Organization Structure of Small NBFCs

Organization Structure of Small NBFCs

Non-Banking Financial Organisations play a critical role in offering a variety of financial services to various of financial services to various categories in India’s ever-expanding financial ecosystem. In recent years, Non-Banking Financial Companies have experienced tremendous development and relevance. They offer various financial services, including taking deposits, disbursing secured and unsecured loans, hiring purchases, leasing, and more. Small NBFCs play a crucial role in economic development and serve the unserved sectors of society.

Non-Banking Financial Companies

We are aware that NBFC stands for Non-Banking Financial Company; let us explore what an NBFC is in more detail. An organization known as an NBFC offers financial services that are comparable to those of traditional banks but do not have a banking license. In accordance with the terms of the RBI Act of 1934, Non-Banking Financial Companies are governed and supervised by the Reserve Bank of India. 

Four Layers of the NBFC

A four-tier structure with a stepwise increase in regulatory restructure has recently been proposed by the Reserve Bank of India (RBI) as a tougher regulatory framework for Non-Banking Financial Companies (NBFCs). The following four layers should serve as the foundation for the regulatory and oversight framework for NBFCs: 

Base Layer

Non-Banking Financial Companies in the lower layer or small NBFCs are considered as a base layer. Those Non-Banking Financial Companies with assets under Rs.1000 crore. The following NBFCs will always be in the Base Layer of the Regulatory Structure when engaging in these activities:

  • Peer-to-Peer Lending Platforms for NBFCs
  • Non-Operative Financial Holding Companies (NOFHC) 
  • NBFCs that do not use public funds and have no client interface 
  • NBFC-Account Aggregators (NBFC-AA)

Middle Layer

  • The middle layer’s NBFCs will be referred to as NBFC-Middle Layer (NBFC-ML)
  • In comparison to the base layer, the regulatory framework for this layer will be more stringent.
  • If necessary, adverse regulatory arbitrage between NBFCs in this tier and banks can be addressed to lessen systemic risk spillovers.

Upper Layer

  • NBFC will welcome a new regulatory superstructure in the Upper Layer, which will be referred to as NBFC-UL.
  • NBFCs, which have a high potential for systemic risk spillover and the capacity to affect financial stability, will be represented in this layer.
  • Since this will be a new layer of control, there are currently no parallels for this layer. However, with necessary and appropriate modifications, the regulatory framework for NBFCs operating under this tier will be similar to that of banks.
  • A recognized NBFC-UL will leave the enhanced regulatory framework if it fails to achieve the standards for classification for four years in a row.
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Top Layer

  • This layer should ideally be empty.
  • Supervisory judgement will probably remove some NBFCs from the top tier of systemically important NBFCs in order to subject them to stricter regulation and oversight.
  • These NBFCs will be present as a unique group at the top of the upper layer. Ideally, supervisors’ opinions on particular NBFCs will prevent this top tier of the pyramid from filling up.
  • If some NBFCs in the top tier are determined by supervisory judgment to represent extremely high risks, they may be subject to more stringent regulatory and supervisory requirements.

NBFC Base Layer Regulation

 With the following exceptions, NBFCs in the Base Layer (NBFC-BL) must abide by the rules that now apply to Non-Deposit Taking Non-Banking Financial Companies – Non-Deposit Taking Companies (NBFC-ND):

Minimum Net Owned Fund criteria: 

 Non-Banking Financial Companies with no public funding and no client interface and NBFCs operating peer-to-peer lending platforms and account aggregators must continue to meet the Net Owned Fund (NOF) criteria of 2 crores.

 Additionally, no modifications to the current regulatory minimum Net Owned Fund (NOF) requirements for Standalone Primary Dealers (SPDs), Mortgage Guarantee Companies (MGCs), Housing Finance Companies (HFCs), and Non-Banking Finance Companies (NBFC-IFCs) have been proposed.

