NON-BANKING FINANCIAL COMPANY AND ITS REQUIREMENTS

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The non-banking financial company also called NBFC is operated after going through the NBFC registration process from RBI. So, we come across the question: what is this banking company and non-banking financial company and how are they different from each other? A non-banking financial company is not purely based on banking, so how does it differ? A bank can take any sort of deposits and it can lend the money to customers or clients. Non-banking financial companies do not take deposits but they lend money to their customers or clients. It is not that easy to take a banking license, the government does not provide a banking license to everyone or anybody. Non- banking financial company is a financial company that works as a bank but, not exactly like a bank which is a pure bank, it can not accept the deposit. An NBFC incorporation is initiated under the Companies Act, 1956, 2013 under section 45(i)© of the Reserve Bank of India act that defines “financial institution”. This NBFC’s financial institution includes financing that means by way of giving loans, advances or otherwise, acquisition of shares, stocks, bonds, debentures or securities, hire purchase, insurance business, chits, kuris, etc. Business, money circulation schemes are the included schemes. Agricultural operations, industrial activity, purchase, or sale of any services and sale or purchase or sale of any goods (other than securities) construction of immovable property are excluded from a non-banking financial company.

How do we identify whether the company is a type of NBFC or not?

Reserve bank of India vides its press release no.1998–99/1269 dated April 8, 1999, laid down the criteria for determining the principality of business this principality is popularly known as 50–50 principle business criteria. Both the assets and the income pattern as evidenced from the last audited balance sheet. The financial assets of a company is more than fifty percent of the gross income. The criteria if income/assets are cumulative, that is, both the tests are required to be satisfied simultaneously as the determinant factor for the principal business of a company. Based on these press releases, the Reserve Bank of India has been insisting on obtaining an annual certificate from the auditor of a non-banking financial company that the company continues to carry on the business of a non-banking financial company. Circular no.DNBS (PD C.C.№8/03–05–002/2006–07 dated October 18, 2006.

Difference between banks and non-banking financial company:

Non-banking financial companies activity are mentioned below-

• The non-banking financial company cannot accept the demand deposits whereas the bank accepts the demand deposits.
• The non-banking financial company do not construct portion of the expenditure and concession network and can not publish cheque drawn on itself.
• The non-banking financial company has deposit insurance and credit guarantee corporation is not available to deposit of non-banking financial companies, unlike in the case of banks.

Requirements of registration and NBFC Guidelines

Under section 45(i)(a) of the reserve bank of India act states that no non-banking financial company shall commence it carry on the business of a non-banking financial company without obtaining a certificate of registration, and having the net owned fund of Rs. 2 crores (Rs. 25 Lacs- April 1999) however as per the revised regulatory framework if a non-banking financial company is having NOF of less than Rs.2 crores then such companies need to increase the NOF in the following manner-

• Rs. 100 lakhs before April 1, 2016; and
• Rs. 200 lakhs before April 1, 2017.

A certain class of Non-banking financial companies regulated by other regulators is exempted from the requirement of registration with a reserve bank of India- merchant banking or stock brokering companies — SEBI; Insurance Companies — IRDA; Nidhi Companies — Act, 2013, Housing finance companies- NBH; etc.

Types of the non-banking financial company –

• Liability — Deposit accepting, Non-deposit accepting.
• Size- systemically important NBFCs, Non-systemically impotent NBFCs.
• Activity:

1. Asset finance company (AFC).
2. Investment company (IC).
3. Loan company (LC).
4. Infrastructure finance company (IFC).
5. Microfinance institutions (NBFC-MFI).
6. Factors (NBFC-Factors).
7. Mortgage Guarantee Companies.
8. The non-operative financial holding company (NOFHC).

