Non-Banking Financial Companies | Types of NBFCs | Salient Features of NBFC Regulation
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 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 instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
The NBFC (Non-Banking Finance Company) sector has grown in size and complexity over the years. The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies under powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective is to:
• Ensure healthy growth of financial companies.
• Ensure that these companies function as a part of the financial system within the policy framework so that their existence and functioning do not lead to systemic aberrations.
• The quality of surveillance and supervision exercised by the Bank over the NBFC's is sustained by keeping pace with the developments in this sector of the financial system.
Registration with RBI
A company incorporated under the Companies Act and desirous of commencing the 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 the Companies Act, and
ii. It should have a minimum net owned fund. [Rs. 200 lakhs]
Types of NBFCs:-
1) Asset Finance Company 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, earthmoving and material handling equipment, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate financing real/physical assets supporting economic activity. Income arising from there is not less than 60% of its total assets and total income.
2) Investment Company means any company that is a financial institution carrying on as its principal business acquiring securities.
3) Loan Company means any company that is a financial institution carrying on as its principal business providing 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 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 `300 crore,
c) has a minimum credit rating of 'A 'or equivalent,
d) a CRAR of 15%
5) Systemically Important Core Investment Company(CIC-ND-SI) is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-
a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;
b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;
c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies;
e) Its asset size is `100 crore or above, and
f) It accepts public funds.
6) Infrastructure Debt Fund-Non- Banking Financial Company (IDF-NBFC) is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through the issue of Rupee or Dollar denominated bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
7) 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 per cent of its total assets, and its income derived from the factoring business should not be less than 50 per cent of its gross income.
8) Mortgage Guarantee Company are financial institutions for which at least 90% of the business turnover is mortgage guarantee business. At least 90% of the gross income is from mortgage guarantee business, and the net owned fund is Rs. 100 crore.
Salient features of NBFC regulations
• The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months. They cannot accept deposits repayable on demand.
• 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 should have a minimum investment-grade credit rating.
• The deposits with NBFCs are not insured.
• The repayment of deposits by NBFCs is not guaranteed by RBI.
• Certain mandatory disclosures are to be made about the company in the company's application form, soliciting deposits.
The interest rate charged by NBFC
Reserve Bank of India has deregulated interest rates charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs.
However, the NBFCs have to be transparent. The rate of interest and manner of arriving at the interest rate to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.
Powers of the Reserve Bank
The Reserve Bank has been given the powers under the RBI Act, 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 principal business criteria.
The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under the RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding-up petition.