1. What is a Non-Banking Financial Company?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 (Now Companies Act, 2013) 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 RBI has defined financial activity as principal business to bring clarity to the entities that will be monitor or regulated as NBFC under the RBI Act. The criteria are called 50-50 test and its as follow:
- The company’s Financial assets must constitute 50% of the total assets.
- The income from the financial assets must constitute 50% of the total income. It is governed by MCA as well as RBI.
2. What are the pre-requisite for a company desires to carry on business of NBFC?
- As per Section 45 I(a) of the RBI Act, 1934 No Company can commence any business of Non-Banking Financial Institution unless it is registered with RBI and fulfill following conditions:
1. It should be a company registered under Section 3 of the Companies Act, 1956(Now Companies Act, 2013).
2. It should have a minimum net owned fund of ₹200 lakhs. (Earlier it was ₹25 Lakhs)
- Exemption to Certain Entities from registration under RBI Act, 1934:
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- Venture Capital Fund;
- Merchant Banking Companies;
- Stock Broking Companies registered with SEBI;
- Insurance Companies holding a valid Certificate of Registration issued by IRDA;
- Nidhi Companies as Notified under Section 620A of the Companies Act, 1956 (Section 406 of the Companies Act, 2013);
- Chit Companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1956;
- Housing Finance Companies regulated by National Housing Bank;
- Stock Exchange (NSE & BSE), and
- Mutual Benefit Companies.
- Core Investment Companies with asset size of less than ₹100 crores, and those with asset size of ₹100 crores and above but not accessing public funds are exempted from registration with the RBI.
3. 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.
*NBFCs whose asset size is of ₹500 crores or more as per last audited balance sheet are considered as systemically important NBFCs.
4. The NBFCs are categorized on the basis of liabilities and activity. Following are the types of NBFCs:
- Asset Finance Company.
- Investment Company.
- Loan Company.
- Infrastructure Finance Company.
- Systematically Important Core Investment Company.
- Micro Finance Company.
- Housing Finance Company.
- Mortgage Guarantee Company.
- Infrastructure Debt Fund.
- NBFC- Non-Operative Financial Holding Company.
5. Points which differentiate NBFCs from Banks:
NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
6. What are the regulations applicable on non-deposit accepting NBFCs with asset size of less than ₹500 crores?
- The regulation on non-deposit accepting NBFCs with asset size of less than ₹500 crores would be as under:
1. They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds* and do not have a customer interface.
2. Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.
3. Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.
4. Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.
*Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of Commercial Papers, debentures etc.
7. The various prudential regulations applicable to NBFCs issued by Banks:
- Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;
- Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and
- Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015.
Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.
8. NBFCs registered with RBI have responsibilities of periodic compliance as follows:
- Returns to be submitted by deposit taking NBFCs:
- NBS-1 is quarterly return that every NBFC, who holds or accepts public deposits, has to file. The primary objective of filling this return is to present the financial information of the company such Statement of Assets and Liabilities, Profit and Loss A/c, Exposure to sensitive sectors and more.
- NBS-2 is a quarterly return which needs to be submitted by every NBFC accepting public deposits. Purpose to submit this return is to present compliances pertaining to various prudential norms like Capital Adequacy, Asset Classification, Net-Owned Funds, Provisioning, etc.
- NBS-3 is a return needs to be filed on quarterly basis. It is filed to capture details on Statutory Investments in the Liquid States, this investment mostly consists of Central or State Government Securities, Fixed Deposits in Schedules Commercial Bank, etc.
- NBS-4 is an Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)
- NBS-6 is a monthly return filed the Deposit taking NBFC holding the Total Assets of 100 Crores or more. This return displays the Company’s exposure to Capital market.
- Half-yearly ALM returnby NBFC holding public deposits of more than ₹20 crore or asset size of more than ₹100 crore
- Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
- Branch Info Return.
- Returns to be submitted by non-deposit taking systematically important NBFCs:
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- NBS-7 is a quarterly return and needs to be filed on quarterly basis. Every NBFC-ND-SI needs to file this quarterly statement of risk-weighted assets, risk asset ratio, and statement of capital funds, etc.
- Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
- ALM (Asset Liability Management) returns:
- Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,
- Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,
- Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly.
- ALM-YRLY is an Annual return for mismatch statement in asset liability.
- Branch Info return.
- Non-Deposit taking NBFCs which holds asset size between 50 Crores and Rs. 100 Crores need to submit the basic info such as the company’s name, address, profit or loss statement, and NOF (Net Owned Profit) during the Last three years quarterly.
9. Apart from the aforesaid compliances as directed by RBI, all the NBFCs are also required to follow the compliances of the Companies Act, 2013 as they are registered under this act. Additional compliances that NBFCs need to follow as per the provisions of Companies Act, 2013 are as Follows:
- Appointment of auditor as per the provisions of Section 139 of Companies Act, 2013.
- Maintenance of Books of Accounts, Preparation and Filing of Financial Statements (AOC-4, XBRL) as per Chapter IX of the Companies Act, 2013.
- Maintenance of Statutory Register and Filing of Annual Return (MGT-7/7A) as per Chapter VII of Companies Act, 2013.
- Convene Statutory Meetings as per Chapter XII of the Companies Act, 2013 subject to reference of SS-1 and SS-2.
- Any other provisions of the Act depending on the situation.
10. The Provisions of Section 73 and Section 76 of the Companies Act, 2013 relating to acceptance of Deposit does not apply to NBFCs.
11. If the NBFCs is Listed on recognized stock exchange, the provisions of SEBI and guidelines of Stock exchange shall also be applicable to NBFCs as well.
12. Rate of Interest charged by NBFCs from its Customers(Borrowers) are deregulated by RBI as the interest rates is based on the terms and conditions of the Loan Agreement entered into between the NBFCs and Borrowers. Provided the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest 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.
*To keep it simple ceiling on interest rates charged by NBFCs have removed by RBI.
Author Bio
For finance on selp-help-group NBFC applicable or not