Understanding of Non-Banking Financial Company (NBFC)

About NBFC

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).

Categories of NBFCs

NBFCs are categorized in terms of

• Liabilities into Deposit and Non-Deposit accepting NBFCs,
• Non Deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
• By the kind of activity they conduct.

Within this broad categorization the different types of NBFCs are as follows:

1. Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lather machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively.

2. Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

3. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

4. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75% of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities.

6. Infrastructure Debt Fund - Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): 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:

• loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding  Rs 1,00,000 or urban and semi-urban household income not exceeding Rs 1,60,000;
• loan amount does not exceed Rs 50,000 in the first cycle and Rs 1,00,000 in subsequent cycles;
• total indebtedness of the borrower does not exceed Rs 1,00,000;
• tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with prepayment without penalty;
• loan to be extended without collateral;
• aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
• loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

8. Non-Banking Financial Company – Factors (NBFC-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% of its total assets and its income derived from factoring business should not be less than 50% 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 Rs 100 crore.

10. NBFC- Non-Operative Financial Holding Company (NOFHC) 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.

Procedure for Incorporation of NBFC

The procedure to incorporate an NBFC is:

1. A company should first be registered under Companies Act 1956 or under the Companies Act 2013.
2. The minimum net owned funds of the Company should be Rs. 2 Crore.
3. There should be a minimum of 1 director from the same background or a Senior Banker as a full-time director in the Company.
4. The CIBIL records of the Company should be clean.
5. After all of the above conditions have been satisfied the online application on the website of RBI should be filled and submitted along with the requisite documents.
6. A CARN Number will be generated.
7. A hard copy of the application also has to be sent to the regional branch of the Reserve Bank of India (RBI).
8. After the application is properly scrutinized, the License will be given to the Company.

Compliance

A.   Returns to be submitted by deposit taking NBFCs

1. NBS-1 Quarterly Returns on deposits in First Schedule.
2. NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public deposits.
3. NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
4. NBS-4 Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)
5. NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of ₹ 100 crore and above.
6. Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 crore
7. Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
8. Branch Info Return.

B.   Returns to be submitted by NBFCs-ND-SI

1. NBS-7 A Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.
2. Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
3. ALM returns: Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly, Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly, Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly.
4. Branch Info return

C. Quarterly return on important financial parameters of non deposit taking NBFCs having assets of more than ₹ 50 crore and above but less than ₹ 100 crore

Basic information like name of the company, address, NOF, profit / loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crore and ₹ 100 crore.

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