A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act. It engages in the business if loans and advances; acquisition of shares, stocks, bonds, debentures, securities issued by the 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, arrangement in one lump sum or in instalments by way of contributors or in any other manner is also a non-banking financial company (Residuary non-banking company).
FINANCIAL ACTIVITY AS PRINICIPAL BUSINESS
Financial activity as principal business is when a company’s
- Financial assets constitute more than 50% of the total assets; and
- Income from financial assets constitutes more than 50% of the gross income.
A company which fulfils both these criteria will be registered as NBFC by Reserve Bank of India (RBI).
The term principal business is not defined by the RBI Act. The Reserve Bank has defined it so as to ensure that only companies, for the most part, engaged in financial activity get registered with it and are regulated and supervised by it. So if a company is engaged in agricultural operations, industrial activity purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank.
REGISTRATION OF NBFC WITH RBI
According to Section 45-IA of the RBI Act, 1934, no NBFC can commence or carry on business of a non-banking financial institution without:
- Obtaining a certificate of registration from the Bank; and
- Having a Net Owned Funds (NOF) of Indian Rupees two crore (INR 2, 00, 00, 000).
However, in terms of power of powers given to the Bank, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI:
- Venture Capital Fund
- Merchant Banking Companies
- Stock broking companies registered with SEBI
- Insurance Company holding a valid Certificate of Registration issued by IRDA
- Nidhi companies as notified under Companies Act
- Chit companies as defined in Section 2 of the Chit Funds Act, 1982
- Housing Finance Companies Regulated by National Housing Bank
- Stock Exchange for a Mutual Benefit company
REQUIREMENTS FOR REGISTRATION AND PROCEDURE
A company incorporated under the Companies Act and desirous of commencing business of non-banking financial institution as defined under Section 45-IA of the RBI Act, 1934 should comply with the following:
- It should be a company registered under Section 3 of the Companies Act, 2013
- It should have a minimum net owned fund of Indian Rupees two crore (INR 2, 00, 00, 00)
- The applicant company is required to apply online and submit a physical copy of the application with the necessary documents to the Regional Office of RBI
- The application can be submitted online by accessing RBI’s secured website http://cosmos.rbi.org.in
- The applicant can tap on the “Click for Company Registration” on the login page of the COSMOS Application
- A window showing Excel application form available for download would be displayed
- The applicant company can then download suitable application form, fill in the data and then upload the form
- The company then gets a Company Application Reference Number for the application filed online
- After this, the company has to submit hard copy of the application form, indicating the online Company Application Reference Number, along with the supporting documents, to the concerned Regional Office
- The company can check the status of the application from the abovementioned secure address, by entering the acknowledgement number
The application form and an indicative checklist of the documents required to be submitted along with the application is available at www.rbi.org.in > Site Map > NBFC List > Forms/ Returns.
CATEGORIES AND TYPES OF NBFCs
NBFCs are categorized
a) In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs
b) Non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
c) By the kind of activity they conduct.
Within this broad categorization the different types of NBFCs are as follows:
- 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 there from is not less than 60% of its total assets and total income respectively.
- Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities
- 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.
- 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%.
- 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
- 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.
- 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 installments at the choice of the borrower
- 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.
- 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.
- 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.