Non-Banking Financial Companies (NBFC)

Evolution of NBFCs in India

Non-Banking Financial Companies, the abbreviated form of which is “NBFCs”, play a crucial role in serving as alternative financing options for businesses and individuals. These Companies have undergone a significant evolution in India.

The concept of financial intermediaries existed in the pre-independence era also and companies providing credit and other financial services were there but the sector was not well-regulated. After acquiring independence in 1947, the Indian government started focusing on creating a robust financial system. With the amendment in its Act of 1934, the Reserve Bank of India began assuming a more prominent role in supervising and regulating financial institutions

In the 1950s, the NBFC sector in India was in its nascent stage. There was limited recognition and regulation and the traditional banks dominated the financial landscape

The specific regulations with respect to NBFCs were not yet in place and the concept of NBFCs was not yet fully developed. It was only in the 1960s onwards that NBFCs began to emerge as a distinct and regulated segment of the financial sector

In December 1964, a new chapter dealing with NBFCs was introduced by the RBI through an amendment in its Act of 1934, this amendment paved the way for the establishment of NBFCs in India. Thereafter, two committees were formed by the government of India to review the structure and working of NBFCs..

James S Raj Committee: For studying the framework of Non-Banking Financial Companies, this Committee was formed in the 1970s and uniform Chit fund legislation for the entire nation was recommended by it.

Chakravarty Committee: This committee, which was established in 1982 to review the monetary system in India, recommended the complete evaluation of interlinking between the banking sector and NBFCs.

In 1997, a significant step was taken by the RBI to formalize the operations of NBFCs and comprehensive guidelines were issued by it. Such guidelines include capital requirements, reserve requirements, and disclosure norms.

Thereafter, the RBI has continued to evolve its regulatory approach and incorporating measures which are contributing significantly to the diversification and growth of NBFCs.

Meaning of Non-Banking Financial Company (NBFC)

As per the website (updated as on January 10, 2017) of the Reserve Bank of India, an NBFC is a company registered under the Companies Act, 1956 (should also include companies registered under the Companies Act, 2013, which replaced the Companies Act, 1956) engaged in the

• loans and advances business;
• acquisition of shares/stocks/ debentures/ bonds/ securities, whether issued by (a) Government or (b) local authority or (c) other marketable securities of a like nature;
• leasing, hire-purchase, and insurance businesses;
• chit business;

But does not include any institution whose principal business is that of:

• agricultural activity;
• industrial activity;
• purchase or sale of any goods (except securities) or providing any services and
• sale/purchase/construction of immovable property.

Different Types/ Categories of NBFCs Registered with RBI

As per the RBI website (Updated as on January 10, 2017), Non-Banking Financial Companies are categorized as follows:

• on the basis of type of liabilities into (i) Deposits and (ii) Non-Deposit taking Non-Banking Financial Companies
• non-deposit taking NBFCs by their size into (i) systemically important and (ii) other non-deposit holding companies and
• on the basis of the kind of activity conducted by them.

Within the above broad categorization, the different types of Non-Banking Financial Companies are as follows:

Investment and Credit Company:

Vide RBI’s Circular RBI/2018-19/130 DNBR (PD) CC No. 097/03.10.001/2018-19 dated 22 February 2019, the following three categories of NBFCs were merged into a new category known as Investment and Credit Company:

Asset Finance Company :

The Company carries on the financing of physical assets as its principal business, such as machinery, vehicles, and equipment. Examples are lathe machines, tractors and material handling equipment, etc.

Investment Company :

The principal business of this Company is the investment in securities such as shares, bonds, debentures, and other financial assets.

Loan Company :

The Company provides loans and advances to individuals and institutions, excluding those related to asset finance. Investment and Credit Company is an NBFC, which carries on as its principal business asset financing. This can be done by way of the providing of finance, whether by making loans and advances or otherwise, for any activity which is different from its own, and the acquisition of securities. The Company should not be in any other category of NBFC as defined by the RBI in any of its master directions.

Infrastructure Finance Company :

Such a company provides long-term finance for infrastructure projects such as highways, ports, and power plants. This NBFC

1. uses a minimum of three-fourths of its total assets in infrastructure loans;
2. has a minimum credit rating of ‘A ‘or equivalent and has a minimum Net Owned Funds of ₹ 300 crore;
3. has a 15% as Capital to Risk-Weighted Assets Ratio

Systemically Important Core Investment Company:

This type of NBFC has the business of acquisition of shares and securities and which satisfies the prescribed conditions as on the date of the last audited balance sheet. In order to qualify as a Core Investment Company, it should hold or raise public funds and its total assets, whether individually or together with other Core Investment Companies in the Group, are Rs. 100 crore or more.

