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India has witnessed a significant interest in foreign Funding in NBFC Sector of India post 1991.Conventionally, India had a bank-dominated financial services sector. However, the importance of Non-Banking Financial Company (NBFC) has been recognized not only as a supplement to mainstream banking in meeting the increasing financial needs of the corporate sector but also for distributing credit to the unorganized sector and to small local borrowers.
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RBI has defined NBFC as a financial institution whose principal business is to grant loans and advance, acquire shares/stocks/bonds/debentures/securities issued by Government or local authority, lease, hire-purchase, insurance business, chit business, receive deposits under any scheme or arrangement.
In addition to above, RBI has also listed the exclusion activities to NBFC which are agricultural activity, industrial activity, trading and purchase or sale of immovable properties.
NBFC has played a critical role in the growth of Indian economy. NBFCs are diversifying financial needs of the economy. The Indian government understands that industrial growth is impossible in an environment where banks are unwilling to finance new businesses. Thus NBFCs helps to achieve financial needs.
Indian government initiatives like Make-in-India, Start-up India, Smart Cities, Housing for all which unlocks a door for the foreign investors. Foreign funding in NBFC
Liberalization in the existing foreign direct investment (FDI) regime in India, has proclaimed a significant change for NBFCs.
NBFCs are governed by the policies and guidelines as issued from time to time by the Reserve Bank of India. FDI in NBFCs has been allowed up to 100% since 1997 subject to the minimum capitalization norms.
FDI in NBFC was permitted under the automatic route in only eighteen identified sub-sectors which were listed out below. Further, any foreign investment also attracted minimum capitalization norms.
There were many challenges faced by the investors in addition to the restricted ambit of activities open to FDI earlier. For instance:
Foreign Direct Investment in NBFCs are no longer restricted to the 18 stipulated activities but have been permitted across all other financial services carried out by NBFCs. This means that as long as the NBFC is subject to a regulatory authority such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Pension Fund Regulatory and Development Authority (PFRDA), Insurance Regulatory and Development Authority (IRDAI) etc., it is permitted to raise 100% FDI under the automatic route, irrespective of the activity it performs.
For example, once a commodity broking license is approved by SEBI, a commodity broking company will not require any further approval from the Foreign Investment Promotion Board (FIPB) for bringing in foreign direct investment.
The Government has also done away with the minimum capitalization requirements under the FDI policy. NBFC would need to require to comply with capital norms mentioned above. They need to comply with capital requirements fixed, if at all, by the relevant sectoral regulatory authority only to get Foreign Funding in NBFC.
The liberalization of FDI in the financial services sector is a welcome move. It is expected to provide a much-needed boost to the sector.
This move is likely to particularly benefit domestic fund management and advisory businesses which may now raise foreign capital under a relaxed regime, without adhering to the previously prescribed minimum capitalization norms.
The new norms would also further the intent of the Government to inspire global fund managers to provide Foreign Funding in NBFC.
Read our article:Advantages of Digitalization in NBFCs
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