NBFC

Learn all about Advantages of NBFC

A Non-Banking Finance Company is a company who serves as a support to the Indian economy by lending to borrowers. These companies are important in developing countries like ours where majority of our population is from rural backgrounds. We are going to learn about the advantages of NBFC in detail in this blog.

What is NBFC and what does it do?

NBFC stands for Non Banking Finance Company which is an institution involved in providing financial services. Their activities include loans and advances, acquisition of stocks, equities, debt etc., chit funds, and leasing. Examples of these firms include chit funds, pawn shops, cashier’s cheque issuers, cheque crashing locations, payday lending, currency exchanges, and microloan providing firms. NBFCs are registered according to the Companies Act 2013^[1].

The Importance of NBFC Advantages

NBFCs are important especially in a developing country like India where most of its population is from rural areas. In these areas usually commercial banks are not available remotely. This is where NBFCs come into action. They provide financial services to people residing in these locations.

A few NBFC advantages include:

• Provides loans and credit facilities
• Invests in money market instruments
• Do wealth management by involving in activities like managing portfolios of shares and stocks
• Funds private education
• Supports investment in properties
• Helps in retirement planning
• Provides guidance to companies in acquisition and merging
• Serves as an option for borrowing of money where banks are not available
• NBFCs are faster than banks

Restrictions on NBFC

Although NBFCs function mostly/almost like commercial banks, they have some limitations issued by RBI. These limitations include;

• NBFC cannot accept demand deposit from any source/means
• The depositor does not receive facilities like deposit insurance scheme
• They cannot issue cheque drawn on itself
• They cannot be a part of payment and settlement system

Types of NBFC

Based on the type of work they do, NBFCs according to RBI is divided into two categories namely:

1. Depository
2. Non depository

Under these two broad categories there are ten types of NBFCs:

• Asset Finance Company {AFC}: AFCs work in providing financial support to economic activities such as automobiles, tractors, lathe machines, generator sets, earth moving etc.
• Investment Company {IC}: Any company whose primary business generally is acquisition of securities.
• Loan Company {LC}: these companies mainly/primarily provide loans and advances not as assets but for other purposes.

Note: Above mentioned three categories have been merged by the government and now it is known as NBFC ICC (Investment and credit Company).

• Infrastructure Finance Company {IFC}: IFC is a firm which
  • Provides at least 75% of its total asset on infrastructure loans
  • Has minimum Rs. 300 crore of Net Owned Funds
  • Has credit rating of minimum of A or equivalent
  • CRAR of 15%
• Systematically Important Core Investment Company {CIC-ND-SI}: This is a type of NBFC company carrying out acquisition of shares and securities satisfying prescribed conditions given by RBI
• Infrastructure Debt Fund {IDF}: They provide funds to the infrastructure sectors
• Non Banking Financial Company-Micro Finance Institution {NBFC-MFI}: This is a non deposit taking NBFC which have more than 85% of its assets in the form of micro finances
• Non-Banking Financial Company- Factors {NBFC-Factors}: This is an NBFC in the business of factoring
• Mortgage Guarantee Company {MGC}: these are companies which;
  • 90% of business turnover is mortgage guarantee business or
  • 90% of the total income is from mortgage guarantee business
  • Also, it’s net owned fund is Rs. 100 crore
• Non-Operative Financial Holding Company{NOHFC}: This is a type of NBFC company which is allowed to set up a bank under the RBI guidelines

Difference between NBFC and Bank

NBFC	Bank
Cannot issue demand draft	Can issue demand draft
Cannot accept demand deposit	Can accept demand deposit
Do not form part of payment and settlement system	Form part of payment and settlement system
Incorporated under RBI Act	Incorporated under Companies Act
Deposit insurance policies of Deposit insurance and Credit Guarantee Corporation is not available to depositors	Deposit insurance policies of Deposit insurance and Credit Guarantee Corporation is available to depositors
NBFCs do not have Banking license	Banks have Banking license
NBFCs do not have running accounts like Current Account or Savings Account	Banks have running accounts like Current Account or Savings Account
It’s major work is to accept money from general public for lending	It’s major work is to accept deposits and lending
They cannot issue credit card	They can issue credit cards
They cannot issue debit cards	They can issue debit cards
It is only for lending purposes	It accept deposits for lending and investment purposes
Provides financial services	Provides financial services

Who regulates NBFC?

The Reserve Bank of India regulates the functioning of Non Banking Finance Company under the framework of Reserve Bank of India Act, Chapter III B and its directions.

What is the procedure of NBFC Registration?

As stated under the Section 45 I of the RBI Act 1934 a company which is already incorporated and has a minimum owned fund of Rs. 2 crore only can register itself as an NBFC. NBFC Registration steps are the following;

• Step 1;

Incorporation of the company: A company must already be incorporated under the Companies Act 1956 or the Companies Act 2013. The company must be registered as a Private or Public Limited Company

• Step 2;

Apply on COSMOS for online registering: The company needs to apply for the online registration process and also submit the physical copy of the application with documents to the regional office of the Reserve Bank of India. This needs to be done on the official RBI website

• Step 3;

Then click on the ‘Click’ option on the COSMOS login page

• Step 4;

Downloading the Excel form: Afterward, in the next step the applicant need to download the Excel form given on the screen and re-upload it after filling the same

• Step 5;

After filling all the required information the applicant company will get a Company Application Reference Number as a Certificate of Reorganization {CoR}

• Step 6;

The next step include submitting of the application along with required documents to the regional office

• Step 7;

The last step is the issuance of NBFC License: When the RBI Head office checks everything and finds everything correct then it issues the NBFC License. The applicant can check the status of their license by using the acknowledgement number.

List of top 10 NBFC companies in India

There are many NBFCs in India. Here is the list of top 10 non banking companies namely;

• Power Finance Corporation Limited
• Shriram Transport Finance Company Limited
• Bajaj Finance Limited
• Mahindra & Mahindra Finance Services Limited
• Muthoot Finance Limited
• HDB Finance Services
• Cholamandalam
• Tata Capital Financial Services Limited
• L & T Finance Limited
• Aditya Birla Finance Limited

Disclaimer

The NBFC is a type of company which usually functions like a commercial bank except it has some limitations prescribed under RBI Act 1934^[2]. Also, these companies do not have banking license. The major advantages of these companies are that they serve as an option for borrowing money where commercial banks are not available. Other advantages are for instance, they Funds private education, Invests in money market instruments, Provides loans and credit facilities etc.

Read our article:RBI Merges Three Categories of NBFCs Into NBFC – Investment and Credit Company (NBFC-ICC) to Ease Operational Flexibility