How to determine the type of non-banking financial company-

• Asset finance company: Financing of material assets benefiting effective or economic training such as automobiles, tractors, generator sets, earthmoving, etc. For example, Magma Fincorp Limited, Srei Equipment Finance Limited.
• Loan company: the furnishing of finances, whether by preparing loans or advances or oppositely for any other recreations other than its own but does not encompass in an asset finance company. For example, Fullerton Indian Credit company Limited, India Infoline Finance Limited.
• Investment Company: Carrying on as its primary business of accession of safeties. For example, Tata Investment Corporation Limited.
• Infrastructure Finance Company: which formulates at least seventy-five percent of its total assets in infrastructure loans has a fewest net acquired funds of Rs. 300 crores have a minimum credit rating of ‘A’ or comparable and a CRAR of 15 percent. For example, L&T Infrastructure Finance Company Limited, IDFC Limited.
• Infrastructure Debt Fund: IDF promotes the progression of long-phrase debt into infrastructure projects. Can raise resources through the problem of Rupee or Dollar-denominated contracts of a minimum of five years majority. Only IFC can underwrite IDF-NBFCs. IDF can be set up either as confidence or as a company- if it is trust then it will be a mutual fund (regulated by RBI). As of June 30, 2015, barely 3 corporations are indicated with RBI that is India Infradebt Limited, L&T Infra Debt Fund Limited, IDFC Infra Debt Fund Limited.
• Systemically Important Core Investment Company: obtainment of stakes and safeties holds up not less than 90% of its total assets. Involvement in equity stakes, preference shares, debt, or loans in group companies. Interests in the equivalence stakes in group companies compose not less than 60% of its assets. It does not enterprise in its enterprise in stakes, debt, or loans in companies anticipates through fence sale for the objective of dilution objective of disinvestment. The size of the bargain is Rs. 100 crore or above and it submits all the public funds. This won’t fulfill keep taking off with any additional financial entertainment applied to in category 45I(c) and (f) of the RBI act, 1934 except enterprise in the bank deposits, money market instruments, government securities, loans to, and investments in debt issuances of the group companies. For example, Tata Capital Limited.
• Micro Finance institution: ND-NBFC bringing into the world not less than 85% of its bargains in the nature of authorized assets. Begetting a lowest NOF of Rs. 5 crores (expect NBFCs registered is North Eastern Region). For example, SKS Microfinance Limited, Asmitha Microfin Limited. NBC’s does not qualify as MFI shall not extend loans to the MF sector in aggregate exceeding 10 percent of the total assets. Qualifying assets mean a loan that satisfies the following criteria-

1. Loan expended by an NBFC-MFI to a borrower with a pastoral household annual revenue not outperforming Rs. 1,00,000 or urban and semi-urban household income not outperforming Rs.1,60,000;
2. The loan amount does not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles;
3. The total indebtedness of the borrower does not exceed Rs. 1,00,000;
4. Tenure of the loan not to be less than 24 months for a loan amount over Rs. 15,000 with prepayment without penalty.
5. Loan to be extended without collateral;
6. The aggregate quantity of loans, provide for income production, is not less than 50 percent of the unlimited loans provided by the MFIs;
7. The loan is readable in weekly, fortnightly, or monthly installments at the choice of the borrower.

• Factors: Business of factoring. Economic assets- at least 50 percent of its cumulative assets and its revenue should not be slighter than 50 percent of its ordinary income. For example, SBI Global Factors Limited, India factoring, and finance solution private limited.
• Mortgage Guarantee Company: 90% of the business turnover is the mortgage guarantee business or at least 90 percent of the gross income is from mortgage guarantee business and the net owned fund is Rs. 100 crore. For example, India Mortgage Guarantee Corporation.
• Non-Operative Financial Holding Company: Promoter or promoter groups will be permitted to set up a new bank. A wholly-owned NOFHC which will clench the bank as well as all additional financial assistance company.

Conclusion- A bank can put up with any type of securities and it can advance the capital to dependents or buyers. Non- banking financial company is a financial company that specializes as a bank but, not precisely like a bank which is a moral bank, it can not ratify the sediment. A non-banking financial corporation is a business that is reported under Act, 1956 Act, 2013 under section 45(i)© of the RBI act that defines “financial institution”. This NBFC’s economic institution comprises financing that means by way of putting on loans, advances or otherwise, acquisition of shares, stocks, chits, bonds, insurance business, debentures or securities, hire purchase, etc. Business, money circulation procedures are the included schemes. The non-banking financial company does not accomplish it take securities but, they entrust money to their dependents or buyer. It is not that susceptible to take a banking license, the administration does not furnish a banking license to everyone or anybody.