Infrastructure Debt Fund:

Non- Banking Financial Company : This company facilitates the flow of long term debt into infrastructure projects. Resources are raised by this type of NBFC through the issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Sponsorship of such NBFCs can be done only by Infrastructure Finance Companies

Non-Banking Financial Company

Micro Finance Institution: It is a non-deposit taking Company, the focus of which is on providing financial services to low-income segments. Not less than 85% assets of such an NBFC are in the nature of qualifying assets which satisfy the criteria prescribed in this regard.

Non-Banking Financial Company

Factors: This is a non-deposit taking NBFC and has factoring as its principal business. At least 50 percent of the total assets of this Company should be constituted of financial assets in the factoring business.. Besides, the income derived from factoring business should not be less than 50 percent of the gross income of the Company.

Mortgage Guarantee Companies:

In the case of these companies, at least 90% of the turnover is from mortgage guarantee business or a gross income of at least 90% is from mortgage guarantee business. The net owned funds are Rs. 100 Crore for such NBFCs,.

Non-Operative Financial Holding Company:

Through this Company, which is a non-deposit taking Company, promoters / promoter groups will be permitted to set up a new bank. It is a wholly-owned Non-Operative Financial Holding Company which will hold the bank as well as other financial services companies regulated by RBI or regulators of other financial sectors, to the permissible extent under the applicable regulatory prescriptions.

Residuary Non-Banking Companies:

The receiving of deposits under any arrangement or scheme or in any other manner is the principal business of these NBFCs. This is not an Investment, Asset Financing, or Loan Company. In addition to liquid assets, investments as per the directions of RBI are required to be maintained. The method of mobilization of deposits and the requirement of deployment of depositors’ funds as per Directions are different in these companies from those of NBFCs. However, applicability is also there of Prudential Norms Directions to these companies `

Account Aggregator:

As per the Department of Financial Services, Ministry of Finance, Account Aggregator is a non-banking financial company which is engaged in the business of providing the service of retrieving or collecting financial information relating to the customer. However, without the explicit consent of the customer. no customer’s financial information is retrieved, shared or transferred by the framework of Account Aggregator… Consumers may voluntarily Register with an Account Aggregator.

Housing Finance Company

This non-banking financial company provides financial assistance for housing and real estate development to individuals and organizations.

Peer-to-Peer Lending Platform

This NBFC is an online financial marketplace that facilitates lending between individuals and businesses. Here, traditional financial intermediaries like banks are bypassed and, for borrowers and attractive returns for lenders, an alternative financing option is provided.

Bill Discounting Company:

This NBFC provides immediate financing to businesses by discounting their unpaid bills, invoices, or other receivables. Through this process, the bills are brought before their maturity date and immediate cash is made available to the bill issuer.

Securitization Company

This NBFC converts illiquid assets into tradable securities. The originators of the assets are provided liquidity when these securities are sold to investors. Thus, this enables them to raise capital.

Venture Capital Fund/Merchant Banking Company:

This NBFC provides financial assistance to small businesses, early-stage companies and startups. Thus, their businesses get support at their growth stages.

Nidhi Company:

“Principle of Mutuality” is the basic concept of nidhi and the core business of such NBFCs is borrowing and lending money between their members.

Categories of NBFCs Exempted from the Provisions of RBI Act, 1934

The website of RBI contains “Master Direction – Exemptions from the provisions of RBI Act, 1934 vide which some categories of NBFCs, as mentioned in the Master Direction (updated as on April 01, 2022), have been given exemption from certain provisions of the Reserve Bank of India Act, 1934, as specified therein. Some of such NBFCs are mentioned below and for details, the above mentioned Master Direction of the RBI can be referred to:

• Chit Fund Companies
• Government of India controlled companies
• Housing Finance Companies
• Insurance companies
• Merchant Banking Companies
• Mortgage Guarantee Companies
• Nidhi Companies,
• Stock Exchanges,
• stock-broking/sub-broking Companies,
• Venture Capital Fund Companies,
• Core Investment Companies having asset size of less than Rs.100 crore,
• Core Investment Companies where although the asset size is Rs.100 crore and above but they do not have access to public funds

Difference Between A Bank And An NBFC

Features	Bank	NBFC
Applicable Act	Banking Regulation Act, 1949	Companies Act, 2013
Regulatory Authority	Regulated by the Reserve Bank of India (RBI)	Regulated by the Reserve Bank of India (RBI)
Acceptance of Deposits	Demand deposits can be be accepted	Demand deposits cannot be accepted
Issuance of Cheques	Cheques drawn on itself can be issued	Cheques drawn on itself cannot be issued.
Deposit Insurance deposit insurance Facility for Deposit Insurance and Credit Guarantee Corporation	Available and allowed	Not Available
Clearing House Membership	Are members of the clearing house.	No clearing house membership.
Credit Creation	Has the power to create credit through fractional reserve banking.	Cannot create a credit like banks.
Maintenance of CRR and SLR	Bank is obliged to maintain ratios like Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR).	Not Applicable
License	Banking license provided by RBI	Does not hold a banking license but a Certificate of Registration with the RBI
FDI	In Private sector banks up to 49% through the automatic route and up to 74% through government’s approval	100% subject to the minimum capitalization norms.
Credit Score Requirements	Higher	Moderate to lower credit score can be considered.
Functions	Offers a wide range of banking services.	Engages in lending and investment activities.

