NBFC

Rakesh Kumar

08 Sep, 2023

Non-Banking Financial Companies (NBFC) operate similarly to banks but do not possess the legal status of a bank. Registered under the Companies Act 2013 and governed by the RBI Act’s section 451(c), NBFCs primarily deal in loans, share acquisitions, and government-issued stocks and bonds. Unlike banks, NBFCs are restricted from accepting demand deposits with a few exceptions. Although their financial activities mirror those of banks, they are distinctly different from institutions engaged in agricultural, industrial activities, or the sale and purchase of goods and real estate. They are overseen by both the Ministry of Corporate Affairs and the Reserve Bank of India (RBI).

What is NBFC?

Nonbank or Non-banking Financial Companies (NBFC) registered under the Companies Act 2013 are working like a bank defined under section 451(c) of the RBI Act. They do not possess any legal status of a bank and work in the market to provide loans and advances, shares acquisition, stocks, bonds, etc., either issued by a government or any such authority. And being restricted from taking demand deposits except in a few cases from the public as the banks can accept. 

It’s totally different from that institution whose primary business is in agricultural and industrial activities, either the sale or purchase of any goods or related immovable properties. They are controlled by both the Ministry of Corporate Affairs and RBI. 

Gist of NBFCs

• NBFCs, known as Non-banking financial companies, were created to provide bank-related financial activities free from commercial banks.
•  NBFCs, duly registered companies, started with the intention to offer lending services but did not title a rank of commercial banks.
• Muthoot Finance Ltd, Bajaj Finance & LIC Housing Finance Limited, etc., are examples of non-banking financial companies within  India.
• Non-banks need to comply with both the Companies Act & RBI Act to get sustainability in the market.

Understanding NBFCs

Non-banking Financial Company’s (NBFC) full form shows that NBFCs are separate from banks. NBFCs usually perform financial activities like lending loans, advances, share acquisition, stocks, bonds, etc., issued by government authorities. They do not possess the rank of the bank. In order to carry out a similar financial function to a bank, NBFCs need to obtain an NBFC license, and their principal business must be receiving deposits in terms of instalments or any arrangement within any scheme.

Types of NBFCs

NBFCs can be classified on the basis of Liabilities and activities.

On the ground of deposits/Liabilities- 

• Deposit Non-Banking Financial Companies – Such NBFCs can easily take deposits from the general public at large.
• Non-deposit Non-Banking Financial Companies – Such NBFCs can’t take deposits from the general public at large.

With respect to their Assets Value-

• Systematically Important NBFCs- Such NBFCs either hold the value of an asset up to 5oo crore or exceed that, which was recorded during its recent previous audit balanced records. 
• Non-systematically Important NBFCs – Such NBFCs are holding assets below 5oo crore recorded in their previous balance sheet.

On the Ground of Activity-

• Asset Finance Company– This AFC is generally financing a number of business activities of individuals to support their productive and economic activities.
• Loan Company- This Company lends different loans other than assets. LIC Finance Limited and PNB Housing are the examples.
• Mortgage Guarantee Company– MGC is only for those having net owned funds of up to 100 crores, and 90%, including the business turnover and the gross income, is divined from MGC. 
• Investment Company– IC usually takes money from the public at large and further investments in different financial and securities, and the profit earned after making initial deductions is shared between the shareholders. IDFC & HDFC Mutual Funds are good examples of Investment Companies.
• Systematically Important Core Investment Company- Accepting generally government funds, and 90% of assets are invested in the form of shares, stocks, debts, etc., for a tenure not more than 10 years from the issuing date, and out of 90%, the 60% are mandatory to invest in equity shares etc.
• Infrastructure Finance Company- IFC usually provides loans out of 3/4^th of total asset value, and they possess 300 crores of their net owned fund. Construction Company like Hindustan is suitable under this category.
• Micro-Finance Institutions- MFI, a non-deposit accepting NBFC having 85% of its qualifying assets, can be used to provide loans for those borrowers having an income in rural areas. INR 60,000 and in urban including the semi-urban, a sum of 1, 20,000/-. Micro can only finance loans in subsequent parts like 35k and 50k in the first and second cycle of loans without any extended security.
• Infrastructure Debt Fund– IDF generally forecast funds in infrastructure with a minimum maturity tenure of 5 years in multiple currencies through bonds. 

Some Establishment without NBFC license

In India, there are different existing establishments carrying forward financial activities, and they do not require licensing from RBI because such existing establishments are being regulated through other financial regulatory bodies. Neither do they require any license from NBFC nor RBI. A list is given below-

• Insurance Companies come under the Insurance Regulatory and Development Authority of India (IRDA)
• Housing Finance Companies are regulated by the Nationalized Bank
• Stock Broking Companies comes under the SEBI
• Merchant Banking Companies monitored and regulated by SEBI
• Mutual Funds comes under SEBI
• Venture Capital Companies are being regulated by SEBI.

Difference between Bank and NBFCs

Generally, NBFCs follow a similar working pattern to banks in terms of financial activities, like providing lending services to borrowers and making further investments in the market. It’s somehow on the point that NBFCs function similarly to the bank. Although, NBFCs differs from a commercial bank as they do not hold the title of a bank. We will make clear how they differ from banks under these categories-

• Demand Deposits– RBI clarified the NBFCs are not liable to take demand deposits, which can be drawn on demand.
• Payment & settlement System– NBFCs are barred from being part of the payment mechanism as they cannot issue any self-drawn cheques. 

Find a List of NBFCs & their Instructions

NBFCs are listed on the official website of the Reserve Bank of India at www.rbi.org.in. Simply visit the sitemap and check the NBFC List. The RBI is used to provide instructions regarding the NBFCs on a regular basis and can be availed on the official website. Visit Notification, Master Circulars, Non-banking and check the official gazette notifications of RBI. 

Steps to get incorporated under NBFCs

• The company must possess a registration under the Companies Act 1956 or the 2013 Act.
• A minimum required net own fund value of 2 crores in this process.
• Either one of the directors must hold a degree in the banking sector i,e. having a good knowledge of the banking sector and must be a full-time working director within the same company.
• The company bears a good cibil record.
• After fulfilling these requirements, an applicant can request for incorporation purposes by using the official website RBI.
• The applicant has to provide each valid document in the online application form available on the website. As this process is completed, a CARN number will soon be generated.
• Now, the applicant needs to take out the hard copy of the application form and forward the said form to the Regional office of the RBI.
•  As the verification process of documents and forms is satisfactorily completed, RBI will issue an incorporation certificate in favour of the applicant company.

Existing Examples on NBFCs

• LIC Housing Finance Limited is a subordinate company to Life Insurance Corporation, having its foundation in the year of 1989 and becoming listed in 1994. Serving as a leading company in the sector of housing finance within India. With an objective to provide home loans and mortgage loan facilities to consumers.
• Muthoot Finance Limited is also incorporated under NBFCs in providing gold loans within the country as it also offers customers different types of loans regarding insurance, selling gold coins, etc.