Non-Banking Financial Company (NBFC)

Examples of NBFC in India

Some of the examples of Non-Banking Financial Company in India that offer investment options, loans, fund transfer services, leasing, and hire-purchase options are Bajaj Finserv, Power Finance Corporation Limited, Mahindra & Mahindra Financial Service, Shriram Transport Finance Company, Muthoot Finance Ltd, etc.

Different Types of NBFCs

The NBFCs can be categorised under two broad heads:

1. On the nature of their activity

1. On the basis of deposits

The different types of Non-Banking Financial Corporations or NBFCs are as follows:

On the nature of their activity:

1. Asset Finance Company

2. Loan Company

3. Mortgage Guarantee Company

4. Investment Company

5. Core Investment Company

6. Core Investment Company

7. Infrastructure Finance Company

8. Micro Finance Company

9. Housing Finance Company

On the basis of deposits:

1. Deposit accepting Non-Banking Financial Corporations

2. Non-deposit accepting Non-Banking Financial Corporations

Requirements to be fulfilled in order to obtain NBFC license:

The fundamental requirements which are to be fulfilled in order to apply for NBFC license are as follows:

1. The company has to be registered under the Companies Act. That is the company should either be a Limited Company or a Private Limited Company (PLC).
2. The minimum Net Owned Fund of the company must be Rs.2 crore.

Services Offered by NBFCs

The services offered by NBFCs are:

1. Personal Loans
2. Vehicle Loans
3. Home Loans
4. Gold Loans
5. Credit Card services
6. Microfinance
7. Insurance Services
8. Services related to leasing and hire purchase
9. Services related to investment and asset management.

Financial Organisations That Do Not Require an NBFC License

Certain entities are involved in the business of financial activities but do not require obtaining a registration with the Reserve Bank of India (RBI). As these entities are regulated by other financial sector regulators, they do not need either the NBFC registration or the NBFC regulations of RBI. These entities are as follows:

1. Insurance Companies which are regulated by Insurance Regulatory and Development Authority of India (IRDA)
2. Housing Finance Companies which are regulated by the National Housing Bank
3. Stock Broking Companies which are regulated by Securities and Exchange Board of India
4. Merchant Banking Companies which are regulated by Securities and Exchange Board of India
5. Mutual Funds which are regulated by Securities and Exchange Board of India
6. Venture Capital Companies which are regulated by Securities and Exchange Board of India
7. Companies that run Collective Investment Schemes which are regulated by Securities and Exchange Board of India
8. Chit Fund Companies which are regulated by the respective State Governments
9. Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)

What is Net Owned Fund?

Net Owned Fund of a company can be defined as the funds owned by a company after deducting the intangible assets and reserves from its Total Owned Fund.

Documents Required for Incorporation of an NBFC

The following documents have to submitted in order to apply and obtain a NBFC license:

1. Details about the company's management.
2. Certified copy of Certificate of Incorporation
3. Certified copy of Certificate of Commencement of Business
4. Certified copy of updated Memorandum of Association (MoA) of the organisation
5. Certified copy of updated Articles of Association (AoA) of the organisation
6. Copy of the PAN card or CIN that has been issued to the organisation
7. Directors' profile which has to be duly filled and signed by each director separately
8. Certificate of experience from the non-banking financial companies at which each director had worked and obtained experience
9. The CIBIL Data applicable to the Directors of the company
10. The last 2 years' financial statements of the relevant unincorporated bodies, if any.
11. A Board Resolution to approve the contents of the application and its submission process, and the authorising signatory
12. A Board Resolution to announce that -
    1. No public deposit has been accepted by the organisation previously (mention the time period)
    2. No public deposits are held by the organisation till date and no deposits will be accepted thereafter without prior permission from the Reserve Bank of India in writing
13. A Board resolution specifying that -
    1. No NBFC activities are being carried on by the organisation
    2. The organisation has stopped all kinds of NBFC operations and will not perform the same without receiving registration from the Reserve Bank of India.
14. In order to formulate the 'Fair Practices Code', a Certified copy of Board resolution is required.
15. A Statutory Auditors Certificate certifying -
    1. that the organisation is not holding any Public Deposit
    2. that the organisation does not hold any Public Deposit
16. A Statutory Auditors Certificate which certifies that the organisation is not involved in any NBFC operation
17. A Statutory Auditors Certificate which certifies the net owned fund as on the application date
18. Authorised Share Capital details
19. Details of the recent patterns of the shareholding of the company along with its percentages.
20. Copies of Fixed Deposit receipt & bankers certificate of no loans/debts with account balances supporting Net Owned Funds
21. The branch or bank's full postal address, credit or loan facilities, bank account and balance details, and so on taken by the company.
22. For existing companies, the last 3 years' Profit & Loss account, audited balance sheet, auditors and directors' reports, etc. are to be submitted.
23. The next 3 years' business plan of the organisation with details such as:
    1. the specific direction of the business
    2. market segment
    3. income/asset pattern statement sans public deposits, cash flow statement, and projected balance sheets
24. Documentary evidence of the company's startup capital source
25. IT Returns or bank statements to be submitted post self-attestation

