NBFC Full Form
As per the Companies Act 2013, Non-Banking Financial Company or NBFC full form means that type of company which is involved in the business of receiving Loans and Credit Facilities, Acquisition of Bonds/Stocks/Shares, Hire-Purchase, Leasing, Assets Financing, Insurance, Currency Exchange, Peer to Peer Lending, Hedge Funds, Chit Business, etc. NBFCs get established first under the Companies Act, as companies. After that, these companies need to apply for NBFC Registration and Certificate of Registration with RBI according to the provisions mentioned in Chapter III B of the RBI Act 1934.
The companies that are in the business of:
- loans and advances,
- investments in stock/equity/shares/bonds/debentures and other Govt securities,
- chit fund,
- hedge funds,
- currency exchange,
- insurance business,
can become NBFCs.
But they cannot be engaged in:
- agricultural activity,
- industrial activity,
- purchase/sale of any goods and services (except securities), and
- sale, purchase, or construction of immovable property.
NBFCs provide various banking and non-banking services to the concerned people. They do not hold a banking license but their functions are regulated and supervised by RBI.
The primary business activity of the NBFCs is to raise capital funds from public depositors and investors and then lend further. NBFCs are the alternative to the banking and financial sector.
Though their financial activities are quite similar to banks, still, the differences between the two do exist. For example, the deposits in NBFC are not insured. Or, unlike banks, NBFCs are not entitled to accept demand deposits or issue cheques.
How is NBFC in Full Form Differs from Bank
Below we explain in detail the difference between the activities of NBFCs and Banks, here.
- NBFC is consolidated under the Companies Act whereas banks are enrolled under the Banking Regulation Act, 1949.
- The NBFC, unlike banks, is not part of the payment and settlement system. It is not entitled to issue cheques to its customers, drawn on itself.
- Unlike banks, the insurance facility on deposits by Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available for NBFC depositors.
- Only those NBFCs are allowed to accept deposits that are repayable on demand whereas all banks are allowed to accept such deposits who have been pre-approved by the RBI to accept these deposits, upon its application specifying the need. The rest of the NBFCs are not allowed to accept demand deposits.
- In NBFC, foreign investments of up to 100% are allowed. Whereas private sector banks are eligible for foreign investment of up to 49%. They may apply for approval from the government for foreign investment up to 74%. On the other hand, this limit is 20% in the case of public sector banks.
- Maintaining various reserve ratios like CRR or SLR is essential for banks. But these are not mandatory for NBFCs.
- Banks can create credit but NBFCs are not allowed.
- Banks can provide transaction facilities to its customers such as providing overdraft facility, issue of traveler’s cheque, transfer of funds, etc. NBFCs are not allowed to provide these facilities.
- The sector in which an NBFC operate, in its full form, is generally rural and unorganized. Having a low or no credit rating score. Unlike banks.
Types of NBFCs
NBFCs can be broadly classified under these 2 categories:
1) Deposit Accepting NBFC (Type -1)
2) Non-Deposit accepting NBFC (Type -2)
1) Deposit Accepting NBFC (NBFC-D)
Deposit accepting entities must get themselves registered with RBI as per the regulations laid down in the RBI Act, 1934. NBFCs need the certificate of registration (CoR) from RBI and are required to follow specific directions prescribed by RBI.
2) Non-Deposit Accepting NBFCs (NBFC-ND)
Non-Deposit Accepting NBFCs also must get registered themselves. However, some additional guidelines are to be followed by the NBFC-Ds than NBFC-NDs, once registered.
Within the above 2 broad categories, the types of NBFCs as differentiated by RBI are:
- Asset Finance Company (AFC): An AFC is a financial institution that has the principal business of financing the physical assets. It includes supporting productive/economic activity, such as automobiles, tractors, generator sets, earth-moving, lathe machines, and material handling equipment, moving on own power and general-purpose industrial machinery.
- Investment Company (IC): IC means any company which is a financial institution and is engaged in the acquisition of securities, as its principal business.
- Loan Company (LC): LC is a financial institution, carrying on, and the provision of finance, as its principal business. Its principal activity is to make loans or advances or otherwise for any purpose other than its own but does not include an AFC.
