During the economic crisis of 2009, businesses across the world got stuck because of not getting finances. The banks which provided finance to them struggled to keep afloat. Relying on just a few institutions has proved to be a costly mistake for many entities. Therefore, alternatives to transform the economy’s savings into a capital investment was needed. India has had huge gaps in credit availability and it was important to build institutions to help fill these blanks. This is where an NBFC or Non Banking Financial Company played an important role. By fulfilling the diverse financial needs of those customers that don’t have access to banks and their services.
NBFCs are companies established under the Companies Act. These companies get NBFC License with the Reserve Bank of India (RBI). NBFCs are intermediaries engaged in the business of finances. NBFC accepts deposits, delivers credit and plays an important role in channelizing the scarce financial resources towards the creation of wealth. They supplement the organized banking sector in meeting the increasing financial requirements of the corporate sector, delivering credit to the unorganized sector and small local borrowers. However, they cannot finance any agricultural activity, industrial activity, sale, purchase or construction of immovable property.
NBFC focuses on activities related to loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by the government/local authority or other similar marketable securities, leasing, hire-purchase, insurance business, etc. The financial services offered by NBFCs include disbursement of finances and loans, acquisition of stocks, shares or bonds, etc.
Objectives of NBFC Sector
The key goal of setting up this prestigious sector has not been profitability. These institutions work with the sole aim of making financial services accessible to one and all. The unique objective set them apart from the banks and made them the prime drivers of growth.
NBFC sector plays an extremely crucial role in the development of the country’s core infrastructure. By offering quicker funds and credit to the Indian trade and commerce industry, these entities are enabling the nation-wide growth of large infrastructure projects. Furthermore, small businesses, start-ups, and MSMEs/SSIs are dependent on funds offered by NBFCs. As these small businesses expand their operations, their need for skilled and unskilled labour, goes up to fulfil the increase in operations. Thus, indirectly, each new NBFC registration creates more job opportunities at the macro-economic level.
The customer base of NBFC vs bank is pretty wide. NBFCs cater to the urban, as well as unorganised rural areas, offering loans to satisfy different requirements. Whereas banks provide finance to the organized sector only. This has resulted in the amount of money lent by the NBFCs to the consumers has been phenomenally more as against banks. Over the last few years, consumer lending has seen a continuous rise, with NBFCs catering to a large portion. With the growth in the economy, the requirement for loans is bound to surge. And NBFCs, along with banks, can give a strong push to the growth and development of the Indian economy.
Growth of NBFC & Their Role
In the last two decades, the capital market in India has witnessed significant ups and downs. The volume of capital market transactions has increased sharply. The functioning diversified. New financial institutions like merchant banks, mutual funds, and venture capital companies have come up and become essential. New financial instruments, such as Fully and Partly Convertible Debentures (FCDs and PCDs), commercial papers, CDs, etc., have emerged. These reflect the growing diversification and measure of sophistication of the financial services sector catering to the needs of growing capital and money markets. The volume of new issues is presently between Rs. 15,000 crores and Rs.20,000 crores. The number of shareholders runs into several millions, indicating the growth of the cult of equity. Commercial banks which deal in the money market are entering the capital market through their merchant banks and mutual funds subsidiaries. They are going to leasing and venture finance also.
They are responsible for providing financial services but are not regulated by a separate governing body and do not hold a full-fledged license for conducting banking operations. Unlike banks, they do not accept demand drafts and are not a part of the Payment and Settlement system.
Further, NBFCs often take lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) most suitable to their business requirements. An NBFC would often take a lead in innovating and customizing the financial services to fund various industries. Such as transportation, employment generation, wealth creation, bank credit in rural segments and aid financially weaker sections of the society. Their role in providing assistance and guidance during emergencies cannot be ignored either.
