Non-Banking Financial Companies (NBFCs) – Types, Regulations

Under the Companies Act, 2013 of India, the NBFC (Non-Banking Financial Company) is a company registered. It is involved in the business of loans and advances, bonds, acquisition of shares, stock, hire-purchase insurance business, or chit-fund business. But it does not involve any institution whose principal business such as industrial activity, agriculture, purchase or sale of any goods (other than securities), or giving any services and purchase/sale/construction of the fixed property.

The working and operations of NBFCs are controlled by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III-B). And the directions circulated by it. On 9 November 2017, the Reserve Bank of India (RBI) circulated a notification outlining norms for the outsourcing of services/functions by Non-Bank Financial Institution (NBFCs).

As per the new criteria, NBFCs cannot outsource core management functions like internal audit, strategic, management of investment portfolio, and compliance functions for knowing your customer (KYC) norms, and sanction of loans. The staff of service providers should have access to customer information only up to an extent that is required to perform the outsourced function. NBFCs Boards should approve a code of conduct for direct sales and recovery agents.

NBFCs and their outsourced agents that do not resort to intimidation or harassment of any sort for debt collection. All NBFCs’ have been guided to set up a grievance redressal machinery that will also deal with the concerns relating to services rendered by the outsourced agency.

Features of NBFC Regulations

Some of the important regulations associating with the acceptance of deposits by NBFCs are mentioned below:

• Non-Banking Financial Companies are preferred to renew/accept public deposits for a mini period of 12 months and a maximum period of 60 months. They cannot allow deposits repayable on demand.
• NBFCs cannot provide interest rates higher than the ceiling rate from time to time directed by RBI. The present ceiling is 12.5% per annum. The interest may be paid or compounded at rests not less than monthly rests.
• NBFCs cannot give gifts/incentives or any other extra benefit to the depositors.
• NBFCs should hold a minimum investment-grade credit rating.
• The deposits with NBFCs are not guaranteed.
• The repayment of deposits by NBFCs is not insured by RBI.
• Certain compulsory disclosures are to be made about the company in the Application Form declared by the company petitioning deposits.

Top Advantages from the NBFCs

There are literally several benefits of the NBFCs; from approving the loans quickly to low-interest rates that no one can list all the benefits that a non-banking financial firm offers. Therefore, here are some of the most notable advantages that the NBFCs offer:

• NBFCs offer a completely tension free disbursal
• Acknowledges the value of the properties highly while sanctioning the loans
• The most important thing that all the small business owners look for is the low-interest rate and the non-banking financial companies are the best organizations that offer small business loans against very low-interest rates.
• Quick approval of loans
• You will be able to avail of the loans from the NBFCs easily from your home through their online website or visit the office.
• The loans are provided with as well as without security.
• The NBFCs are ahead of the other banking organizations as they do not consider the statutory charges like stamp duty or registration duty differently. And you will be capable of getting your loan approved by your financial institution within a very short time without much paperwork and guarantees.

Types of NBFC

In terms of the kind of liabilities into Deposit and Non-Deposit accepting NBFCs, non-deposit allowing NBFCs by their size into systemically relevant and other non-deposit enduring companies (NBFC-NDSI and NBFC-ND) and by the kind of activity they carry. Within these broad classifications the different types of NBFCs are mentioned below:

1. Asset Finance Company (AFC): An Asset Finance Company is a company that is a financial institution holding on as its main business the financing of real assets implementing economic/productive activity. Such as automobiles, tractors, earthmoving, lathe machines, generator sets, and material handling equipment, moving on its power and common purpose industrial machines.

2. Investment Company (IC): Investment Company determines any company that is a financial institution taking on as its principal business the acquisition of securities,

3. Loan Company (LC): Loan Company determines any company that is a financial institution taking on as its principal business the provision of finance whether by offering loans or advances or otherwise for any activity other than its individual but does not include an Asset Finance Company.

