIC-ND-SI NBFC are engaged in the business of acquisition of securities and shares which its holds 90% of its total assets in the form of investment in shares and equity. Such NBFC’s shall compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.
HOW NBFCs ARE DIFFERENT FROM A BANK?
Activities of an NBFC are similar to that of a bank; however, there are some differences between the two as stated below:
An NBFC cannot accept demand deposits;
- NBFCs are not a part of the payment and settlement system
- NBFC cannot issue cheques drawn on itself;
- Unlike a bank, Deposit insurance facility is not available to the depositors of NBFCs.
REQUIREMENTS FOR REGISTRATION OF AN NBFC
An NBFC should:
- Be a Company registered under the Companies Act;
- Should have a minimum net owned fund of INR 2 Crores;
NBFC REGISTRATION PROCESS
Every company registered under the Companies Act, with the object clause of financial activity need to obtain a certificate of Registration (CoR) from Reserve Bank of India (RBI) to commence the business as NBFI.
- For the purpose of registration of an NBFC, an application is to be submitted in the prescribed form along with the necessary attachments with the RBI for its perusal. On being satisfied that the provisions of the RBI Act have been complied with then a CERTIFICATE OF REGISTRATION is issued to the institution.
- It is imperative to fulfill the following prerequisites for obtaining a certificate of registration of NBFC from RBI:
- The applicant must be a Company registered under the Companies Act for the time being in force
- The Company shall have a minimum NOF (Net Owned Funds) of INR 2 Crores who wish to set up an NBFC in India.
- At least one of the directors should be an experience in a similar field of business or should be an experienced banker.
- The CIBIL records of the Company, Director or Shareholder should be free from any irregularities.
- On satisfaction of the aforementioned essentials, the Company should go for its registration as NBFC in the form prescribed by the RBI along with all the mandatory documents and attachments. This application (COSMOS) can be filled on the website of RBI.
- On Successful submission of the application, an application reference number (ARN) is issued by the RBI to the applicant for the purpose of tracking the status of its application. Once, the ARN is obtained a physical copy of the application along with all the attachments should also be submitted with RBI.
- Once the application is received by the RBI, on scrutiny of Company Profile, Promoter/Director and Shareholder Profile then upon satisfaction the license of registration of NBFC is granted by the RBI.
DOCUMENTS FOR NBFC REGISTRATION
1) Certified copies of the Certificate of Incorporation of the Company.
2) Certified copies of main object clause of the Memorandum of Association of the Company.
3) Board resolution(s) stating the following:
- the company undertakes that it is not carrying on any NBFC activity or has not carried on and stopped any NBFC activities in the past activity and will not carry on or commence the same before getting registration from RBI
- the unincorporated bodies in the group where the director holds substantial interest or otherwise
- which has not accepted any public deposits in the past; and
- does not hold any public deposit as on the date of application
- will not accept any public deposits in the future
- the “Fair Practices Code” as per RBI Guidelines has been formulated by the Company
4) the company:
- has not accepted public funds in the past and/or does not hold any public fund as on the date; and
- the Company will not accept any deposits in the future without the prior approval of Reserve Bank of India
- the company shall seek prior approval of RBI before creating any customer interface in the future
5) Copy of Fixed Deposit receipt & bankers certificate indicating Net Operating Fund.
6) The companies which are already in existence the following documents are to be submitted for the last 3 years OR from the period of incorporation of the Company till the closure date of the previous financial year:
- Audited balance sheet along with annexures
- Profit & Loss statement
- Directors Report
- Auditors report
7) Banker’s report regarding:
- Directors of the applicant company having substantial interest in any other companies
- Applicant company along with the directors of its group, subsidiary, associate, holding company and related parties.
- The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.
Note: Bankers report is to be obtained from all the bankers of each of these entities. This report should specifically mention the details of deposits and loans balances as on the date of application and the conduct of the account.
8) Copy of the certificate of highest educational and professional qualification in respect of all the directors
The advantage of NBFC’s in Indian Economy
On an average 70% of the Indian population lives in rural areas, NBFC’s due to its low-cost operations can cover those areas by providing loans, chit–funds etc thus NBFC’s are an integral part of the Indian economy. NBFC’s can perform below activities
Loans and credit facilities
Offer financial assistance to company/individual that requires capital. Types of facilities include personal loan, company loan, loan overdraft services, term loans and letters of credit etc.
Facilitate investments in property the flow of long-term debt into infrastructure projects. Such type of NBFC’s are called Infrastructure Finance Companies (IFC)
Trading money market instruments
Such NBFC’s allows short-term capital needs at a low cost. Such institutions involves in Banker’s Acceptance, Treasury Bills, Repurchase Agreements, Certificate of Deposits, Commercial Papers etc
Funding private education
There are approximately 200,000 private schools in India., many of these schools need funds to upgrade their infrastructure. Such facility can provide loans to Schools, loans to Institutes, loans to coaching centers, education Eco space ect.
Managing portfolios of stocks and shares is an investment service that associates other financial services to address the needs of affluent clients. Such institutions are highly in demand in Indian market
Provides retirement planning
Retirement planning NBFC offers the facilitation of setting retirement income goals and of people across India. At its core, it ensures that when your salary stops, an alternative income source to take care of monthly expenses.