- Infrastructure Finance Company (IFC): IFC is an NBFC which:
- uses at least 75% of its total assets in infrastructure loans,
- a CRAR of 15%,
- has a minimum NOF or Net Owned Funds of Rs. 300 crores,
- has a credit rating of minimum “A” or equivalent.
- Systemically Important Core Investment Company (SI-CIC-ND): SI-CIC-ND is an NBFC engaged in the business of acquisition of shares and securities. The transactions must fulfill the following requirements:
It holds at least 90% of its Total Assets in the form of investment in equity or preference shares, and debt or loans in group companies,
- its investments in the equity stocks (including instruments that could be compulsorily converted into equity shares within a period not exceeding 10 years from the date of issue) in group companies form at least 60% of its Total Assets,
- it does not trade in its investments in shares, debt or loans in group companies other than through block sale for dilution or disinvestment,
- no financial activities that are listed u/s 45I(c) and 45I(f) of the RBI Act, 1934, are undertaken by it. Excluding activities for investments in bank deposits, government securities, money market instruments, loans to and investments in debt issuances of group companies, or guarantees declared on behalf of group companies,
- its asset size is Rs. 100 crore or more, and,
- it accepts public funds.
- Infrastructure Debt Fund: IDF-NBFC is a company with the NBFC License to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raises resources by issuing Rupee or Dollar denominated bonds that have a minimum maturity period of 5-years. Only IFC – NBFC can sponsor IDF-NBFCs.
- Micro Finance Institution (NBFC MFI): NBFC MFI is a non-deposit taking NBFC with not less than 85% of its assets like qualifying assets satisfying the following criteria:
Loan disbursed by an NBFC MFI to a borrower with a Rural Household Annual Income not more than Rs. 60,000, or Urban and Semi-Urban Household Income of not more than Rs. 1,20,000.
- the loan amount must not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles.
- the total indebtedness of the borrower must not be more than Rs. 50,000.
- loan duration of at least 24 months, if the amount is over Rs. 15,000 with prepayment without penalty,
- loan to be extended without any security,
- the aggregate amount of loans, given for income generation, is at least 75% of the total loans given by the MFI,
- the loan is repayable on weekly, fortnightly, or monthly installments. The option of frequency to be selected by the borrower.
Full Scope of NBFC Form
In India, the NBFC segment has a tremendous opportunity for growth. These organizations are very important to the economy and that is the reason why their operations receive so much attention from the government and various regulators etc. The credit gap in India in the MSME and for the largest socio-economic group at the bottom of the pyramid is quite significant. And this is the area where the NBFCs are active and specialize in.
The industry has seen some low times in the past 1-2 years due to the NBFC crisis. So now is the time for the NBFCs to upgrade their business model. For this, digital technology provides the way ahead. Using its help, the product portfolio, customer experience, etc. can be improved.
With easier availability of internet and connectivity to the World Wide Web increasing its foothold in rural and backward areas, the smartphone technology presents an opportunity to NBFCs to enhance the networking and position their products prominently. The customer data, conveniently available on digital and social media platforms, can be used to improve sales strategies. Credit risk can be ascertained by analyzing data of mobile bill payments, prepaid top-ups, browsing, and download history. The creditworthiness of large and untapped market segments can also be found online, which helps NBFCs in taking quicker business decisions and optimizing them. It has become easier for NBFCs to identify the individual, his intentions, and the ability to repay loans.
NBFC P2P online lending has grown tremendously in the past few years. NBFCs can increase customer satisfaction by putting sophisticated user-friendly tools on their websites. Such as knowledge centers, live chats, calculators, and live application tracking system.
Benefits of NBFC to Economy in Full Form
NBFC companies became popular with institutional investors by providing semi-rural and rural India with access to finance. The following are the advantages of NBFCs that have made them so relevant in India:
- The amount of paperwork and official procedures required with NBFCs is much less as compared to banks. So NBFCs are far more convenient options for the consumers rather than other financial institutions.
- It serves all businesses, whether small or big.
- The NBFCs have become significant to the well-being of the economy. Become essential for the development of industrial, commercial, institutional, and service sectors. Thus, the government takes an active interest in their functioning, striving to improve the NBFC regulations and facilities.
- NBFC, in its full form, is considered to have a service-oriented approach.
