Non-Banking Financial Companies

[ word=”350″]NBFCs or Non Banking Financial Companies are those companies which provide banking services without meeting the legal definition of a bank. A NBFC is 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.

The NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government. They also deal in other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.

However, the companies cannot be NBFCs if their primary business is related to agriculture activity, industrial activity, sale/purchase/construction of immovable property.

Usually, the 50-50 test is used as an anchor to register an NBFC with RBI. 50-50 Test means that the companies at least 50% assets are financial assets and its income from financial assets is more than 50% of the gross income.

Regulation of NBFCs

Non-Banking Financial Companies are regulated by different regulators in India such as RBI, Irda, SEBI, National Housing Bank and Department of Company Affairs. RBI regulates the companies which deal in lending, accepting deposits, financial leasing, hire purchase and acquisition of shares / stocks etc. The companies that take up activities like stock broking, merchant banking etc. are regulated by SEBI while the Nidhi and Chitfund companies are regulated by Department of Company Affairs. Housing finance companies are regulated by National Housing Bank.

NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI but they need to register with respective regulators. For example:

• Venture Capital Fund/Merchant Banking companies/Stock broking companies are registered with SEBI
• Insurance Company needs to hold a certificate of registration with IRDA
• Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
• Housing Finance Companies regulated by National Housing Bank.

Difference between NBFC and Banks

The major differences between NBFCs and Banks are as follows:

• NBFC cannot accept demand deposits (they can accept term deposits)
• NBFCs do not form part of the payment and settlement system
• NBFCs cannot issue cheques drawn on themselves
• Deposits with NBFCs are not covered by Deposit Insurance.

Different Categories of NBFCs

All NBFCs are either deposit taking or Non-deposit taking. If they are non-deposit taking, ND is suffixed to their name (NBFC-ND). The NBFCs which have asset size of Rs.100 Crore or more are known as Systematically Important NBFC. They have been classified so because they can have bearing on financial stability of the country.  The Non-deposit taking NBFCs are denoted as NBFC-NDSI. Under these two broad categories, the different NBFCs are as follows:

Asset Finance Company(AFC)

The main business of these companies is to finance the assets such as machines, automobiles, generators, material equipments, industrial machines etc.

Investment Company (IC)

The main business of these companies is to deal in securities.

Loan Companies (LC)

The main business of such companies is to make loans and advances (not for assets but for other purposes such as working capital finance etc. )

Infrastructure Finance Company (IFC)

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 IFC provided it has credit rating of A or above and has a CRAR of 15%.

Systemically Important Core Investment Company (CIC-ND-SI)

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 CIC-ND-SI. Out of the 90%, 60% should be invested in equity shares or those instruments which can be compulsorily converted into equity shares. Such companies do accept public funds.

Infrastructure Debt Fund (IDF-NBFC)

A debt fund means an investment pool in which core holdings are fixed income investments. The Infrastructure Debt Funds are meant to infuse funds into the infrastructure sector. The importance of these funds lies in the fact that the infrastructure funding is not only different but also difficult in comparison to other types of funding because of its huge requirement, long gestation period and long term requirements.

In India, an IDF can be set up either as a trust or as a company. If the IDF is set up as a trust, it would be a mutual fund, regulated by SEBI. Such funds would be called IDF-MF. The mutual fund would issue rupee-denominated units of five years’ maturity to raise funds for the infrastructure projects.

If the IDF is set up as a company, it would be an NBFC; it will be regulated by the RBI. The IDF guidelines of the RBI came in September 2011. According to these guidelines, such companies would be called IDF-NBFC.

An IDF-NBFC is a non-deposit taking NBFC that has Net Owned Fund of Rs 300 crores or more and which invests only in Public Private Partnerships (PPP) and post commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.

Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit taking NBFC which has at least 85% of its assets in the form of m microfinance. Such microfinance should be in the form of loan given to those who have annual income of Rs. 60,000 in rural areas and Rs. 120,000 in urban areas. Such loans should not exceed Rs. 50000 and its tenure should not be less than 24 months. Further, the loan has to be given without collateral. Loan repayment is done on weekly, fortnightly or monthly installments at the choice of the borrower.

Non-Banking Financial Company – Factors (NBFC-Factors)

Factoring business refers to the acquisition of receivables by way of assignment of such receivables or financing, there against either by way of loans or advances or by creation of security interest over such receivables but does not include normal lending by a bank against the security of receivables etc.

An NBFC-Factoring company should have a minimum Net Owned Fund (NOF) of Rs. 5 Crore and its 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.

Systemically important NBFCs.

Deposit Taking by NBFCs

• All NBFCs are not allowed to take deposits. Only those NBFCs which have specific authorization from RBI are allowed to accept/hold public deposits. NBFCs cannot take demand deposits. They can accept only term deposits with a tenure of minimum 12 months.
• The 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.
• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. NBFCs (except certain AFCs) should have minimum investment grade credit rating.
• The deposits with NBFCs are not insured under Deposit Insurance Scheme.
• NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.
• An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits.
• There is no Ombudsman for hearing complaints against NBFCs. However, all NBFCs have in place a Grievance Redressal Officer, whose name and contact details have to be mandatorily displayed in the premises of the NBFCs.

Other Important Information

Residuary Non-Banking Company

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits.

Do Multi-Level Marketing companies, Chit funds come under the purview of RBI?

No, Multi-Level Marketing companies, Direct Selling Companies, Online Selling Companies don’t fall under the purview of RBI. Activities of these companies fall under the regulatory/administrative domain of respective state government.

What are Unincorporated Bodies (UIBs)?

Unincorporated bodies (UIBs) include an individual, a firm or an unincorporated association of individuals, which accept deposits. In terms of provision of section 45S of RBI act, accepting such deposit is illegal. The state government has to play a proactive role in arresting the illegal activities of such entities to protect interests of depositors/investors.