Comprehensive Guide: NBFC Types, Compliance & RBI Directions 2024

 Non-Banking Financial Companies (NBFCs) play a crucial role in India’s financial sector, offering diverse financial services. Understanding the types and regulations governing NBFCs is essential for both investors and stakeholders. This comprehensive guide explores the various types of NBFCs, their classifications, compliance requirements, and recent regulatory changes mandated by the Reserve Bank of India (RBI) in 2024.

MEANING OF NBFC

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 or Companies Act 2013 as the case may be, 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.

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI.

DIFFERENT TYPES/CATEGORIES OF NBFCS

1. In terms of the type of liabilities into Deposit and Non-Deposit accepting

2. Non deposit taking NBFCs by their Asset size into systemically important and other non-deposit holding companies

3. By the kind of activity, they conduct.

Deposit Taking NBFC’s

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 a Deposit Taking NBFC’s.

Non Deposit Taking NBFC’s

A non-banking institution which is is not engaged in principal business of receiving deposits is a Non-Deposit Taking NBFC’s.

Non Deposit Taking NBFC’s- systemically important (NBFC-ND-SI)

It is a Non Deposit Taking NBFC’s which whose asset size is of ₹ 500 cr. or more as per last audited balance sheet are considered as systemically important NBFCs.

Non Deposit Taking NBFC’s- systemically important (NBFC-ND)

It is a Non Deposit Taking NBFC’s which whose asset size is below ₹ 500 cr. or more as per last audited balance sheet are considered as systemically important NBFCs. 

NBFC’s By the kind of activity

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 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. 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:-

(a) 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;

(b) 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;

(c) 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;

(d) 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.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

6. Infrastructure Debt Fund: NBFC (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:

i. 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;

ii. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;

iii. total indebtedness of the borrower does not exceed ₹ 1,00,000;

iv. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;

v. loan to be extended without collateral;

vi. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;

vii. 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.

‘Net Owned Fund’ is the amount as arrived at above, minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund.

The Reserve Bank of India (RBI) has implemented significant changes in the regulatory framework for Non-Banking Financial Companies (NBFCs). The Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 categorizes NBFCs into four layers, impacting their operations and compliance requirements:

1. Base Layer –non-deposit taking NBFCs below the asset size of Rs 1000 crore.

2. Middle Layer– all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, non-deposit taking NBFCs with asset size above Rs 1000 Crore.

3. Upper Layer -those NBFCs which are specifically identified by the Reserve Bank.

4. Top Layer –This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer.

Some of the other important changes are as under:-

1. NOF has been increased for NBFC from 2 crore to 10 cr. in phase manner with some exceptions which is as under:-

However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF shall continue to be ₹2 crore. It is clarified that there is no change in the existing regulatory minimum NOF for NBFCs – IDF, IFC, MGCs, HFC, and SPD

2. Change in NPA classifications.- The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs in phase manner:-

3. Risk Management Committee – In order that the Board is able to focus on risk management, NBFCs shall constitute a Risk Management Committee (RMC) either at the Board or executive level. The RMC shall be responsible for evaluating the overall risks faced by the NBFC including liquidity risk and will report to the Board.

4. Multiple NBFCs in a Group – Classification in Middle Layer NBFCs that are part of a common Group or are floated by a common set of promoters shall not be viewed on a standalone basis. The total assets of all the NBFCs in a Group shall be consolidated to determine the threshold for their classification in the Middle Layer. 5. Leverage Ratio- The leverage ratio of NBFCs (except NBFC-MFIs, NBFCs-ML and above) shall not be more than seven at any point of time. 6. Standard asset provisioning (except NBFC-ML and above)

5. Leverage Ratio- The leverage ratio of NBFCs (except NBFC-MFIs, NBFCs-ML and above) shall not be more than seven at any point of time.

6. Standard asset provisioning (except NBFC-ML and above)

NBFC-BL shall make provision for standard assets at 0.25 percent of the outstanding, which shall not be reckoned for arriving at net NPAs. The provision towards standard assets need not be netted from gross advances but shall be shown separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet

7. Disclosures – Disclosure requirements shall be expanded, inter alia, to include types of exposure, related party transactions, loans to Directors/ Senior Officers and customer complaints and others.

8. Loans to directors, senior officers and relatives of directors – NBFC-BL shall have a Board approved policy on grant of loans to directors, senior officers and relatives of directors and to entities where directors or their relatives have major shareholding.

9. Experience of the Board – Considering the need for professional experience in managing the affairs of NBFCs, at least one of the directors shall have relevant experience of having worked in a bank/ NBFC.

Policy on Demand/Call Loans

Investment Policy

Schedule to the balance sheet NBFCs shall append to its balance sheet as prescribed under the Companies Act, 2013, the particulars in the schedule as set out in Annex VIII.

NBFC new return applicability and filing.

NBFC new return applicability and filing RBI has recently introduced XBRL returns for filing all NBFC returns CIMS portal for filing all applicable return of NBFC’s.

NBFC’s having asset size between Rs. 2 Crore and below Rs. 100 crores.

NBFC’s having asset size between Rs. 100 Crore and below Rs. 500 crores.

NBFC’s having asset size between Rs. 500 Crore and below Rs. 1000 crores.

Conclusion: In conclusion, the dynamic landscape of NBFCs in India necessitates a comprehensive understanding of their types, regulations, and compliance requirements. The recent directives issued by the RBI aim to strengthen the regulatory framework, enhance risk management practices, and foster transparency within the NBFC sector. Stakeholders must stay abreast of these regulatory changes and ensure compliance to navigate the evolving landscape effectively.