Other than these, the applicant might also have to submit other additional documents as required.

Incorporation Process of an NBFC

The step-by-step process of incorporating a Non-Banking Financial Corporation (NBFC) is discussed below:

1. The company should have a valid registration under the Companies Act, 1956 or the Companies Act, 2013.
2. The company should have a minimum net owned funds worth Rs.2 crore.
3. At least one of the Directors has to be of the same background or has to be a Senior Banker. This Director also has to be a full-time director in the company.
4. The company should have a clean CIBIL record.
5. Once the conditions which are mentioned above are met, the applicant can apply for the incorporation through the website of the Reserve Bank of India.
6. An online application has to be filled up and submitted through the RBI website.
7. Along with the form, the applicant is required to upload the requisite documents on the online portal.
8. Once all of the above-mentioned steps are completed, a CARN number will be generated.
9. The applicant is also required to send a hard copy of the application which is filled up and submitted on the portal, to a regional branch office of the Reserve Bank of India.
10. The license will be issued to the company, after the thorough scrutinisation of the application.

Guidelines Prescribed by RBI for NBFCs

The functions of the NBFCs in India are supervised by the Reserve Bank of India (RBI). Hence, the NBFCs have to abide by the guidelines put forward by the RBI in Chapter III B of the RBI Act of 1934. The regulations prescribed by the RBI are as follows:

1. NBFCs cannot accept demand deposits from public depositors or investors as it is not authorised by law.
2. The minimum time period for which the public deposits can be taken by the company is 12 months, while the maximum tenure can be 60 months.
3. The Reserve Bank of India will not guarantee the repayment of any amount which is taken by the NBFCs.
4. The Company cannot charge an interest rate which is more than the rate prescribed by the Reserve Bank of India.
5. NBFCs can issue cheques to their customers in order to make payments or settlements.
6. The company has to furnish a record of the statutory return on the deposits taken by the company in the form NBS- 1 every year.
7. The company has to furnish a quarterly return on the liquid assets of the company.
8. The audited balance sheet of the company has to be submitted every year.
9. The company has to ascertain its credit ratings every 6 months and submit the same to the RBI.
10. The companies which have a Public Deposit of Rs.20 Crore or more or have assets worth Rs.100 Crore or more will have to submit a half-yearly ALM return.
11. The depositors of the NBFCs cannot avail the securing facility of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
12. Only the NBFCs that have been duly rated and matches the recommended Minimum Investment Grade Credit (MIGC) rating, are eligible to accept conditional deposits from public depositors.
13. The RBI has restricted the NBFCs from providing additional benefits, extra incentives, or gifts to the customers or depositors, than those which are offered by the banks.
14. The company has to maintain a minimum of 15% of the Public Deposits in its Liquid Assets.

What can be done in case a Non-Banking Financial Corporation (NBFC) defaults and fails to pay the amount taken?

In case the NBFC defaults and fails to make the payment of the amount taken, the depositor can file a suit against the company to the Consumer Forum or the National Company Law Tribunal.

Difference between NBFC and Bank

While NBFCs engage in lending and investment activities akin to banks, several notable distinctions set them apart: