Non-Banking Financial Companies (NBFC) are commercial establishments which provide financial services and banking facilities without meeting the legal definition of Banks. However, they are covered under the Banking regulations as laid down by the Reserve Bank of India, and also provide banking services like loans and credit facilities.
As the trend goes, most people prefer NBFCs to banks; they find the NBFCs safe, efficient and quick. NBFCs play crucial roles in the economy, mostly granting loans which allow for the growth of new ventures.
However, the initial phase of the growth and development of NBFCs saw a classification of NBFCs which was a bit confusing.—Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)
The representatives of the NBFC sector drew the attention of the RBI, and made a request to provide a separate classification for NBFCs engaged in financing tangible assets. Accordingly, Re-classification of NBFCs was done as per the RBI notification of December 06, 2006. Subsequent to the re-classification of NBFCs, companies financing real/physical assets for productive/economic activity were classified as Asset Finance Company (AFC). The remaining companies continued to be classified as loan/investment companies.
Thus as per the Asset Based Classification, NBFCs are divided into the following types—
1. Asset Finance Company (AFC)
2. Investment Company (IC)
3. Loan Company (LC)
The following paragraphs elucidate about NBFC as a Loan Company (LC)
Loan Companies (LC) is one NBFC primarily carrying on, as its principal business, the providing of finance to the public whether by making loans or advances or otherwise for any activity other than its own but does not include an equipment leasing company or a hire-purchase, Asset Finance company.
The loan is a type of agreement where the lender temporarily lends property, usually cash to the borrower with a promise. As per the agreement, the borrower will return the loan along with the interest while complying with the terms and conditions.
The NBFC loan companies offer different kinds of loans as per the individual’s preferences. For example, demand loan, term loan, secured loan, unsecured loan, home loan, industrial loan, commercial loan, personal loan, and agricultural loan.
The NBFC loan companies are generally small partnership firms which accept deposits from the public at high-interest rates, and further give loans to the retailers, small scale firms, wholesalers, self-employed persons, etc. at a higher rate of interest.- Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.
The NBFC-loan company could include any business activity that is performed by either the equipment leasing company or the hire-purchase company. Although the nature of all these companies is similar, their business activities can be very different from each other; at the same time, their funding requirements vary significantly.
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How to Start a NBFC Loan Company
# Choose a Niche
While you can establish a broad loan business for personal, auto and home loans, it is wise to establish one niche first. Focus on getting the correct licensing and build a client base as you expand into other areas. Your niche determines where you start your licensing and compliance education. .
# Register the Business
Lending is a highly regulated industry. Start off by registering your business. Pay the registration fees, and then get a tax identification number. These two are basic items in registering any business legally and are necessary for licensing.
# Obtain Correct Licensing
Complete all pre-licensing preparations. Anyone in the mortgage industry, business and personal, must meet all background and credit verifications.
# Establish Your Lending Guidelines and Financing
Starting your own loan company doesn’t necessarily mean you need to have all the money yourself. Establish relationships with banks, credit unions, car dealers and investors. After you have your financing in place, establish your lending guidelines.
# Adopt Good Business Practices
Regardless of the type of loans you offer, any advertising and loan terms must meet rules and regulations. Protect your clients’ personal and private data. Allow the underwriting – not personal relationships – to make lending determinations to avoid discriminatory practices. Read and understand the basics of the relevant Acts.
Following the rules and regulations helps keep you in line with all regulatory needs. And take help of the professional consultant institutions like MUDS. —Shweta Gupta, Founder and CEO, MUDS
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