Non Banking Financial Companies(NBFC)
Written by Prabhat Dubey Dt. April 12th, 2021
Covid-19 pandemic has hit us at its worst like any other country in the world. But, with a view to achieve Nation’s vision of 5 Trillion Dollar Economy, Country’s Finance Ministry has taken a lot of steps to normalise the situation and increase the liquidity in the market as soon as possible.
Banks as always are to play crucial role in re-establishing liquidity in the market and flow of credit as before. Recently, NBFCs have taken a lead in providing business loans. Despite economic up-downs, they have remained the preferred choices for retail lending. And still, due to less stringent terms and procedures these Non-Banking Financial Institutions continue to hold a major share in business loan financing. Realising the importance of NBFCs, let us obtain a briefing about them and how to establish one:-
As stated by RBI – “A Non- Banking Financial Corporation is a Company incorporated under the Companies Act 2013 or 1956, engaged in the business of Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local authority or other marketable securities.
The NBFCs provide several services ranging from microfinance to insurance, granting loans to MFIs, finance infrastructure, etc.
A non-banking institution which is a Company and has principal business of receiving deposits under any scheme or arrangement by any mode is also a non-banking financial Company (Residuary Non-banking Company).”
Briefly, a Non – Banking Company carrying on the business of a financial institution will be an NBFC.
Categories & Types of NBFCs
Categories of NBFCs:
NBFCs can be classified on the basis of two criteria .i.e., Based on Deposits and Based on Business Activities.
Based on Deposits
On the basis of Deposit, there are two types of NBFCs as presented below:
- Deposit-taking Non-Banking Financial Company [NBFC-D]: NBFC’s which have been issued a certificate of Registration by RBI with a specific authorization to accept deposits. They can raise funds from the public (directly or indirectly) and can freely lend them to ultimate customers.
- Non-Deposit taking Non-Banking Financial Company [NBFC-ND]: NBFC’s which are not eligible to accept deposits i.e. certificate of authorization to accept deposits have not been issued by RBI.
Based on Business Activities
On the basis of Business Activities, there are several types on NBFCs operating in the market. Four major types of such NBFCs are presented below:
- Asset Finance Company (AFC): An AFC is any Company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activities.
- Investment Company (IC): IC means any Company which is a financial institution carrying on as its principal business the acquisition of securities.
- Loan Company (LC): LC means any Company which is a financial institution carrying on as its principal business Arrangement of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
- Infrastructure Finance Company (IFC): IFC is a non-banking finance Company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
Owing to features such as Quick disbursal of funds, Competitive Interest Rates, Lenient eligibility criteria and Minimum supporting documents and paperwork; NBFC’s are taking a crucial edge in Financial sector. Let us obtain a briefing about their registration:-
According to Section 45 I (a) of the RBI Act, 1934, a Company can only register itself as NBFC if it is already incorporated and should have a minimum net owned fund of Rs. 200 Lakhs. The steps for NBFC registration are as follows:
Step 1-CompanyIncorporation: The applicant’s Company must have the incorporation certificate under the Companies Act, 2013 or the Companies Act, 1956 and needs to obtain the Company registration either as Private or Public Limited Company.
Step 2 -Apply for online registration on COSMOS: The applicant needs to apply for online registration and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India. The application can be submitted on RBI’s official COSMOS website.
Step 3 – Login: In the next step, the Applicant needs to click on “CLICK” option on the login page of the COSMOS Application.
Step 4-Downloading the excel form: An Excel application will show up which is to be downloaded and then uploaded after filling up all the required details. The Company needs to indicate the correct name of the Regional Office in the field “C-8” of the “Annex-I identification Particulars” in the Excel application form.
Step 5- Allocation of CARN: Once the Applicant has submitted the form, the Company will receive a Company Application Reference Number for the CoR (Certificate of Recognition) application filed online.
Step 6 – Submission to Regional Office: Once the Company has received CARN, it needs to submit the physical application form along with the supporting documents to the regional office. The ROC will scrutinize the form and documents and will then send it to the head office.
Step 7- Issuance of NBFC License: After everything is found to be correct, the Head Office of RBI will, then, issue the NBFC license. The applicant can check the status of the application by keying in the acknowledgment number.
Further, after issuance of Registration Certificate, NBFCs are required to follow certain guidelines as issued by the Reserve Bank of India major being Not Acceptance of Demand Deposits furnishing of Quarterly return on Liquid Assets, etc.