Non-Banking Financial Institutions (NBFC) are Companies that are registered under the Companies Act, 2013 and are regulated by the Reserve bank of India Act, 1934 and its Master Direction Circulars as may be updated from time to time. These are the Companies engaged in the business of providing facilities of loans and advances and investments in securities and other services similar to that provided by “Banks” but the major difference between the banks and NBFC are as following:
- 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.
However, the primarily test is that the financial assets of NBFC shall constitute at least more than 50% of its total assets and income generated from these financial assets shall not be less than 50% of the total income of the NBFC in order for it to obtain the requisite license by RBI. In this article, we shall study about various kinds of NBFCs and the pre requirements for obtaining registration under the respective categories. Now, the different categories of NBFCs depending on their nature of work are as following:
1. Asset finance Company(AFC): These are the Companies which have its principal business relating to financing of assets such as financing of machinery, automobiles,tractors, lathe machines, generator sets, earth moving and material handling equipment’s, moving on own power and general-purpose industrial machines. However, income arising from such physical assets and income arising therefrom shall not be less than 60% of its total assets and income respectively.
2. Investment Companies(IC):These are the Companies which carry its business from acquisition of securities and derives its income from such acquisition.
3. Loan Company: These are the Companies which carry its business by providing loans and advances and derive its income from interest obtained from such loans.
4. Infrastructure Finance Company(IFC): These Companies offer infrastructure loans to its borrowers such as Project Loans for a specific infrastructure project as proposed by the borrowers and minimum 75% of its total asset shall be such loans, with minimum credit rating of ‘A’ or equivalent and a CRAR of 15%.
5. Systematically important Core Investment Companies(CICs): These are such Companies which are engaged in acquisition of securities of group companies and satisfy the following conditions:
- Not less than 90% of its asset shall be from such acquisition,
- It does not trade in its investments in shares, debt or loans in group companies except through block sale,
- Its asset size is ₹ 100 crore or above, and
- It accepts public funds.
6. Infrastructure Debt Funds:These provide long term debt for infrastructure projects to its borrowers by raising finance through various rupee or dollar denominated bondsof minimum 5-year maturity.
7. Micro Finance Institution(MFI): These Companies provide small loans to low income population and satisfy the following criteria:
- Loan amount to be more than Rs.50,000/- in the first cycle and Rs.1,00,000/- subsequently, wherein loan shall be disbursed without any collateral.
- Disbursement shall not exceed to a rural household whose annual income not exceeds Rs. 1,00,000/- and urban or semi-urban whose income does not exceed Rs. 1,60,000/-
- Tenure of the loan not to be less than 24 months for loan amount in excess of 15,000/- with prepayment without penalty.
8. NBFC-Factors:These Companies are those which deals in process of Factoring i.e. taking of bills receivable from companies at discounted prices and recovering such money thereafter.
Further, the further categorization of NBFC on the basis of whether they accept deposits or not and the asset size are as following:
PRE-REQUISITES FOR REGISTRATION
The requirements to register an NBFC shall vary in accordance with its categories discussed above, however we have covered the basic pre requisites here:
1. As per section 45-IA of the RBI act, 1934 the minimum net owned fund required for NBFCs to get registered is Rs. 200 Lakhs except for:
- NBFC-MFI: Minimum NOF required of Rs 5 crore (Rs. 2 crore in North eastern region)
- NBFC-Factors: Minimum NOF required of Rs 5 crore.
- NBFC-CIC: Minimum Asset of Rs. 100 crore.
2. It should be a registered Company under the provisions of the Companies Act, 2013.
3. Minimum one Director having experience in the field of banking or senior banker as full time Director in the Company.
4. Clear and clear CIBIL, SEBI records i.e. credit reports.
5. Next five-year plan for running and setting up of business as an NBFC.
PROCEDURAL:
1. Incorporate a Company in accordance with the minimum net owned funds criteria with the Registration of Companies having respective jurisdiction.
2. Once the Company is incorporated, create fixed deposit via capital inducement with a scheduled commercial bank.
3. The application has to be submitted online on COSMOS portal of RBI by downloading company registration form and filing up the requisite details.
4. Once the excel format is filed online, the Company would get a Company Application Reference Number (CARN).
5. The application is also required to be submitted physically at the concerned RBI regional office mentioning the CARN.
6. RBI will scrutinize the application and issue certification of registration on being satisfied.
DOCUMENTS REQUIRED:
1. Certified copies of certificate of incorporation, MOA and AOA of the Company.
2. Background of Directors of the Company.
3. Banker’s Report evidencing the subscribed amount of the subscribers.
4. Clean Banker’s Report.
5. Copy of the certificate of highest educational and professional qualification in respect of all the directors.
6. Copy of Fixed Deposit receipt &bankers’ certificate of no lien indicating balances in support of NOF.
7. IT and Data security policy.
FREQUENTLY ASKED QUESTIONS:
Q.1 What is excluded from NBFC?
Reply: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.
Q.2 In case a Company is engaged in lending and borrowing of money activities but in a small form, then is it required to obtain license?
Reply: Absolutely no, interestingly, this test is popularly known as 50-50 test (income-asset test) and is applied to determine whether or not a company is into financial business.
Q.3 Can individuals, partnership firms and other association of individuals obtain license to carry on the NBFC activity?
Reply: No, unincorporated bodies cannot obtain license and only Companies registered with the Ministry of Corporate Affairs can apply to the Reserve Bank of India.
Q.4 Does Nidhi Companies and credit cooperative society also required to obtain NBFC license from RBI.
Reply: No, Nidhi Companies and credit cooperative society are not required to obtain registration, however then they can accept deposits and give loans from/to their members only and there is a maximum limit of loan that can be given/accepted by them as well.
Q.5 In the event any NBFC violates the provisions of the RBI Act, 1934, what penal action can be taken by the Reserve Bank of India?
Reply: 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.
Q.6 Can a person not residence of India incorporates an NBFC?
Reply: Yes, as 100% FDI is allowed.
Q.7 Is it necessary to incorporate a new Company or we can obtain license from an existing Company as well meeting the NOF criteria?
Reply: Absolutely yes, for companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years, whichever is less, should be submitted.
{The author is a Company Secretary in Practice at Kajal Goyal and Associates and can be reached at (M) +91-9999952595 and (E) goyalcskajal@gmail.com}
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