Non-banking financial Companies (NBFCs) in India: Regulations, Categories, & Compliance

In India, Non-Banking Financial Companies (NBFCs) form a vital segment of the financial sector, contributing significantly to economic growth. Defined under the Companies Act, 2013, NBFCs engage in diverse financial activities, including deposit-taking and lending. This article delves into the regulatory intricacies governing NBFCs, emphasizing the prerequisites for registration, net owned fund calculations, and compliance measures. As key players in financing and investment, NBFCs operate within specific categories, each serving distinct financial purposes. Navigating through the regulatory landscape is crucial for these institutions, ensuring their sustained contribution to India’s dynamic financial ecosystem.

“Non-banking financial company (NBFC)’’ means–

(i) a financial institution which is a company registered under the Companies Act, 2013 or any other previous companies acts;

(ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

(iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.

A Non-banking Financial Company can commence or carry on the business of a non-banking financial institution only after:

• obtaining a certificate of registration from the Reserve Bank of India (RBI); and
• having the net owned fund of twenty-five (25) lakh rupees or such other amount, not exceeding hundred crore rupees, as the Bank may, by notification in the Official Gazette, specify.

**The Bank may notify different amounts of net owned fund for different categories of non-banking financial companies.

“Net owned fund” means

• the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting therefrom–
• accumulated balance of loss;
• deferred revenue expenditure; and
• other intangible assets; and
• further reduced by the amounts representing–
• investments of such company in shares of–
• its subsidiaries;
• companies in the same group; and
• all other non-banking financial companies; and
• the book value of debentures, bonds, outstanding loans and advances (including hire purchase and lease finance) made to, and deposits with,–
• subsidiaries of such company; and
• companies in the same group, to the extent such amount exceeds ten per cent of (a) above.

MAINTENANCE OF PERCENTAGE OF ASSETS:

Every NBFC shall invest and continue to invest in India in unencumbered approved securities, valued at a price not exceeding the current market price of such securities, at the close of business on any day and maintain of continuous basis minimum 5% and maximum 20% of the deposits outstanding at the close of business on the last working day of the second preceding quarter.

Note:

• “unencumbered approved securities” includes the approved securities lodged by the non-banking financial company with another institution for an advance or any other arrangement to the extent to which such securities have not been drawn against or availed of or encumbered in any manner;
• If the amount invested by NBFC falls below the specified rate then such company shall be liable to pay RBI a penal interest at a rate of 3% p.a. above the bank rate for the shortfall.
• If the shortfall continues in the subsequent quarters then penal interest rate will be 5% p.a. above the bank rate for the shortfall.
• Penal interest should be paid within 14 days

RESERVE FUND:

Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared.

• Reserve fund can only be used for such purpose as specified by RBI.
• Whenever NBFC will withdraw any amount from reserve fund, it shall report to the RBI within 21 days of withdrawal.
• Period of 21 days can be extended by RBI if there is sufficient cause.
• Central Government has the power to exempt any NBFC from the requirements of maintaining reserve fund. However, such exemption should be given only on the recommendation of RBI.

Click here for the Returns to be submitted by NBFCs in addition with the Forms and returns to be filed with the Registrar of Companies in accordance with the provisions of the Companies Act, 2013

Filing of returns shall be subject to the amendments and the category of the NBFCs.

CATEGORIES OF NBFCS:

NBFCs are categorized –

• in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
• non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
• by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:

1. 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. 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.

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

3. 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.

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

• which deploys at least 75 per cent of its total assets in infrastructure loans,
• has a minimum Net Owned Funds of ₹ 300 crore,
• has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

• 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;
• 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;
• 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;
• 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.
• Its asset size is ₹ 100 crore or above and
• It accepts public funds.

6. 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.

7. 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:

• loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;
• loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;
• total indebtedness of the borrower does not exceed ₹ 1,00,000;
• tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;
• loan to be extended without collateral;
• aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
• loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

8. 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 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

9. Mortgage Guarantee Companies (MGC) – MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.

10. NBFC- Non-Operative Financial Holding Company (NOFHC): is financial institution through which promoter / promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

FREQUENTLY ASKED QUESTIONS (FAQs):

1. What does conducting financial activity as “principal business” mean?

• Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term ‘principal business’ is not defined by the Reserve Bank of India Act.

2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

• NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

(1) NBFC cannot accept demand deposits;

(2) NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

(3) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

3. What are the essential documents required to be submitted along with the application form to the Regional Office of the Reserve Bank?

• The application form and an indicative checklist of the documents required to be submitted along with the application is available at rbi.org.in → Site Map → NBFC List →  Forms/ Returns.

Conclusion: Understanding the regulatory framework for NBFCs in India is imperative for both existing entities and potential entrants. Compliance with RBI guidelines, proper categorization, and adherence to specific requirements ensure the smooth functioning and credibility of NBFCs in the financial sector.

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