Non-Banking Financial Company (NBFCs)
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 service. A non-banking institution is a corporation whose primary activity is to accept deposits under any plan or arrangement in one lump payment or in installments via contributions or in any other method.
- Difference between banks and NBFCs
- NBFCs lend and make investments, therefore their operations are similar to those of banks; nevertheless, there are a few distinctions, as detailed below.
- NBFCs cannot take demand deposits, are not part of the payment system, and cannot issue checks drawn on themselves.
- NBFC depositors do not have access to the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facility, as banks do.
- Types
- NBFCs are classified.
- Deposit and non-deposit accepting NBFCs have different obligations. Non-deposit taking NBFCs are classified as systemically significant or non-deposit holding firms (NBFC-NDSI and NBFC-ND) based on their size and activity type.
- Within this broad classification, the many kinds of NBFCs are as follows:
- Asset Finance Company (AFC
- An AFC is a financial institution that primarily finances physical assets that support productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment, self-propelled vehicles, and general purpose industrial machines. For this purpose, principal business is defined as the aggregate of financing real/physical assets that sustain economic activity, with revenue deriving from them accounting for at least 60% of total assets and total income.
- Investment Companies (IC) are financial institutions that primarily acquire securities. Loan Companies (LC) are financial institutions that primarily provide finance, such as loans or advances, for activities other than their own. Asset Finance Companies are not included.
- Infrastructure Finance business (IFC) is a non-banking finance business that invests at least 75% of its assets in infrastructure loans, has a minimum Net Owned Funds of Rs 300 crore, a credit rating of ‘A’ or equivalent, and a CRAR of 15%.
- Systemically Important Core Investment Company (CIC-ND-SI) is an NBFC that acquires shares and securities.
- Infrastructure Debt Fund – Non-Banking Financial Company (IDF-NBFC) IDF-NBFC is a regulated NBFC that facilitates the flow of long-term loans into infrastructure projects. IDF-NBFC raises funds by issuing rupee or dollar-denominated bonds with a minimum five-year maturity. Only Infrastructure Finance Companies (IFCs) may sponsor IDF-NBFCs.
- Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI): A non-deposit-taking NBFC with at least 85% qualifying assets that meet the following criteria:
- Loan given by an NBFC-MFI to a borrower having a rural household yearly income not surpassing Rs 1,00,000 or an urban and semi-urban family income not exceeding Rs 1,60,000.
- The loan amount cannot exceed Rs 50,000 in the first cycle and Rs 1,00,000 in future cycles.
- The borrower’s total debts does not exceed Rs 1,000,000.
- For loan amounts more than Rs 15,000, the loan tenure cannot be shorter than 24 months, and prepayment is permitted without penalty.
- Loan will be granted without collateral.
- The aggregate amount of loans issued for income creation is at least 50% of the total loans given by MFIs.
- The borrower may return the loan in weekly, fortnightly, or monthly installments.
- Non-Banking Financial Companies (NBFC-Factors) are non-deposit-taking NBFCs focused on factoring. Financial assets in the factoring industry should account for at least half of total assets, and revenue from the factoring business should not be less than half of gross income.
- Mortgage Guarantee Companies (MGCs) are financial companies that generate at least 90% of their revenue from mortgage guarantees, with a net owned fund of Rs 100 crore.
- NBFC (Non-Operative Financial Holding Company) is a financial organization that allows promoters to establish new banks.It is a wholly-owned Non-Operative Financial Holding Company (NOFHC) that will own the bank as well as any other financial services firms regulated by the RBI or other financial sector authorities, to the degree permitted by the relevant regulatory provisions.
- What action may be done against individuals or financial institutions that make misleading claims of being regulated by the Reserve Bank?
- It is prohibited for any financial organization or unincorporated body to falsely pretend to be controlled by the Reserve Bank in order to deceive the public into collecting deposits, and such conduct is punishable under the Indian Penal Code. Information in this respect may be sent to the local Reserve Bank and Police office.The list of registered NBFCs is published on the Reserve Bank of India website, which may be seen at www.rbi.org.in.
- What precautions should a depositor take before depositing a deposit with an NBFC?
- A depositor who wishes to make a deposit with an NBFC must take the following precautions:
- That the NBFC is registered with the RBI and explicitly permitted to receive deposits. A list of deposit-taking NBFCs that are permitted to take deposits is accessible at www.rbi.org.in. The depositor should review the list of NBFCs that may receive public deposits, as well as the list of organizations that cannot accept deposits.
- NBFCs are required to prominently display the Reserve Bank’s Certificate of Registration (CoR) on their websites. This certificate should also show that the NBFC has been specially approved by the RBI to take deposits. Depositors must carefully examine the certificate to determine that the NBFC is permitted to receive deposits.
- The highest interest rate that an NBFC may give to a depositor should not be more than 12.5%. The Reserve Bank adjusts interest rates based on the macroeconomic circumstances. The Reserve Bank updates interest rates on its website, www.rbi.org.in, under Sitemap, NBFC List, and FAQs.
- The depositor must insist on a suitable receipt for any sum deposited with the firm. The receipt should be signed by a company-authorized official and include the deposit date, depositor’s name, amount in words and numbers, interest rate due, maturity date, and amount.
- When brokers/agents collect public deposits on behalf of NBFCs, depositors must ensure that the brokers/agents are lawfully authorized by the NBFC.
- The depositor must keep in mind that public deposits are unsecured, and deposit insurance is not accessible to NBFC depositors.
- The Reserve Bank of India accepts no responsibility or guarantee regarding the company’s current financial position, the accuracy of any statements or representations made or opinions expressed by the company, or the repayment of deposits/discharge of liabilities.
- Characteristics
- The NBFCs may accept and renew public deposits for a minimum of 12 months and a maximum of 60 months. They cannot take deposits that are repayable on demand.
- NBFCs cannot provide interest rates greater than the ceiling rate set by the RBI from time to time. Currently, the ceiling is 12.5% annually. The interest may be paid or compounded at intervals no shorter than monthly.
- NBFCs are not permitted to provide depositors with gifts, incentives, or any other extra benefits.
- NBFCs should have a minimum investment grade credit rating.
- Deposits with NBFCs are not insured.
- The RBI can not guarantee that NBFCs would return deposits.
- Certain necessary disclosures regarding the firm must be disclosed in the application form given by the company requesting deposits.
- Functions
- Infrastructure funding
- This is the biggest sector in which major NBFCs operate. A large amount of this sector alone accounts for a significant share of monies loaned across all segments. This mostly comprises real estate, trains or metros, flyovers, ports, and airports.
- Trade Finance
- Dealer/distributor finance companies provide working capital, vendor financing, and other company loans.
- Retail financing
- Companies that offer short-term cash for loans against stocks, gold, and real estate, mainly for consumption reasons.
- Types
- There are two types of NBFCs: those taking public deposits (NBFCs-D) and those that do not (NBFCs-ND). Residuary Non-Banking Companies (RNBCs) are another kind of NBFC that primarily accepts deposits and invests in recognized securities.
- Non-deposit-taking NBFCs by their size are divided into systemically significant and other non-deposit holding firms (NBFC-NDSI and NBFC-ND).