 For NBFC-Investment and Credit Company (NBFC-ICC), NBFC-Micro Finance Institutions (NBFC-MFI), and NBFC-Factors, the regulatory minimum Net Owned Fund (NOF) criteria will be raised to 10 crores.

Qualification – Given the requirement for professional expertise in managing the affairs of the NBFCs, at least one of the directors must have relevant experience working in a bank or NBFC.

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Ceiling on Subscription through IPO – Application of the maximum of Rs. 1 crore per borrower for financing subscription to Initial Public Offer (IPO) is the cap on subscription through IPO. NBFCs, however, are able to set more restrictive boundaries. 

Grant of Loans to Senior Officers and Directors – Establishing a board-approved policy for lending money to people like directors, senior officers, relatives of directors, and businesses where those people are key shareholders.

Risk Management Committee – Establishing a risk management committee, either at the executive or board level, to assess the total risks the NBFC faces, including the liquidity risk, and to provide a report to the board.

Disclosure – Base Layer NBFCs must disclose extra information in their annual financial statements, such as related party transactions, exposure to the real estate sector, exposure to the capital markets, sectoral exposure, etc.

Role of Non-Banking Financial Companies in the Indian Economy 

 Non-Banking Financial Companies are playing an important role in the Indian economy. Some of the main roles are listed below:

  • Encourages financial inclusion by making credit available to the underserved and unbanked areas of the nation.
  • Give businesses access to loans and other ancillary services to support their expansion.
  • Services for managing wealth include managing a portfolio of investments in stocks, shares, and other securities.
  • Due to the usage of cutting-edge technological solutions like open banking and API banking, loans are sanctioned quickly.

Structure of Small NBFCs

 The main structure of the Non-Banking Financial Companies are:

  • Board of Directors
  • Chief Executive Officer or Managing Director
  • Branch Head
  • Operational Team
  • Finance and Accounting Team
  • Credit Assessment and Underwriting Team
  • Collections Team

The particular structure of the NBFC depends on their size and the area in which they are involved or conducting their business. The reserve bank is reforming the industry and changing compliance rules as necessary in order to streamline the governance structure for NBFCs. 

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Unlike large NBFCs, small NBFCs don’t have complex hierarchies and many divisions. Their organizational structure is simple, and the employees work according to their business needs and structure. But complying with the regulatory norms is a serious issue. Registering their business as NBFC is not that easy.

FAQs: –

  1. What is the structure of NBFC?

    Based on their size, activity, and perceived riskiness, NBFC regulatory structures will be divided into four layers. The lowest tier's NBFC are referred to as the NBFC-Base Layer. NBFC-Middle Layer and NBFC-Upper Layer are the names given to the NBFCs in the middle and upper layers. The top layer, often referred to as the NBFC-Top Layer, is ideally empty.

  2. What are the layers of NBFC?

    With the SBR Framework's introduction, NBFCs will henceforth be categorized as:
    a. Base Layer (BL), 
    b. Middle Layer (ML),  
    c. Upper Layer (UL), and
    d. Top Layer.

  3. What is a small company as per the Companies Act bare act?

    The Act identifies a small business as one that is not publicly traded and has a paid-up share capital of at least Rs. 4 crores, or if greater, an amount mentioned therein that does not exceed Rs. 10 crores. A revenue or turnover equal to or below Rs. 40 crore or a greater sum specified but not exceeding Rs. 100 crore.

  4. Can a Section 8 company be a small company?

    The following companies are not considered small businesses: a subsidiary or holding firm, a business with section 8 registration or a legal entity or business covered by a special law.

  5. Who Cannot be a small company?

    A private firm is the only type that qualifies as a small business. A holding company, subsidiary, charitable organization, or organization subject to a Special Act cannot be categorized as a small business.

  6. What is an organized and unorganized financial system?

    Banks, financial institutions, and other regulated companies make up the organized sector of the money market. In contrast, unregulated entities, including money lenders, chit funds, and other unofficial financial intermediaries, are found in the unorganized sector.

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