Non-Banking Financial Company (NBFC) in India


A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income.

A company which fulfills both these criteria will be registered as NBFC by RBI.

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below—

[1] NBFC cannot accept demand deposits;

[2] NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

[3] deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company.

This registration authorises it to conduct its business as an NBFC.

For the registration with the RBI, a company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution, should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999).

 

Features of NBFC—

[1] The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

[2] NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.

[3] NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

[4] NBFCs should have minimum investment grade credit rating.

[5] The deposits with NBFCs are not insured.

[6] The repayment of deposits by NBFCs is not guaranteed by RBI.

 

Types of NBFCs:

[1] Asset Finance Company—

The main business of these companies is to finance the physical assets such as machines, automobiles, generators, lathe machine, industrial machines, earth moving etc.

[2] Investment Company—

It is any financial intermediary whose principal business is that of buying and selling of securities.

[3] Loan Companies—

The principal business of these companies is to make loans and advances.

[4] Infrastructure Finance Company—

A company which has net owned funds of at least Rs. 300 Crore and has deployed 75% of its total assets in Infrastructure loans is called Infrastructure Finance Company.

These companies should maintain credit rating ‘A’ or equivalent with Capital to Risk Asset Ratio of 15%.

[5] Systemically Important Core Investment Company—

A systematically important NBFC (assets Rs. 100 crore and above) which has deployed at least 90% of its assets in the form of investment in shares or debt instruments or loans in group companies is called Systemically Important Core Investment Company.

[6] Infrastructure Debt Fund—

The Infrastructure Debt Funds are meant to infuse funds into the infrastructure sector.

[7] Non-Banking Financial Company – Micro Finance Institution

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

[1] loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding 1,00,000 or urban and semi-urban household income not exceeding 1,60,000;

[2] loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;

[3] total indebtedness of the borrower does not exceed 1,00,000;

[4] tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;

[5] loan to be extended without collateral;

[6] aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;

[7] loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

[8] Non-Banking Financial Company – Factors

NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring.

The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.
[9] Mortgage Guarantee Companies (MGC)—

MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is 100 crore.

[10] NBFC- Non-Operative Financial Holding Company (NOFHC)

It is financial institution through which promoter / promoter groups will be permitted to set up a new bank.

It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

 

Certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI. These are—

 

[1] Chit Fund Companies— Regulated by the respective state government.

[2] Housing Finance Companies— Regulated by the National Housing Bank.

[3] Insurance Companies— Regulated by IRDA.

[4] Mutual Funds— Regulated by SEBI.

[5] Merchant Banking Companies— Regulated by SEBI.

[6] Nidhi Companies— Regulated by Ministry of Corporate Affairs.

[7] Stock Broking— Regulated by SEBI.

[8] Venture Capital Companies— Regulated by SEBI.

 

List of some NBFCs in India—

[1] HDFC

[2] Bajaj Finserv

[3] Power Finance Corporation Limited

[4] Indiabulls Housing Finance Limited

[5] LIC Housing Finance Limited

[6] Shriram Transport Finance Company Limited

[7] Sundaram Finance

[8] Mahindra and Mahindra Financial Services Limited (MMFSL)

[9] L & T Finance

[10] Reliance Capital