NON BANKING FINANCIAL

COMPANY

INTRODUCTION:
Non Banking Financial Company

• A Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956.

• It is engaged in the business of loans and advances, acquisition of stocks/bonds/debentures

issued by Government or local authority.

• A non-banking institution which is a company and has principal business of receiving

deposits in one lump sum or in installments is also a non-banking financial company
(Residuary Non-banking Company).

Non Banking Financial Company vs. Scheduled Banks:

NBFCs lend and make investments and hence their activities are akin to that of banks; however
there are a few differences as given below:

1. NBFC cannot accept demand deposits.

2. NBFCs do not form part of the payment and settlement system and 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.
4. An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
5. An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale
Purchase, Construction of Immovable Property
6. Foreign Investment allowed up to 100%.
Multi-regulator model:
India works on a multi-regulator model. There are certain class of NBFCs regulated by other
regulators are exempted from the requirement of registration under Section 45-IA of the RBI
Act, 1934 with RBI.

CATEGORISATION OF NON BANKING FINANCIAL

COMPANY:
NBFC's are categorized into 3 types
• In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,

• Non deposit taking NBFCs by their size into systematically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-ND)

• By the kind of activity they conduct.

TYPES OF NON BANKING FINANCIAL COMPANY:

Asset Finance Company (AFC):
Principal business for this purpose is defined as aggregate of financing real/physical assets
supporting economic activity and income arising therefrom is not less than 60% of its total
assets and total income respectively.

Investment Company (IC):

IC means any companies which invest money on behalf of their clients who, in return, share in
the profits and losses.

Loan Company (LC):

LC means any company which is providing 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):

a) It deploys at least 75 per cent of its total assets in infrastructure loans.
b) It has a minimum Net Owned Funds of ₹ 300 crore
c) It has a minimum credit rating of ‘A ‘or equivalent.
d) It has a CRAR of 15%.
Infrastructure Debt Fund (IDF):
Can be termed as Infrastructure Debt Fund - NBFC

a) IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debtinto
infrastructure projects.
b) IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum
5 year maturity.
c) Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

Mortgage Guarantee Companies (MGC):

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 ₹ 100 crore.

NBFC- Non-Operative Financial Holding Company (NOFHC):

a) A financial institution through which promoter / promoter groups will be permitted
to set up a new bank.
b) It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will
hold the bank as well as all other financial services companies regulated by RBI to the extent
permissible under the applicable regulatory prescriptions.

Size of NBFCs:
NBFCs are categorized into two different categories viz. deposit accepting and non-deposit
accepting. The non-deposit accepting NBFC is further bifurcated into systemically important
and non-systemically important companies. The term Systemically important non-deposit
taking non-banking financial company' has been defined to means a nonbanking financial
company not accepting / holding public deposits and having total assets of 500 crore and
above as shown in the last audited balance sheet.

Share of NBFCs:

Source: RBI - data as on June 30, 2015

As at the end of June 2015, RBI has cancelled CoR of 2,607 NBFCs and prohibited 9 NBFCs
from accepting deposits. Out of total 11,842 NBFCs registered with RBI, 3 companies are
registered as Infrastructure Debt Funds, 65 companies are registered as Micro-Finance
Institutions, 4 companies are registered as NBFC-Factors, 38 companies are registered as
Core Investment Companies, 1 company is registered as Mortgage Guarantee Company,
442 companies are registered as Asset Finance Companies and 11,289 companies are
registered as other viz. Loan Company or Investment Company.

Requirement for registration with RBI:

Section 45-IA of the RBI Act, 1934 states that –
No non-banking financial company shall commence or carry on the business of a
nonbanking financial institution without –
 obtaining a certificate of registration; and
 having the net owned fund 2 crores (Prior to the issuance of notification
dated April 21, 1999 the requirement of having minimum NOF was revised
from 25 lakhs to 2 crores)
However, as per revised regulatory framework if a NBFC is having NOF of less than ` 2
crores then such companies need to increase the NOF in the following manner –
 1 crores before April 1, 2016; and
 2 crores before April 1, 2017
An application for registration needs to be submitted by the Company in the prescribed
format along with necessary documents for RBI’s consideration. RBI has specified different
indicative list of documentations/ information to be submitted along with the application for
NBFC-CIC, NBFC-Factors, NBFC-MFI and other NBFCs. However, in order to avert dual
registration, RBI has exempted certain class of companies from the requirement of
registration with RBI.

