ALL ABOUT NBFC'S

August 05, 2015 1434 Comments

Dear Readers,
You all must have heard that the Reserve Bank of India is entrusted with the responsibility of
regulating and supervising the Non-Banking Financial Companies. So, let’s discuss about what
actually NBFC’s are.

About the term 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 fund
business.

Difference between BANK & NBFC:

NBFCs lend and make investments and hence their activities are akin to that of banks; however
there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques
drawn on itself;
iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not
available to depositors of NBFCs, unlike in case of banks.
Different types/categories of NBFCs registered with RBI:
NBFCs are categorized
a) In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
b) Non deposit taking NBFCs by their size into systemically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-ND) and
c) By the kind of activity they conduct.
Within this broad categorization the different types of NBFCs are as follows:

i. 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, lathe machines, generator sets, earth moving and
material handling equipments, moving on own power and general purpose industrial machines.

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

iii. 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.

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

a) which deploys at least 75 per cent 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%.

v. 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.

vi. 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:
a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not
exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000.
b. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with
prepayment without penalty;

vii. 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 75 percent of its total assets and its income derived from
factoring business should not be less than 75 percent of its gross income.

Register with RBI:

A company incorporated under the Companies Act, 1956 and desirous of commencing business
of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should
comply with the following:
i. it should be a company registered under Section 3 of the companies Act, 1954
ii. It should have a minimum net owned fund of Rs 200 lakh.

Deposits in NBFC:
a) Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid
or compounded at rests not shorter than monthly rests.
b) 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.
c) The deposits with NBFCs are not insured.
d) The repayment of deposits by NBFCs is not guaranteed by RBI.

Brief about RNBC

a) Residuary Non-Banking Company is a class of NBFC which is a company and has as its
principal business the receiving of deposits, under any scheme or arrangement or in any other
manner and not being Investment, Asset Financing, Loan Company.
b) These companies are required to maintain investments as per directions of RBI, in addition to
liquid assets.
c) The amount payable by way of interest, premium, bonus or other advantage, by whatever
name called by a RNBC in respect of deposits received shall not be less than the amount
calculated at the rate of 5% (to be compounded annually) on the amount deposited in lump
sum or at monthly or longer intervals; and at the rate of 3.5% (to be compounded annually) on
the amount deposited under daily deposit scheme.
d) Further, a RNBC can accept deposits for a minimum period of 12 months and maximum
period of 84 months from the date of receipt of such deposit. They cannot accept deposits
repayable on demand.

Some other regulators:

Category of Companies Regulator
Chit Funds Respective State Governments
Insurance companies IRDA
Housing Finance Companies NHB
Venture Capital Fund / SEBI
Merchant Banking companies SEBI
Stock broking companies SEBI
Nidhi Companies Ministry of corporate affairs, Government of
India

_______________________________________________________________________

NBFC is most popular and common terms who wish to start finance / lending business . For
startup there some substitutes like Nidhi company Section, Section 8 Micro finance, credit
cooperative society. NBFC license provided access of CIBIL Score.

Non-banking financial incorporation (NBFC) are fast emerging as an important segment of

Indian economy. NBFC offers almost everything as banks do, performing financial
intermediation in a variety of ways, making loans, accepting deposits, and advances, leasing, hire
purchase, etc. NBFC can raise funds from the public, directly or indirectly, and can freely lend
them to ultimate spenders. The minimum tenure to accept deposits is 12 months and the
maximum period of 60 months. NBFC advance loans to the various small wholesale and retail
traders and self-employed persons. NBFC is very popular due to attractive interest rates on
deposits.

The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within
the framework of the Reserve Bank of India Act. Section 45-IA provides that no NBFC shall
commence or carry on the business of Non- Banking Financial Institution without obtaining a
Certificate of Registration issued by the Reserve Bank of India.