Incorporation of a Company to Carry On Business as an NBFC

For incorporation of a Company for the purpose of doing business as an NBFC, the requirements of the Companies Act, 2013 as well as those of the Reserve Bank of India are to be followed.

Decisions to be made

Briefly, for incorporating an NBFC as a Company, the following decisions will be required:

1. Type of Company to be Incorporated: It has to be decided whether the Company is to be formed as a Private Limited Company or a Public Limited Company. Both types of such companies have their own pros and cons.
2. Selection of Name of the NBFC: The name of the proposed company should represent the business to be carried on and decided taking into account the guidelines of the Ministry of Corporate Affairs as also of the Reserve Bank of India, if any. As such, the appropriate name of the Company will have to be decided.
3. Decision about the Registered Office of the Company: The registered office serves as a point of contact for all legal communications. The state in which the registered office shall be situated is required to be included in the Memorandum of Association of the Company.
4. Deciding about activities to be carried out by the proposed Company: As an NBFC basically undertakes business relating to Finance, activities to be carried on by the proposed company will have to be decided, taking into account guidelines of the Reserve Bank of India. Such activities shall form part of the “ Main Objects” Clause of the Memorandum of Association of the Company.
5. Deciding on the paid up capital of the Company: Requirement relating to Net Owned Funds: Any company which desires to be incorporated as an NBFC with RBI should have a minimum net owned fund worth Rs.200 Lakh. As such, the paid up capital of the proposed Company will have to be kept at a minimum of Rs. 200 lakh

Process for Incorporation of NBFC as a Company under the Companies Act, 1956.

A new company incorporation has to be done through online filing of SPICe+ form on the website of the Ministry of Corporate Affairs. This Form, which is an integrated web form with a single-window for multiple services, stands for “Simplified Proforma for Incorporating Company electronically Plus” Basically, this . SPICe+ form provides information about 10 services by three Ministries and Departments of the Central Government (namely Ministry of Corporate Affairs, Ministry of Labour and the Department of Revenue in the Ministry of Finance) and of one State Government (where the Company is proposed to be incorporated).

Further, as per Rule 38A of the Companies (Incorporation) Rules, 2014, the application for incorporation of a company should be accompanied by e-form AGILE-PRO-S, which is e-Form INC-35, which contains an application for registration of the following numbers:

• GSTIN
• EPFO
• ESIC,
• Professional Tax Registration,
• Opening a Bank Account and
• Shop and Establishment Registration

With regard to this Form, the Institute of Company Secretaries of India made a request to the Ministry of Corporate Affairs, Government of India. vide their letter dated 24th May 2024, with the subject “ESI/EPF Registration in e-form AGILE-PRO-S — Request to Develop Optionality”, to provide an option to the companies so that EPF and ESI registration can be opted-out by them during the incorporation process itself, as in the case of GSTIN Registration (where such companies fall under exemption criteria).

It is suggested that for the formation of a Company, professional help may be taken so that the same gets incorporated as soon as possible.

Requirements – Commencement of Business as a Non-Banking Financial Institution

As per the website of the Reserve Bank of India, which is shown as “Updated as on January 10, 2017”, under the heading “FAQs – All you wanted to know about NBFCs”, business of non-banking financial institution, as defined under Section 45 I(a) of the RBI Act, 1934, can be commenced after registration of a company under Section 3 of the companies Act, 1956 and such company should have a minimum net owned fund of Rs. 200 lakh. It has also been mentioned there that for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs, the required minimum net owned funds have been indicated separately in the “FAQs on specialized NBFCs”.

Here, it is wondered why there is no mention of Companies incorporated under the Companies Act, 2013, which replaced the Companies Act, 1956 and came into effect in 2013 whereas the website of the RBI, which the above requirements have been shown has been shown to be updated in 2017.

Conclusion

Non-Banking Financial Companies , which are of different types and complement the banking sector, have been promoting inclusive growth by developing innovative financial products and solutions and financing start-ups. MSMEs and projects related to Infrastructure. They are essential for the financial landscape of India as they are providing a wide range of financial services to a diverse range of customers. Although there have been occasional slowdowns, the future of Non-Banking Financial Companies appears to be promising and dynamic.