- 1 About NBFCs
- 2 Conditions to Register as NBFC
- 3 Types of NBFC Not to be Registered under RBI:
- 4 Types of NBFC
- 4.1 1. Investment & Credit Company
- 4.2 2. Infrastructure Finance Company
- 4.3 3. Systematically Important Core Investment Company
- 4.4 4. Infrastructure Debt Fund in Types of NBFC
- 4.5 5. Microfinance Institution
- 4.6 6. Factors as Types of NBFC
- 4.7 7. Mortgage Company in Types of NBFC
- 4.8 8. Non- operative Financial Holding Company
- 5 Frequently Asked Questions
The banking sector all over the world constitutes a large number of financial operations such as deposits, loans, etc. Most nations have a centralized bank to regulate all the banks operating in that nation. There are various types of financial institutions that indulge in financial transactions. These types include NBFC or Non-Banking Financial Company, which is different from the banks.
An NBFC functions almost like a bank. It receives money as a whole or in installments connected to a scheme and runs its financial process by providing loans, financial leasing, or hire purchase. But, it cannot accept public deposits by allowing people to open savings/current accounts with it.
However, NBFCs can receive deposits under any arrangement or scheme in one lump sum or regular contributions or some similar method. An NBFC, also, cannot issue cheques and drafts, drawn on itself.
NBFCs provide credit and loans at the micro-level. That is mainly to small, medium scale enterprises, to help them overcome their liquidity cash insufficiency.
There are a variety of NBFCs that an individual comes across in day to day life that involves itself in various financial activities. But before we learn about the types of NBFC, let’s check the provisions set by the RBI for companies to become an NBFC.
Conditions to Register as NBFC
There are a few requirements that the business has to meet before applying to RBI for NBFC License.
- The business should be registered as a company under the Companies Act, 1956, or 2013.
- The minimum capital (Net Owned Fund) requirement is Rs. 2 crores.
- The principal business of the applicant should be financial activities. If the financial flow of the business is more than 50% of the total capital asset, then that company can get NBFC registration.
- It should have at least 1 Director from the financial field or a senior banker as a Director.
- The CIBIL (Credit Information Bureau Limited) records should be clean.
Types of NBFC Not to be Registered under RBI:
There are certain businesses that are involved in providing financial activities but do not need to obtain a registration with RBI. These types of entities are regulated by other financial sector regulators, and to avoid dual regulation, they are not required to obtain an NBFC License from RBI. They are:
- Insurance Companies: These are regulated by the Insurance Regulatory and Development Authority of India (IRDA),
- Housing Finance Companies: Being regulated by the National Housing Bank (NHB),
- Stock-Broking Companies: These are regulated by the Securities and Exchange Board of India (SEBI),
- Merchant Banking Companies: Again being regulated by SEBI,
- Mutual Funds: SEBI is the regulator,
- Venture Capital Companies: SEBI is the regulatory authority,
- Companies running Collective Investment Schemes: SEBI is the regulator,
- Chit Fund Companies: These are regulated under the Chit Fund Act and by the respective State Governments,
- Nidhi Companies: Being regulated by the Ministry of Corporate Affairs (MCA).
Types of NBFC
NBFC Registration can be either Deposit Accepting or Non-Deposit Accepting ones. If they are Non-Deposit Accepting NBFCs, ND is suffixed to their name, as in NBFC-ND. The NBFCs with an asset size of Rs.100 Crore or more are known as Systematically Important NBFC. The types of NBFC have been named so because they can impact the financial stability of the country. The Non-Deposit Accepting Systematically Important NBFCs are known as NBFC-NDSI.
Under the broad categories of Deposit Accepting and Non-Accepting NBFCs, they may be further divided into below 8 categories:
1. Investment & Credit Company
ICC-NBFC is any financial institution carrying on as its principal business – asset finance, the provision of finance whether by making loans or advances or otherwise, for any activity other than its own, and the acquisition of securities. And is not included in any other types of NBFC as defined by RBI in any of its Directives.
(a) Asset Finance Company: An AFC is a financial institution which carries on the financing of various assets for individuals and the businesses supporting productive/economic activity, as its principal business. For example, automobiles, tractors, machinery, heavy industrial equipment, large power generator sets, lathe machines, earthmoving & material handling equipment, production & farming equipment, moving on own power, and general-purpose industrial machines.
The income arising from these should not less be than 60% of its total assets.
(b) Investment Company: The financial institution whose principal business is the acquisition of securities. That is it takes money from the public which is invested in various securities and financial products.
Then the company deducts its operational cost from the earned profit and the balance is distributed to its shareholders.
Bajaj Alliance General Insurance Company, IDFC, HDFC mutual fund are examples of some Investment company.
(c) Loan Company: NBFC – LC is a financial institution that offers a loan for various purposes except for AFC. The loan is offered not for assets but for other purposes such as working capital finance etc. But includes the Housing Finance Firms.