4. Infrastructure Finance Company (IFC): Infrastructure Finance Company is a non-banking finance company.

• That deploys at least 75% of its total assets in infrastructure loans.
• It holds a minimum Net Owned Funds of Rs. 300 crores.
• It holds a minimum credit rating of “A” or equivalent.
• CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-ND-SI): Systemically Important Core Investment Company is an NBFC commencing on the business of acquisition of shares and securities. It should meet the mention of the term given below: –

• This includes not less than 90% of its Total Assets in the form of investment in equity shares, debt, preference shares, or loans in group companies.
• Its investments in the equity shares (involves instruments imperatively exchangeable into equity shares in a period not exceeding 10 years from the date of issue) in group companies compose not less than 60% of its Total Assets.
• This does not trade in its investments in shares, debt, or loans in group companies without block sale for dilution or disinvestment.
• It does not take on any other financial activity related to Section 45I(c) and 45I(f) of the RBI act, 1934 without investment in bank deposits, government securities, money market instruments, loans to and investments in debt issuances of group companies or guarantees issued on account of group companies.
• CIC-ND-SI asset size is Rs. 100 crores or above and
• It accepts public funds

6. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a company enrolled as NBFC to aid the issue of long duration debt into infrastructure projects. IDF-NBFC allocates resources by the issue of Rupee or Dollar titled bonds of minimum 5-year maturity. IDF-NBFCs can be sponsored only by Infrastructure Finance Companies.

7. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): Non-Banking Financial Company – Micro Finance Institution is a non-deposit accepting NBFC. It should not less than 85% of its assets alike reducing assets that meet the guidelines mentioned below:

• This loan is paid by a Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI) to a borrower by a rural household yearly income that will not be exceeding Rs. 1,00,000 or urban and semi-urban household assets not exceeding Rs. 1,60,000.
• The loan amount does not exceed Rs. 50,000 in the first cycle and Rs. 1,00,000 in the following cycles.
• The borrower does not exceed Rs. 1,00,000 from its total indebtedness.
• Security of the loan not to be less than 24 months for loan amount over Rs. 15,000 with prepayment without penalty.
• Loan to be increased without insurance.
• The total amount of loans, given for income generation, is not less than 50% of the total loans provided by the MFIs.
• The loan is repayable on weekly, fortnightly, or monthly installments at the selection of the borrower.

8. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit receiving NBFC involved in the principal business of factoring. The financial assets in the factoring business obligation to constitute at least 50 % of its total assets and its income received from the factoring business should not be more than or equal to 50 % of its gross income.

• Mortgage Guarantee Companies (MGC): Mortgage Guarantee Companies are financial institutions for that at least 90% of its business that turnover is a debt guarantee business or at minimum 90% of the gross income is of debt guarantee business and the net fund is Rs. 100 crores.
• NBFC: Non-Operative Financial Holding Company (NOFHC) is a financial institution in which promoter/promoter groups will be enabled to establish a new bank. It’s a completely-hold Non-Operative Financial Holding Company (NOFHC) that will operate the bank as well as all other financial services companies controlled by RBI or other financial sector controls, to the limit permitted under the applicable regulatory directions.

Types of NBFC that not Registered under RBI

Some businesses are included in providing financial activities but do not need to get a registration with RBI. These types of entities are managed by other financial sector regulators, and to avoid dual regulation. They are not required to get an NBFC License from RBI. They are mentioned below:

• Insurance Companies: These are managed by the Insurance Regulatory and Development Authority of India (IRDA),
• Housing Finance Companies: Being controlled by the National Housing Bank (NHB),
• Stock-Broking Companies: These are controlled by the Securities and Exchange Board of India (SEBI),
• Merchant Banking Companies: Again being directed by SEBI,
• Mutual Funds: SEBI is the regulator,
• Venture Capital Companies: SEBI is the regulatory authority,
• Companies working with Collective Investment Schemes: SEBI is the regulator,
• Chit Fund Companies: These are directed under the Chit Fund Act and by the individual State Governments,
• Nidhi Companies: Being regulated by the Ministry of Corporate Affairs (MC
• Difference between NBFCs & Banks

NBFCs offer Functions Related to that of Banks but there are some Differences-

• NBFCs give banking services to people without operating a Bank license,
• An NBFC cannot receive Demand Deposits,
• An NBFC is not a component of the payment and settlement system
• An NBFC cannot assign cheques drawn on itself
• For NBFC depositors, the Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not possible, unlike banks
• An NBFC is not needed to secure Reserve Ratios (CRR, SLR, etc.)
• An NBFC cannot satisfy essentially in agricultural or industrial activities or sale-purchase, construction of the fixed property
• Foreign Investment allowed up to 100 %
• An NBFC accompanies running in Financial Body and Money handling.