Net Owned Fund:

Net Owned Fund is defined in the Explanation to Section 45-IA of the RBI Act, 1934 as
follows -
(a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest
balance sheet of the company after deducting there from-
i. accumulated balance of loss;
ii. deferred revenue expenditure; and
iii. other intangible assets; and
(b) further reduced by the amounts representing-
1. investments of such company in shares of-
i. its subsidiaries;
ii. companies in the same group;
iii. all other non-banking financial companies; and
2. The book value of debentures, bonds, outstanding loans and advances (including hire-
purchase and lease finance) made to, and deposits with-
i. subsidiaries of such company; and
ii. companies in the same group,
to the extent such amount exceeds ten per cent, of (a) above
Formation Procedure
• A company with main object clause/ y ancillary clause for carrying out NBFI
activities (check object clause)
• Obtain checklist of requirements from RBI website
• Fill up prescribed form, available on RBI website, according to instructions with
the requirements
• Fill up the e‐form provided in excel format
 Get the required certifications of the statutory auditors/chartered accountants
(as the case may be)
• Submit softcopy on RBI website before submission of the hard copy.
 Obtain the printout of successful submission of the softcopy. Mention the date of
submission on the print if date is not appearing on print.
• Submit the hardcopy application in duplicate to regional office of RBI
• Each page in the application file should be numbered
• Prepare the application in triplicate so that a replica is with the applicant for
future reference.

Commencement of Business
• NBFC must commence its business within 6 months from the date of CoR
 If not commenced within 6 months, CoR will stand withdrawn
 •No change in control prior to commencement of its business

Corporate Governance Guidelines:

RBI came up with the Non-Banking Financial Companies - Corporate Governance

(Reserve bank) Directions, 2015 (hereinafter referred to as “CG Directions”) dated April
10, 201511. The provisions of the directions shall not apply to NBFC-CIC-SI and NBFC-
NDNSI. The CG Directions required the NBFCs to constitute the following committees:
Constitution of Committees-:

Audit Committee (AC):

The constitution, power, function and duties of the AC is same as laid down in Section
177 of the Act, 2013.AC shall consist of at least three members of the board of directors
of the company. In order to mitigate the risk faced by the Company the AC shall ensure
that an Information System Audit of the internal systems and process is conducted at
least once in every two years.

Nomination Committee (NC):

The constitution, power, function and duties of the NC is same as laid down in Section
178 of the Act, 2013. NC shall be constituted to ensure that the directors appointed on
the board of the company are fit and proper.

Risk Management Committee (RMC):

RMC shall be constituted for managing the integrated risk. However, the composition,
power, functions are not specified in the CG Directions. The Securities and Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
requires top 100 listed entities (determined on the basis of market capitalisation) to
constitute RMC comprising of majority of members of the board of directors and senior
executives of the company.

Asset Liability Management Committee (ALCO):

In addition to the RMC, CG Directions requires the NBFC to constitute an ALCO for
managing the asset liability mismatch risk.

Fit and Proper Criteria:

NBFCs shall put in place a board approved policy for ascertaining the fit and proper
criteria of the directors (existing and new directors). The policy duly framed by the
board shall be in accordance with the guidelines laid down by the RBI in the CG
Directions. The company shall ensure that they obtain a declaration and undertaking
from the directors and deed of covenant duly signed by the director in the format as
given in Annex 2 and 3 under the CG Directions, respectively.
The company shall furnish a statement on change of directors, and a certificate from the
Managing Director of the NBFC that fit and proper criteria in selection of the directors
has been followed on the quarterly basis within 15 days from the end of the quarter to
the RBI. The statement submitted by NBFCs for the quarter ending March 31, should be
certified by the auditors.

Age limit:
In terms of the Fit and Proper criteria for directors of NBFCs given in Annex 1 of the
Framework (Revised Regulatory Framework for NBFCs dated November 10, 201412),
Independent / non-executive directors of an NBFC should be between 35 to 70 years of
age. However, the requirement was done away with in the final guidelines issued by the
RBI requiring NBFCs to comply with the provisions in Companies Act, 2013.
Section 196(3) of the Act, 2013 requires the company to appoint any person as managing
director, whole-time director or manager who is twenty-one years or above and has not
attained the age of seventy years.

FDI in NBFCs:
100% FDI is allowed under automatic route, if NBFC is engaged in:
 Merchant Banking
 Underwriting
 Portfolio Management Services
 Investment advisory services
 Financial consultancy
 Stock broking
 Asset Management
 Venture Capital
 Custodian Services
 Factoring
 Credit Rating Agencies
 Leasing and Finance* (financial leases only)
 Housing Finance
 Forex Broking
 Credit Card business**
 Money changing business
 Micro Credit
 Rural Credit

*FDI in operating leases is permitted up to 100% on the automatic route

** Credit Card business includes issuance, sales, marketing & design of various payment
products such as credit cards, charge cards, debit cards, stored value cards, smart card,
value added cards etc.
An NBFC engaged in the aforementioned activities is permitted to get foreign equity
upto 100 per cent under the automatic route subject to the following minimum
capitalization requirements as specified in para 6.2.18.8.2 of the FDI Policy23:
i. US $ 0.5 million for foreign capital up to 51% to be brought upfront.
ii. US $ 5 million for foreign capital more than 51% and up to 75% to be brought
upfront.
iii.US $ 50 million for foreign capital more than 75% out of which US $ 7.5 million
to be brought upfront and the balance in 24 months.
iv. Downstream investment by an NBFC