A Non-Banking Financial Company (NBFC) Similar To That Of A Bank, Except For The
Following Differences:
  It cannot accept demand deposits
 It cannot issue cheque drawn on itself
 Non-banking financial incorporation (NBFC) in India is classified under three types:
*Asset finance companies (AFC)*investment company (IC)*Loan company (LC)

Non-Banking Finance Companies (NBFC) Is Classified Into The Following Categories:

 Development finance institutions

 Investment companies
 Discount & guarantee houses
 Corporate development companies
 Venture capital companies
 Leasing companies
 House finance companies

Advantages Of An NBFC

 Provides loans and credit facilities to Public

 Trading money market instruments
 Funding private education & Business
 Wealth management
 Discounting services e.g. discounting of instruments
 Underwrite stock and shares, TFCs and other obligations

Procedure For NBFC Registration :

1. Company Registration

The first step is to form a new Company (Private Limited or Public Limited) under the
Companies Act

2. Minimum Net Owned Fund

NOF should be Rs. 200 Lac After the incorporation of a new Company in the form of Equity
share capital. The Capital to be raised after incorporation of a company here should be Equity
Share Capital and not Preference Share Capital.

3. The Opening Of A Bank Account

The amount which is received post incorporation of the company shall be deposited in a bank
account as Fixed Deposit and its must be free from all aliens.

4. Application to RBI for Business Operations.

5. RBI will conduct due diligence and will issue certificate of commencement of business.
Documents Required

From All Directors And Shareholder.

 Certified copy of up-to-date Memorandum and Articles of Association of the Company.

 Banker's Report in a sealed envelope.
 Auditors report about receipt of minimum net owned fund.
 A certificate of Chartered Accountant regarding details of
group/associate/subsidiary/holding companies along with details of investments in other
NBFCs as shown in the Proforma Balance Sheet

IL&FS triggers NBFC crisis: Investors may

stay on the sidelines for now fearing more
defaults
Set off by Infrastructure Leasing & Financial Services' (IL&FS) subsidiary’s
interest default on a commercial paper, the chain reaction could be seen in the
plunging stocks of Housing Finance Companies (HFCs) and other non-banking
financial institutions (NBFCs) and financial companies over the week. All this, on
account of rising fears of more defaults and the likelihood of shrinking liquidity in
the system.

As IL&FS grapples with its own problems of refinancing, slow monetisation of

projects and drying up of funds, the anxiety has now spread to the financial sector.
As for the latest sell-off frenzy, sentiment has turned sour over the selling of
DHFL’s commercial paper by DSP Mutual Fund (MF), leading to panic over an
impending liquidity crisis in the financial system. To explain what caused this
panic we need to understand some facts.

The first is excessive borrowing from the market. Market (non-bank) borrowings
of NBFCs accounted for around 74 percent of the total borrowings in FY18,
according to a recent report released by Credit Suisse. Of this, 88 percent was via
bonds and 12 percent was via commercial paper. Second is narrowing of margins.
Over the last few years, NBFCs witnessed strong demand and increasingly began
borrowing from markets taking advantage of a favourable interest rate
environment. In a rising interest rate scenario, however, borrowing via commercial
paper (CP) has also become more expensive. However, having lent at lower rates
earlier, NBFCs are now witnessing a margin squeeze.

The third concern is the liquidity situation. Concerns of rising twin deficits and
inflation have sparked fears of tightening liquidity, which in turn, may lead to a
further rise in yields (that have already risen rapidly - Government bond yields
have already crossed 8 percent) vs. bank MCLR rates (which impact bank
borrowing costs for NBFCs and dent margins further).

Fourth, impending interest rate hike. The Reserve Bank of India (RBI) began
increasing the policy rate since June 2018 after a long time, driven by worries over
a widening twin deficit and rising inflation. Fifth is, MF exposure to NBFC-issued
CP.

According to the report cited earlier, as of March 2018, MFs held 60 percent of
NBFC-issued commercial paper, sharply increasing from 41 percent in March
2016. In fact, from March 2012 to March 2018, MF investments in CP and bonds
rose from 25 percent to a whopping 65 percent. MFs are likely to reduce this
exposure through more selling, further dampening sentiment in the sector.
What can NBFCs do now? An increase in lending rates seems to be the most
obvious option—however, this can only be exercised to a limited degree depending
on the extent of fixed vs. floating lending, maturity period, and other factors.

In light of the current situation, investors are likely to withdraw profits for now and
flock to safe havens until plain seas are in sight. The rupee may see rough times
and further volatility in the near term.

Liquidity concerns that do not appear baseless, skyrocketing crude oil prices, and
an ever-so unstable global landscape are expected set the tone in the markets for
now.

Policymakers would be in a conundrum as they prepare for the 5 October review

meet—the big question being whether interest rates will be raised—as recent
events paint an interesting picture: macro numbers call for a hike, liquidity fears
demand otherwise.