- The rate of interest to be charged on loans by the NBFC is based on its own decision. It has the liberty to charge a high-interest rate on short-term lending, within a limit set by RBI.
- NBFCs are considered easier to approach by the customers. And provide a handful of other hassle-free services as well. Such as support investment in property, help in trading money market instruments, fund private education, provide retirement planning.
- Not only individual clients, but businesses prefer to work with the NBFCs as well. Because they advise companies on mergers and acquisitions, preparing feasibility reports, market, or industry studies for companies.
- They are instrumental in addressing the financial needs across classes of society.
NBFCs Not Under RBI Regulations
RBI would regulate only that NBFC in full form, which deals in lending, accepting deposits, financial leasing, hire purchase and acquisition of shares/stocks, etc. Some NBFCs are being regulated by different regulators, depending on their business model. For instance, the companies engaged in activities like stock broking, merchant banking, etc. are regulated by SEBI in India. There are other regulators in India as well, such as IRDA, National Housing Bank, and Department of Company Affairs, etc.
NBFCs that are not under RBI regulations are exempt from the requirement of registration with RBI. But they do need to register with the regulators in their respective fields.
- The Insurance Company needs to be registered with IRDA.
- Venture Capital Funding/Merchant banking Companies/Stockbroking Companies are registered with SEBI.
- Housing Finance Companies (HFCs) are regulated by the National Housing Bank (NHB).
- Nidhi Companies are notified u/s 620A of the Companies Act, 1956.
- Chit Fund Companies are regulated by the state government under which they operate, with provisions being defined in clause (b) of Section 2 of the Chit Funds Act, 1982.
- Non-Banking Non-Finance Companies come under the Companies Act, 1956.
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Frequently Asked Questions
Q. What is NBFC’s full form?
The full form of NBFC is Non-Banking Financial Company. It is a financial institution providing banking services without requiring to hold a bank license. Though, a lot of its activities are similar to that of the banks. But it does not need to hold any banking licenses.
An NBFC is a company registered under the Companies Act and regulated by RBI. The principal business of NBFCs includes financial activities related to investments, giving loans and advances, hire-purchase, insurance business, leasing, chit-fund business, acquisition of shares, bonds, debentures, stocks, and Government or local authority bonds/ securities which are marketable.
Q. What are the requirements for NBFC registration?
The entity desiring to start the business of non-banking financial activities as defined under Section 45 I (a) of the RBI Act, 1949 should:
1) be a company registered under the Companies Act. Either 1956 or 2013.
2) have a minimum net owned fund (NOF) of Rs. 200 lakh. (The minimum NOF required for specialized NBFCs such as NBFC-MFIs, NBFC-Factors, CICs is separate).
Q. How to get NBFC registered?
- Below steps are required for taking NBFC license with RBI:
- File an application form, available online with the official portal of RBI. Upload the necessary documents along with it. You’ll receive a CARN. This reference number is to be used with all future correspondence.
- The application and the documents, in hard copies, are to be sent to the regional office of RBI. Under whose jurisdiction the company is located. Here the accuracy of all rendered documents is checked.
- If the application form is found to be all right, the regional office will forward the application (and documents) for NBFC License to the central office of the RBI.
- RBI shall grant NBFC License in a CoR (certificate of registration) if the applicant company is fulfilling the requirements laid down u/s 45-IA.
Q. What are the documents required for applying for an NBFC license?
- Certificate of Company’s Incorporation
- Documents related to the administration, financials, and management of the company
- MoA and AoA
- Address proof of the company
- Detailed information about Directors or Partners of the Company- PAN & other KYC, qualifications, etc
- Accounts of the company well-audited for at least the past 3-years
- Board Resolution favoring the formation of NBFC
- Bank Account with a minimum paid-up equity share capital of Rs. 2 Crore
- Net worth certificate
- Clean banker report
- Other relevant documents on request
Q. What are Systemically Important NBFCs (SI-NBFC)?
NBFC that have an asset size of Rs. 500 cr or more as per its last audited balance sheet has been classified as SI-NBFC. These are classified separately because they are so large that any of their activities will have a bearing on the financial stability of the market and the overall economy. Therefore, their activities are to be closely monitored.