Top 10 NBFCs in India

Below are the top 10 NBFCs in India:

1. Power Finance Corporation Limited

Founded in 1986 Finance Corporation Limited is a Navratna Status company. The Chairman and Managing Director of the company are Mukesh Kumar Goel. Power Finance Corporation provides financial assistance to different power projects in the country and also supports organizations involved in Power generation, transmission, and distribution. It is also enrolled in the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) as well.

2. Shriram Transport Finance Company Limited

Founded in 1979, Transport Finance Company Limited concentrates on funding commercial and business vehicles, besides others. For Light Duty Trucks, Heavy Duty Trucks, Mini Trucks, Passenger Vehicles, Construction Vehicles, and Farm Equipment it has been offering funding services. General insurance, mutual funds, common assets, stockbroking are the specialization of the company.

3. Bajaj Finance Limited

Bajaj Finance Limited is a unit of Bajaj Holdings and Investments and was founded in 2007. It is a remarkably popular finance company as it offers loans to doctors for career enrichment, home loans, gold loans, individual loans, business and entrepreneur loans, etc. Apart from these, it too provides services like wealth advisory, lending money, and general insurance.

4. Mahindra & Mahindra Financial Services Limited

Instituted in 1991 Mahindra & Mahindra Financial Services Limited (MMFSL) is one of the most notable organizations and has two affiliates giving Insurance services and rural housing financial services. It has over 1000 branches, and a customer base of over 3 million, all over the country. (MMFSL) also specializes in offering gold loans, vehicle loans, corporate loans, home loans, working capital loans, and many more.

5. Muthoot Finance Ltd

India’s first NBFC Muthoot Finance Ltd was initiated as a small lender from a village in Kerala in 1888. It approves loans only against the security of gold ornaments and is also a leader in India’s gold loan and financial market. Muthoot Finance Ltd also offers foreign exchange services, money transfers, wealth management services, travel, and tourism services besides financing in gold transactions. The company operates around 4,400 branches throughout the country with its headquarters in Kerala, India. It is also the progenitor of Muthoot Housing Finance (India) Ltd, which offers home loans.

6. HDB Finance Services

Operated by India’s biggest private-sector HDFC Bank, HDB Finance service is recognized as the fastest-growing NBFC in India. Through a network of more than 1,000 branches in 22 Indian states and 3 Union Territories, it offers a variety of secured and unsecured financial loans. It also comprises personal and business loans, doctor’s loans, auto loans, gold loans, enterprise business loans, consumer durables loans, construction equipment loans, car loans(new and used), equipment loans, and tractor loans. The company runs through Lending Business and BPO Services divisions.

7. Cholamandalam

Cholamandalam Investment and Finance Company Limited (Chola) is a Financial Service division of Murugappa Group, incorporated in 1978. It began as an equipment financing company and is leading as a complete financial services provider offering all kinds of services like – vehicle finance, home loans, home equity loans, SME loans, investment advisory services, stockbroking, and an innkeeper of different financial services to customers.

8. Tata Capital Financial Services Ltd

Tata Capital Financial Services Limited a subsidiary of Tata Sons is one of India’s leading NBFCs. It portrays itself as a one-stop financial service provider that provides the diverse needs of retail, corporate and institutional customers across businesses. It is enrolled as ‘Systemically Important Non-Deposit Accepting Non-Banking Financial Company (NBFC)’ with RBI.

9. L & T Finance Limited

L & T Finance Limited established in 1994 is one of the fastest-growing companies in the non-banking financial sector. Including its headquarter in Mumbai, L & T grants funding assistance to various areas like trade, agriculture, industry, Commercial Vehicle loans, Individual Vehicle loans, and corporate and rural loans. It was also bestowed with the Company of the Year award in the 2010 Economics Times Awards.