LIC Finance Ltd, PNB Housing Finance Firm, HDFC are some examples of the NBFC – LC.
2. Infrastructure Finance Company
It is an NBFC which –
- Deploys 3/4th of its total assets in infrastructure loans
- Has a minimum Net Owned Fund of Rs? 300 crores
- Has been ranked at least “A” in its credit rating or similar
- CRAR of at least 15%
Some examples are GMR infrastructure ltd, Hindustan Construction Company, etc.
3. Systematically Important Core Investment Company
An NBFC which:
- Holds at least 90% of its total assets in the form of investment in shares, stocks, debt, or loan group company.
- Out of 90%, 60% should be invested in equity shares or those which compulsorily convert later in equity shares, within a period not exceeding 10 years from the date of issue.
- 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.
- It is not involved in any activity referred to in section 45(c) or 45(f) of RBI act 1934.
- The asset size is Rs. 100 crore or more.
- That accepts public funds.
4. Infrastructure Debt Fund in Types of NBFC
IDFs raise resources through bonds for long-term infrastructure projects. The bonds are issued in multiple currencies with a minimum 5–year maturity for investors. It facilitates the flow of long term debt into infrastructure projects. Only IFC-NBFCs can sponsor IDF-NBFCs.
5. Microfinance Institution
NBFC-MFI is an ND-NBFC (Non-Deposit Accepting NBFC) with not less than 85% of its assets in the nature of qualifying assets that satisfy the following criteria:
- loan disbursed by it to a borrower having a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000,
- the loan amount is not more than Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles,
- the total indebtedness of the borrower is not more than Rs. 50,000, d. duration of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty, e. loan to be extended without any security,
- the aggregate amount of loans, given for income generation, is not less than 75% of the total loans given by the MFIs,
- the loan is repayable on weekly, fortnightly, or monthly installments at the option of the borrower.
Bandhan Financial Service Ltd, Ujjivan Financial service are some examples.
6. Factors as Types of NBFC
In India, this type of NBFC is rarely found. Such companies normally buy loans or advances at a much-discounted rate from lenders and after that, they adjust the repayment table of the debtor to ensure facile settlement adding small profit.
It does not include normal lending by a bank against the security of receivables, etc.
An NBFC-Factoring company should have a minimum NOF of Rs. 5 Crore. And its financial assets in the factoring business should compose of at least 75% of its total assets. And its income received from factoring business should not be less than 75% of its gross income.
7. Mortgage Company in Types of NBFC
NBFC-MGCs are FI for which:
- At least 90% of the business turnover is of mortgage guarantee,
- At least 90% of the gross income is from the mortgage guarantee business,
- NOF is Rs. 100 crores.
8. Non- operative Financial Holding Company
It is a separate category of NBFCs, set-up of a new bank opened by the promoters. It is a wholly-owned Non-operative financial holding company. Permitted by the RBI under applicable regulatory prescription. To set up or hold the bank as well as another financial service.
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Frequently Asked Questions
Q. What is NBFC?
NBFC is a company registered under the Companies Act 1956 or 2013. NBFC is a company with its primary business of receiving deposits. It raises funds from the public (directly or indirectly) and lends them to the small enterprises. NBFCs provide credit facilities and are preferred more than banks. They are not allowed to run their business without getting a license from RBI.
NBFCs are an important source of financing for the Indian small scale industries.
Q. What is the process of NBFC registration?
- The applicant company is required to apply online for NBFC registration to the RBI. On successful submission of the application form and relevant documents, a CARN number is generated. This number is to be used for reference during all future conversations and inquiries.
- After that, the company is to submit the hard copies of the online application, and the supporting documents uploaded, to the nearest regional office of the RBI.
- After verifying the documents, the regional office forwards the application to the head office of the RBI. There, a more thorough examination is conducted.
- If all legal conditions are being met, the company will be registered as an NBFC. And the NBFC license will be issued.
Q. What documents are required for NBFC registration?
The documents to be attached with the application form for NBFC registration are:
- Company’s Incorporation Certificate
- Company’s Bank Account with a minimum paid-up equity share capital of Rs. 2 crore
- MoA & AoA
- Address proof of the company
- Duly filled up and signed Annexure I, II, and III
- Details about the Directors
- Documents of administration and management of the company
- Audited financial accounts for the last 3-years
- Board resolution approving the company’s registration as an NBFC
- A brief overview of the company’s works and activities in the past 3 years
- Income tax, PAN, etc.
- Any other relevant documents.
Q. Does RBI regulates all financial institutions?
No, RBI does not regulate all financial institutions. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Insurance companies, Nidhi Companies, and Chit Fund Companies are NBFCs but they are exempt from registration u/s 45-IA of the RBI Act, 1934.