NBFC Role in Revolutionising the Economy
- Growth: In terms of year-on-year (YoY) growth rate, the NBFC sector beat the banking sector in contributing to the economy every year. On an average, this segment grew by 22% every year, in its initial stages. Despite the slowdown in the economy and various setbacks faced in the last few years, the sector is still growing and enhancing operations.
- Profitability: NBFCs have been more profitable than the banking sector because of lower costs. This enabled them to offer cheaper credit to customers. As a result, the amount of money lent to customers by NBFCs is higher than that of the banking sector with more customers opting for NBFCs.
- Enhancing the Financial Market: An NBFC caters to the urban and rural poor companies and plays a complementary role in financial inclusion. These financial companies bring much-needed diversity to the market by diversifying the risks, increasing liquidity in the markets thereby bringing efficiency and promoting financial stability to the financial sector. They highlight the public issues of corporations as well as providing funds needed by the start-up companies as capital. The financial market is dependent on the functions that are taken care of by these lending companies.
- Infrastructure Lending: NBFCs by lending to infrastructure projects, contribute largely to the economy. This is very important for the growth of a developing country like India. The amount involved is quite large, the projects being risky, with no surety of returns, and profits occurring after a longer time-frame. These factors deter banks from financing these projects. Since their inception, NBFCs have contributed more to infrastructure lending than banks.
- Promoting Inclusive Growth: All the top NBFC in India cater to a wide variety of customers – both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. Microfinance provided by them plays an important role to attain stable financial inclusions. All these activities by the institution with an NBFC License help promote inclusive growth in the country.
- Upliftment in the Employment Sector: With the growth in operations of the small industries and businesses, the policies of NBFCs are uplifting the job situation. More opportunities for employment are arising with the influence of the NBFCs in the private as well as government sectors. The business activities in the private sector provide more employment opportunities and occupation practices. And NBFC play a key role in their growth and stability.
- Mobilization of Assets: With more public preferring to deposit in NBFCs because of their higher rate of interest, NBFCs allow mobilization of resources; funds and capitals. Due to their easier norms for investing, these companies create a balance between intra-regional income and asset distribution. Turning the savings into investments, these companies contribute to economic development as compared to traditional bank practices. Proper organization of capital helps in the development of the trade and industry, leading to economic progress. They operate not intending to maximise their profit and are, therefore, engaged in activities that generate zero or very low revenue.
- Financing for Long-Term: NBFC play a key role in providing firms with funds through equity participation. As against traditional banks, NBFCs supply long-run credit to trade and commerce industry. They facilitate to fund large infrastructure projects and boost economic development. Long-term finance permits growth with stable and soft interest rates. The economy thrives when businesses of SSIs and MSMEs flourish.
- Raising the Standard of Living: NBFCs collaborate with the government for the upliftment of the society. The NBFCs attract deposits from the general public and convert it into capital for industrial and other sectors for smooth economic development. The rise in businesses consequently raises the demand for workforce and creates employment opportunities raises the purchasing power of individuals and, subsequently, raising demands. This works to upgrade the living standards of a society. Also, foreign deposits are attracted to these financial institutions and support economic process and development.
- Innovative Products: NBFCs, by being flexible in terms of lending and investment opportunities than banks, are more proactive in innovating financial products. This facilitates their growth in an exceedingly prudent manner. They fine-tune their selling campaigns in regard to their target customers. These corporations are the game changers within the developing economy. For instance, the factorization & bill payment service has been revolutionized. NBFC P2P is a relatively new segment in India that is already creating waves by providing considerably higher margins and facilitating loans at a lower cost.
The banking sector would always be most important in the field of business because of its credibility in aiding manufacturing, infrastructural growth and even being the backbone for the common man’s money. But despite this, the NBFC sector’s role is critical and its presence in a country only helps boost the economy in the right direction.
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NBFC Guidelines: Registration, Compliances, Returns & Prudential Norms
Frequently Asked Questions
Q. What is NBFC?
NBFC or Non-Banking Financial Company is a financial institution that provides banking services without requiring to hold a bank license. Though, many of its activities are similar to banks. But they do not require any banking licenses.