10. Aditya Birla Finance Ltd.

Aditya Birla Finance Limited, a part of Aditya Birla group is an essential non-deposit accepting non-banking finance company and ranks amongst the top five largest private diversified NBFC in India as of 31st March 2017. It also offers custom-built solutions in areas of personal and business loans, corporate finance, mortgages, capital market-based lending, project loans, structural finance, wealth management and digital lending, debt capital markets, and syndication. Guidance suitable on non-deposit accepting NBFCs with asset size of less than Rs. 500 crore

The guidance on Non-Deposit accepting NBFCs with asset size of fewer than Rs. 500 crores would be as follows:

1. If they have not obtained any public funds and do not have a customer interface then they shall not be subjected to any regulation either prudential or administration of business management viz., Fair Practices Code (FPC), KYC, etc.
2. Those having customer interfaces will be constrained only to conduct business regulations including FPC, KYC, etc. if they are not obtaining any public funds.
3. Those who are allowing public funds will be subjected to limited prudential guidance but not conduct of business guidance if they have no customer interface.
4. Such Companies where public funds are accepted and customer interface exist will be subjected both to restricted prudential regulations and conduct of business regulations.

How to join an NBFC?

The procedure to incorporate an NBFC is:

• First, a company should be registered as either a Private Limited or a Public Ltd under the Companies Act 2013 or 1956 if already registered.
• Rs. 2 Crore should be the minimum net owned funds of the company.
• A Finance Experience must be possessed by 1/3rd of the Directors of the Company.
• The Company’s CIBIL records should be clean.
• A thorough business plan of 5 years should be prepared by the company.
• The requirements for capital compliances must be complied with by the company.
• The online application should be filled and submitted along with the necessary documents on the website of RBI after all of the above conditions have been completed.
• After the submission, a CARN Number will be generated.
• Application’s Hard Copy must have to be sent to the regional branch of Reserve Bank of India.
• The license will be provided to the company after the application is correctly examined.

What are the instructions that an NBFC must follow?

Once the Company gets a legitimate license it has to stick to the following guidelines:

1. The deposits which are payable on demand cannot be received.
2. A minimum period of 12 months and a maximum time of 60 months should be taken by a company for the public Deposits.
3. The Company cannot charge the interest more than the ceiling designated by the Reserve Bank of India from time to time.
4. The Reserve Bank of India does not guarantee the repayment of any amount taken by the Company.
5. All the information about the company as well as any change in the composition of the Company has to be provided to the Reserve Bank of India.
6. The deposits will be unsecured taken by the Public.
7. The Company’s audited balance sheet should be submitted every year.
8. A sanctioned return on the deposits taken by the company has to be supplied in the form NBS – 1 every year.
9. A Quarterly Return on the liquid assets has to be furnished by the company.
10. A certificate from the auditors had to be obtained declaring that the company is in a place to pay back all the deposits or money received from the Public.
11. The company has a Public Deposit of Rs. 20 Crore and above or has an amount worth Rs. 100 Crores and above has to return a half-yearly Asset Liability Management (ALM).
12. Every 6 months, a credit rating has to be taken and submitted to the RBI.
13. The Company has to maintain a minimum level of 15% of the Public Deposits in Liquid Assets.
14. The consumer can visit the National Company Law Tribunal or the Consumer Forum to file a lawsuit against the company if the NBFC defaults in the payment of any amount taken.

NBFCs Rate of Interest and Term of Deposit

Can all NBFCs accept Deposits? Is there any cover on acceptance of Public Deposits? What is the Rate of Interest and Term of Deposit Which NBFCs can accept?

All NBFCs are not authorized to acquire public deposits. Only those NBFCs to which the Bank had given a particular authorization and have an investment-grade rating are entitled to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds. All current unrated AFCs that have been provided to accept deposits shall have to get themselves rated by March 31, 2016.

Those AFCs that do not get an investment-grade rating by March 31, 2016, will not be entitled to renew existing or acquire fresh deposits thereafter. Unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity and do not accept fresh deposits till they obtain an investment-grade rating in the interceding period, i.e. till March 31, 2016.

However, as a matter of public policy, the Reserve Bank has decided that only banks should be permitted to accept public deposits and as such has since 1997 not declared any Certificate of Registration (CoR) to new NBFCs for permission of public deposits.

