In this article, Bharath Selvakumar,  pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on NBFCs in India.

Banking sector throughout the world constitutes a large number of financial operations such as deposits, loans etc. Most nations have a centralized bank that regulates all the other banks that operates in that nation. There are various types of financial companies that exist which indulge in financial businesses. A Non-Banking financial company is one such type of a financial company with a difference from banks.

Introduction

The Reserve Bank of India (RBI) defines a Non-Banking Financial Company as,

“A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 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.”

Simply put, a Non-Banking Financial Company (NBFC) receives money as a whole or in instalments connected to a scheme and runs its financial process. There are a variety of NBFCs that an individual comes across in day to day life that involves itself in various financial activities.

Difference between Non-Banking Financial company and a Bank

It is of prime importance to understand the basic difference between a bank and a Non-Banking Financial Company (NBFC). The basic differences from a bank are:

• Demand deposits cannot be accepted by NBFC

Demand deposits are those that can be by anyone into the financial institution and can be withdrawn at any time as per the wish of the depositor without any prior notice to the institution eg. current accounts in banks. These deposits are restricted to NBFCs by the RBI.

• Unlike banks, NBFC is not a part of payments and settlements system regulated by RBI

Payment and settlement systems in India include credit cards, debit cards, Real Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT) and few others. NBFC cannot do these operations as per RBI regulations.

• NBFC cannot issue cheques on its name

As the NBFCs are restricted to be a part of payments and settlement system by the RBI, issuing cheques by NBFC cannot be done.

• For the depositors in NBFC the deposit insurance facility and credit guarantee corporation is not available.

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a subsidiary of RBI that insures all the deposits such as savings, fixed, recurring etc. upto a limit of ₹1,00,000 for each deposit and provides a guarantee for credit facilities. This facility is not extended to NBFC by the RBI.

Types of Non-Banking Financial Companies

Non-Banking Financial Companies are of many types depending on various factors. They are:

• Asset Finance Company (AFC)

Asset Finance companies are those that are involved in the financing of physical assets for an economic activity. The physical assets may be automobiles, generator sets, earth movers etc.

• Investment Company (IC)

Investment Company involves its business activity to the acquisition of securities such as shares, debentures, equity etc.

• Loan Company (LC)

Loan Companies are those that are into proving finances such as loans or advances for an activity or a business.

• Infrastructure Finance Company (IFC)

A company can be classified as an Infrastructure company if it satisfies the following conditions:

1. A company having at least 75% of its total assets in infrastructure loans.
2. Having a minimum of ₹ 300 crores of net fund.
3. Having an ‘A’ in credit rating.
4. Having Capital to Risk weighted Assets Ratio (CRAR) of 75%.

• Systematically Important Core Investment Company (CIC-ND-SI)

This type of company carries out business in the acquisition of securities, shares. And also following conditions should be satisfied:

1. Having a minimum of 90% of total assets in form of investments in securities of companies.
2. Investments in equity shares should contribute not less than 60% of total assets of the company.
3. Having asset size over ₹ 100 crores.
4. Involves only in the block sale of its investments with the sole intention of disinvestment or dilution.
5. Public funds should be accepted.
6. Should not involve in any other activity other than investing.

• Infrastructure debt fund Non-Banking Financial Company (IDF-NBFC)

It is a company that facilitates the long-term flow of long-term debt into infrastructure projects. It raises finances through the issue of Rupee or Dollar bonds with the minimum maturity period of 5 years. IDF-NBFC is liable to get sponsor only from IFC companies.

• Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

It is a non-deposit accepting NBFC having the minimum of 85% of its assets satisfying following criteria:

1. Loans are given to people from a rural background with income not exceeding ₹1,00,000 or an urban person with income not exceeding ₹1,60,000.
2. The loan should not exceed ₹50,000 in the first cycle and ₹1,00,000 in consecutive cycles.
3. Total debt of a person should not exceed ₹1,00,000.
4. The tenure of loan for the amount more than ₹15,000 should not be less than 24 months if prepaid should be with the penalty.
5. Loans can be expanded without collateral.
6. Loans can be repaid in instalments on weekly, monthly or fortnightly basis left to borrower’s choice.
7. Total aggregate loans given for income generation by the company should not be less than 50% of total loans given.

