Non-Banking Financial Companies (NBFCs) are financial institutions in India that provide various banking services but do not hold a banking license. They are regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934. NBFCs play a significant role in the Indian financial system by providing credit to sectors underserved by traditional banks, such as small and medium enterprises (SMEs), infrastructure, and housing.
Definition and Role of NBFCs
- Definition: As per RBI, an NBFC is a company registered under the Companies Act, 2013 (or 1956) that provides financial services like loans and advances, asset financing, and investment in marketable securities but cannot accept demand deposits (like banks).
- Key Functions:
- Lending and asset financing
- Investment in stocks, bonds, and other financial instruments
- Leasing, hire purchase
- Insurance and retirement plan services (specialized NBFCs)
Key Differences Between NBFCs and Banks
- Deposit acceptance: NBFCs cannot accept demand deposits, while banks can.
- Payment system: NBFCs cannot issue cheques drawn on themselves, unlike banks.
- Deposit Insurance: NBFC deposits are not covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC), while bank deposits are insured.
Types of NBFCs in India
NBFCs can be categorized based on the activities they engage in and the specific services they offer. Below are the major categories:
- Based on Liability Structure
– Deposit-taking NBFCs (NBFC-D): These NBFCs are allowed to accept public deposits and are more stringently regulated by the RBI.
– Non-deposit taking NBFCs (NBFC-ND): These NBFCs are not allowed to accept public deposits and usually serve through loans and asset management.
- Based on Size
– Systematically Important NBFCs (NBFC-ND-SI): These are NBFCs with an asset size of INR 500 crore or more and are considered systematically important because their failure can impact the financial system.
– Non-Systematically Important NBFCs (NBFC-ND): NBFCs with assets under INR 500 crore.
- Based on Activities
– Investment and Credit Company (ICC): Engages in lending and investment activities.
– Asset Finance Company (AFC): Specializes in financing physical assets like automobiles, machinery, etc.
– Infrastructure Finance Company (IFC): Provides long-term funding for infrastructure projects.
– Micro Finance Institution (MFI): Lends to the economically weaker sections of society, generally in rural areas.
– Housing Finance Company (HFC): Provides loans for housing purposes.
– Infrastructure Debt Fund (IDF-NBFC): Re-finances infrastructure projects by raising debt funds.
– Gold Loan NBFCs: Provide loans against gold ornaments as collateral.
Formation Process of NBFCs in India
- Company Incorporation
– Register as a company under the Companies Act, 2013. This can be either a Private Limited or Public Limited Company.
– The minimum net owned fund (NOF) requirement for NBFCs is INR 2 crore (except for specific types like NBFC-MFI and NBFC-Factors, which have different NOF requirements).
– The company must include financial activities in its object clause of the Memorandum of Association (MOA).
- Capital Requirements**
– The company must have a net owned fund (NOF) of at least INR 2 crore, (except for specific types like NBFC-MFI and NBFC-Factors, which have different NOF requirements), before applying for registration with the RBI.
- Application for RBI License
– After incorporation, the company must submit an online application on the COSMOS Portal of the RBI for NBFC registration.
– Hard copies of all required documents must be sent to the Regional Office of RBI.
Key documents required include:
– Certificate of incorporation.
– MOA and Articles of Association (AOA).
– Business plan for the next 5 years.
– Details of directors and shareholders.
– Financial statements, bankers’ reports, and auditors’ reports.
- Approval and Certificate of Registration (CoR)
– Once the application is submitted and verified, the RBI will issue a Certificate of Registration (CoR) if the company complies with all regulatory requirements.
– After the license is granted, the NBFC can start operating.
Key Compliance Requirements for NBFCs
NBFCs must adhere to several regulations and compliances to maintain their license and ensure smooth operation. Here are the key compliance norms for NBFCs:
- Annual Compliances
– Statutory Audit: NBFCs must conduct a statutory audit by a certified chartered accountant (CA).
– File Financial Statements: Balance sheet, profit & loss account, and annual report must be filed with the RBI annually.
– Filing Returns: NBFCs must file various returns like NBS-1, NBS-2, NBS-3, and NBS-9 for deposit-taking companies.
- Net Owned Funds (NOF) Maintenance
– NBFCs are required to maintain a minimum NOF of INR 2 crore (may differ for specific types of NBFCs).
- Capital Adequacy Ratio (CAR)
– NBFCs are required to maintain a minimum capital adequacy ratio (CAR) of 15% to ensure they have enough capital to absorb potential losses.
- Prudential Norms
– Compliance with prudential norms related to income recognition, asset classification, provisioning for bad and doubtful debts, and capital adequacy is mandatory.
- Fair Practices Code
– All NBFCs must adopt and display a Fair Practices Code ensuring transparency in their operations, such as loan sanctions and recovery policies.
- KYC (Know Your Customer) Norms
– NBFCs must strictly comply with **KYC norms** to verify the identity of their customers. This includes maintaining proper records of customer identity and transactions.
- Non-Performing Assets (NPA) Classification
– NBFCs must classify assets as NPA (Non-Performing Assets) when payments are overdue for more than 90 days and make appropriate provisions for them.
- Corporate Governance Requirements
– NBFCs are subject to corporate governance norms including the appointment of independent directors, setting up audit committees, and regular disclosures.
- RBI Inspections
– NBFCs are subject to periodic inspections by the RBI to ensure that they comply with the regulatory framework.
- CIBIL Reporting
– NBFCs must report their loan disbursement and recovery details to credit information companies (CICs) like CIBIL.
Conclusion
NBFCs are crucial in bridging the gap between banks and underserved segments in India’s financial ecosystem. The formation of an NBFC involves meeting capital requirements, obtaining RBI registration, and adhering to ongoing compliance standards such as capital adequacy, prudential norms, fair practices, and annual reporting.