Presently, NBFC can offer 12.5% of the maximum rate of interest. The interest may be paid or increased at intervals not lower than monthly intervals. The NBFCs are allotted to accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months. They cannot accept repayable deposits on demand.

Precautions a depositor should take before placing a deposit with an NBFC

A depositor needing to place a deposit with an NBFC must follow the following precautions before placing deposits given below:

• The NBFC is enrolled with RBI and specifically authorized by the RBI to take deposits. A record of deposit-taking NBFCs approved to allow deposits are available at www.rbi.org.in > Sitemap > NBFC List. The depositor must check the list of NBFCs allowed to accept public deposits and also check that it is not appearing in the list of companies prohibited from taking deposits that is accessible at www.rbi.org.in > Sitemap > NBFC List > NBFCs who have been circulated prohibitory orders, winding up petitions filed and legal cases under Chapter IIIB, IIIC and others.
• NBFCs have to prominently disclose the Certificate of Registration (CoR) issued by the Reserve Bank on its site. This certificate also shows that the NBFC has been specially approved by RBI to accept deposits. Depositors must examine the certificate to ensure that the NBFC is approved to accept deposits.
• The maximum interest rate that an NBFC can pay to a depositor must not exceed 12.5 percent. The Reserve Bank keeps changing the interest rates depending on the macro-economic environment. The Reserve Bank Of India (RBI) proclaims the change in the interest rates on www.rbi.org.in > Sitemap > NBFC List > FAQs.
• The depositor needs to ask for a proper receipt for every amount of deposit placed with the company. The receipt should be properly signed by an officer approved by the company and should state the date of the deposit, the name of the depositor, rate of interest payable, the amount in words and figures, maturity date, and amount.
• In the case of brokers/agents etc obtaining public deposits on behalf of NBFCs, the depositors should assure themselves that the brokers/agents are properly approved by the NBFC.
• The depositor needs to bear in mind that public deposits are unsecured and the Deposit Insurance means it is not possible for depositors of NBFCs.
• The Reserve Bank of India (RBI) does not allow any responsibility or guarantee about the present state as to the financial soundness of the company or for the accuracy of any of the statements or representations made or opinions stated by the company and for repayment of deposits/discharge of the indebtedness by the company.

Conclusion

The main advantage of NBFC is that the start-up businesses or aspirants who want to join the businesses can get a quick loan without any trouble. Thus, if one is considering making one’s mark in the business world then they can take services by taking a loan from NBFCs. As the process is completely hassle-free. Only if the financial record is genuine with the correct documents.

Frequently Asked Questions

Q1: What is a Non-Banking Financial Company (NBFC)?

Ans. NBFC is a Non-Banking Financial Company whose principal business of which is:

• lending money or
• investing in shares/stocks/bonds/debentures or
• leasing hire purchase, or
• doing insurance business, chit business or
• Receiving deposits under any scheme or arrangement.

Q2. What are the types of Non-Banking Financial Company (NBFC)?

Ans. There are 2 types of NBFCs, and they are:

• Deposit-taking NBFCs.
• Non- Deposit-taking NBFCs.

Q3. What are the requirements to register as an NBFC?

Ans. As per the rules & regulations of Reserve Bank of India Act[1], 1934 No company can commence the business of NBFC unless it has obtained the certificate of NBFC registration and holding a net owned fund of Rs. 2 Crore.

For registering as an NBFC an application to the Regional Office of RBI should be made along with the required documentation.

Q4. NBFCs are doing functions similar to banks. What is the difference between banks & NBFCs?

Ans. NBFCs lend and get investments and therefore, their activities are akin to that of banks. However, there are some differences as mentioned below:

• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot dispense cheques drawn on itself;
• The deposit insurance convenience of Deposit Insurance and Credit Guarantee Corporation is not accessible to depositors of NBFCs, unlike in the case of banks.

Q5. What are systemically important NBFCs?

Ans. NBFCs whose asset size is Rs. 500 cr or more as per the last audited balance sheet are considered as systemically important NBFCs. The reason for such distribution is that the activities of such NBFCs will have a presence on the financial stability of the overall economy.

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