NBFC is a company registered under the Companies Act, and regulated by RBI. Principal business of NBFCs includes activities related to investments, giving loans and advances, leasing, hire-purchase, insurance business, chit-fund business, acquisition of shares, bonds, debentures, stocks, and Government or local authority bonds/ securities which are marketable.
Q. What is the role of NBFC in India’s growth??
- NBFCs have played a critical role in the development of core sectors of infrastructure, transport, and MSMEs.
- It also created opportunities for employment and work for economically weaker sections, by providing them financial support.
- NBFCs provided them with an alternative source of funding and liquidity.
- NBFCs also make a major contribution to the state exchequer.
- With their specialised expertise, they provide an alternative source of credit and related services in the credit intermediation chain more cost-efficiently.
- NBFCs exist in areas where banks prefer to keep away from providing this unorganised sector of society the last mile connectivity.
Q. How to get NBFC registered?
- Below steps are required for registering NBFC with RBI:
- File an application form, available online with the RBI on its official portal. Enclosing it with the necessary documents. The applicant will get a CARN. This reference number is to be used during all further correspondence.
- The application and the documents are to be physically sent to the regional office of RBI, nearest to the company. Here the accuracy of all rendered documents is checked.
- If the documents are found to be all right, the regional office will forward the application (and documents) for NBFC License to the central office of the RBI.
- The central office of RBI grants NBFC License if the applicant company is fulfilling the requirements laid down u/s 45-IA.
Q. What documents are required with NBFC license application?
- 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 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 (NBFC-SI)?
NBFC with an asset size of Rs. 500 cr or above as per the last audited balance sheet have been classified as NBFC-SI. The reason being that their activities will have a bearing on the financial stability of the overall economy, and therefore, should be closely monitored.
Q. What provisions are there for NBFC-ND with an asset size of less than Rs. 500 crore?
The regulations on NBFC-ND with an asset size of less than Rs. 500 crore are:
(i) They shall not be subjected to any regulation (whether prudential or conduct of business regulations), such as Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.
(ii) Those which have a customer interface will be subjected only to conduct of business regulations if they are not accessing public funds.
(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they don’t have a customer interface.
(iv) Where both public funds are accepted and customer interface exists, such companies are subjected both to limited prudential regulations and conduct of business regulations.
Q. What are the responsibilities of the NBFCs registered with RBI, about submitting returns and other information?
- Returns to be submitted by NBFC-D
- NBS-1Quarterly Returns on deposits in First Schedule.
- NBS-2Quarterly Returns on Prudential Norms are required to be submitted by NBFC accepting public deposits.
- NBS-3Quarterly Returns on Liquid Assets by the deposit accepting NBFC.
- NBS-4Annual Returns of critical parameters by a company whose CoR was rejected, holding public deposits.
- NBS-6Monthly Returns on exposure to capital market by NBFC-D with total assets of Rs. 100 crore or over.
- ALM Half-yearly Returns by NBFC holding public deposits of over Rs. 20 crore or asset size of more than Rs. 100 crore
- Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
- Branch Info Return.
- Returns to be submitted by NBFCs-ND-SI
- NBS-7Quarterly statement of capital funds, risk-weighted assets, risk asset ratio etc., for NBFC-ND-SI.
- Important Financial Parameters Monthly Returns by NBFCs-ND-SI.
- ALM Returns:
(i) NBS-ALM-1: Monthly Statement of short term dynamic liquidity.
(ii) NBS-ALM-2: Half-yearly Statement of structural liquidity,
(iii) NBS-ALM-3: Half-yearly Statement of Interest Rate Sensitivity.
- Branch Info return.
- Returns by NBFC-ND having assets of more than Rs. 50 crore but less than Rs. 100 crore
Basic information like name of the company, address, NOF, profit /loss during the last 3-years to be submitted quarterly.