Non-banking Financial Company : The Indispensable Facts!!!

Introduction:

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business but does not include any institution whose principal business includes agriculture, industrial activity or the sale, purchase or 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).

The World Bank has endorsed the use of reported non-financial data in the credit origination processes and considers it a powerful tool for driving financial inclusion in emerging markets. More recently, in the Financial Inclusion 2020 (FI 2020) roadmap, Accion highlighted the great value of alternative data as an instrument to increase financial inclusion and help achieve their FI 2020 objectives.

Salient features of NBFCs:

1. 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.
2. 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.
3. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
4. NBFCs (except certain AFCs) should have minimum investment grade credit rating.
5. The deposits with NBFCs are not insured.
6. The repayment of deposits by NBFCs is not guaranteed by RBI.
7. There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.

Types of NBFCs in India:

1. Investment Company: IC means any company which is a financial institution carrying on as its principal business the acquisition of securities
2. Loan Company: 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
3. Asset Finance Company: 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 equipment’s, 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 therefrom is not less than 60% of its total assets and total income respectively
4. Infrastructure Finance Company: 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 ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
5. 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.
6. 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 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.
7. Housing Finance NBFCs: It is a form of non-banking financial company which is engaged in the principal business offinancing of acquisition or construction of houses that includes the development of plots of lands for the construction of new houses.

Residuary Non-Banking Companies (RNBCs): It is yet another form of a financial institution engaged in the principal business of accepting deposits, under any scheme or arrangement or in any other form and not being asset financing, investment, Loan Company. The Residuary Non-Banking Company primarily deal in accepting deposits in any form and investing these in the approved securities. The operations of such company are regulated by RBI and in addition, to the liquid assets, it maintains its investments as per the RBI directions.