• Non-Banking Financial Company-Factors (NBFC-Factors)

This type of company involves itself in the business of factoring. It should the minimum of 50% of its total assets through factoring and should constitute more than 50% of its gross income from factoring.

• Mortgage Guarantee Company (MGC)

It is a company having a net fund ₹100 crore and having at least 90% of its income from mortgage guarantee.

• NBFC- Non-Operative Financial Holding Company (NBFC-NOFHC)

It is a set up of a new bank opened by the promoters. It’s a wholly-owned Non-Operative Financial Holding Company that holds the bank and other financial services regulated by RBI.

Is it Necessary to Register a Non-Banking Financial Company with RBI?

No, it is not necessary for every NBFC to be registered with the Reserve bank of India (RBI). Though the question is binary, it has to have a brief explanation for this. A Non-Banking Financial Company can operate without registering itself with RBI and also without having the net fund of ₹2,00,00,000 in its company. However since there are many types of NBFCs there are certain other bodies that come into picture for regulating, other than RBI. In order to avoid dual regulation, certain types of NBFC’s are exempted from registering with the RBI and are in turn controlled by concern regulating bodies connected with the business type of the company. Below table gives few types of companies and its respective regulatory body of that type company:

Company Type	Regulating Body
Chit Funds	State Government
Venture Capital Fund	Securities and Exchange Board of India (SEBI)
Stock Brokering	Securities and Exchange Board of India (SEBI)
Merchant Banking	Securities and Exchange Board of India (SEBI)
Housing Finance	National Housing Bank (NHB)
Nidhi Company	Ministry of Corporate Affairs

What are the procedural requirements to start an NBFC in India?

Owing to the scope and the diversification of NBFCs, any person with an idea of venturing into a new business having funds would be tempted into financing sector. Though there are a lot of financing individuals who can be found in every area of a place mostly using undue standards in financing there are many who would like to venture into financing complying with legal formalities.

Below is an example of how to register an NBFC (in this case, a Microfinance institution)

Registering the Company

Firstly a name for the company has to be decided and has to be registered with the ROC. Also, it has to be registered as either a private limited or a public limited company.

Capital for the company

The minimum capital requirement for starting up a Micro Finance Institution is ₹2,00,00,000 for companies in the Northeastern region of India and ₹5,00,00,000 for rest of India.

Certificate for the capital holding

After the capital requirement is achieved it is necessary to deposit this amount in a bank account on a fixed deposit and obtain the certificate for the same from the bank.

Documents checklist for registration

• Registration certificate of the company.
• Company’s Memorandum of Association (MOA) certified copy.
• Resolution of the Board copy.
• Certificate of banking for deposited money.
• Report of the Bank for the company.
  

Submission the Application

With all the documents mentioned above-prepared application with those documents can be applied to the RBI for approval. Online application with all the required documents can be submitted in RBI online portal [https://cosmos.rbi.org.in]. Also, all the documents have to be physically submitted to the regional office of RBI in the respective region of the company.

Registration charges

The professional fee charged by RBI for registration of a new Micro Finance Institution is ₹4 to ₹4.5 lakh since this is a tedious, time consuming and a complicated process. The total registration charges will be up to ₹8.5 lakh.

It is to be noted that the registration process is complicated, time-consuming and costly but on the other side it is also worth it and has a great scope.

Conclusion

The scope of Non-Banking Financial companies is very high and extends into a broad dimension. From a simple lending company in the rural area to chit funds that most middle-class people rely to venture capital and investment companies that big companies rely on NBFCs lends its help and finds its scope to most in an economy. Though NBFCs roles are shadowed by banks the role of it to a developing economy like India is much appreciated and pivotal because it is able all class of people across the country and provide its services for the development of the same.

Reference:

• FAQ on Everything you needed to know about NBFCs from Reserve Bank of India website [https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92 (April 25, 2018)].
• Documents required for registering as Type-I NBFC attachment from RBI website [https://rbidocs.rbi.org.in/rdocs/Forms/PDFs/CHECK17062016.PDF (April 25, 2018)].
• Article on How to start new microfinance company by Paras Mehra [https://www.hubco.in/articles/how-to-register-a-micro-finance-company-in-india-a-mfi-nbfc-in-india (April 25, 2018)].