Non Banking Financial Institution or NBFC are companies which perform banking functions but are not banks. NBFC are regulated by Reserve Bank of India.
RBI under section 45 I (f) of RBI Act defines a NBFC as a Company which has as its “principal business” that of receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner. It also means any non Banking institution which RBI may specify. Therefore a NBFC may not only be a company under the companies Act 2013 but also any cooperative society or Trust or corporation.
Statutory limits: To get registration under RBI the NBFC must
1. Be a Company under companies Act 2013. Therefore an Individual, Partnership firm or LLP cannot be registered as NBFC
2. Have Net owned funds (NOF) equal to 2 crores.
Therefore NBFC cannot perform the following functions
1. Cannot accept Demand deposits. They can accepts normal deposits but not DD.
2. They do not form part of the payment & settlement system & cannot issue cheques drawn on itself
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
Net owned funds means Share capital & reserves less accumulated loss & investment in shares of subsidiary, group companies & other NBFC.
There are basically 10 types of NBFC which can be formed & all these have different requirement. The following are the NBFC
1. Asset finance company: AFC is any company which is a financial institution carrying on its principal business of that of financing of physical assets supporting productive/economic activity such as automobile, tractors, machine etc. It must have 60% of its total assets in financial Assets & 60% of its gross total income must be from such assets.
2. Investment company: It is a NBFC whose principle business is to acquire securities. It must have 50% of its total assets in Investment Activity & 50% of its income must be from such assets.
3. Loan company: Loan company is any financial institution whose principle business is to lend loans & advance. The same criteria as investment company applies to loan company.
4. Infrastructure finance company: It is a institution which has 75% of its total assets in infrastructure loans. Also the NOF must be 3 crore or more. It should also have minimum credit rating of A
5. Core Investment companies: These are the financial institution which carries on the acquisition of shares & securities.
a. It must invest not less than 90% of its total assets in the form of investment in equity shares or preference shares or debt or loans of group companies.
b. Its investment in equity shares in group companies must not be less than 60% of its own assets.
c. Asset size must be more than 100 crore.
6. Infrastructure Debt Fund companies: These NBFC is facilitate flow of long term debt to the infrastructure projects. It raises funds from issue of bonds of 5 years maturity.
7. Microfinance: A Microfinance NBFC is one of the most popular NBFC. It is a non deposit taking NBFC having NOF of 5 crores & having 85% of its net assets in the qualifying assets. A Qualifying Asset means a loan disbursed without collateral.
The following are conditions.
a. Loan disbursed must not be more than Rs 1 lakh for rural household borrower or Rs 1.6 lakh for urban household
b. Loan amount must not exceed Rs 50,000 in first cycle & Rs 1,00,000 in subsequent cycle.
c. Total indebtedness of the borrower does not exceed Rs 1 lakh.
d. Tenure of loan must not be less than 24 months for loan exceeding Rs 15,000.
e. Loan to be extended without collateral
8. Factor: A Factor NBFC is a one which is engaged in factoring.
9. Mortgage Guarantee company: MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 1 00 crore.
10. Non operative Finance holding company: It is a financial institution through which promoter /promoter groups will be permitted to set up a new bank.
1. Interest to be charged must not exceed average base rate of 5 commercial bank multiplied by 2.75
2. Processing charge for loan should not be more than 1% of gross loan amount
3. NBFC can charge differential rate of interest for customers
4. Cannot levy prepayment penalty
5. Corporate governance guidelines to be followed.
FDI in NBFC: A minimum Equity investment of US $ 500,000 is allowed which must not exceed 51% of the share capital of the company. NBFC cannot access External Commercial Borrowing.