A Non-Banking Financial Company/Corporations (NBFC) may be a company registered under the Companies Act, 2013(or any earlier enactments) occupied with the matter of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the government or any office.
It doesn’t include any institution whose principal business is that of agricultural activity, industrial activity, purchase or sale of any other goods (other than securities) or providing any services and sale/purchase/construction of an immovable property.
Section 45 I(c) of the RBI Act says that – A non-banking company carrying on the business of a financial institution will be termed as an NBFC. It is governed by RBI and the Ministry of Corporate Affairs.
Difference between NBFCs and Banks[1]
- NBFC can’t acknowledge demand deposits.
- NBFC is not required to keep up Reserveratios (CRR, SLR, etc.).
- NBFC isn’t a piece of installment and settlement framework.
- Foreign Investment allowed up to 100%.
- NBFC can’t give cheque drawn on itself.
Categories of NBFCs
These are the types of NBFCs that are registered with RBI.
- Asset Finance Company (AFC)
- Investment Company (IC)
- Systemically Important Core Investment Company (CIC-ND-SI)
- Infrastructure Finance Company (IFC)
- Loan Company (LC)
- Infrastructure Debt Fund (IDF-NBFC)
- Micro-Finance Institution (MFI-NBFC)
- Non-Banking Financial Company – Factors (NBFC-Factors)
- NBFC- Non-Operative Financial Holding Company (NOFHC)
- Mortgage Guarantee Company (MGC)
Benefits of Incorporating an NBFC[2]
- Competitive Interest Rates – Rate of interest is one amongst the most aspects of every type of loan. Non-Banking Financial Sectors have begun to target this area within recent decades and have brought down the interest rates to either adequate bank lending rates or now and then even lower to bank rates.
- Quick Processing – At banks, it is significant that the candidate ought to satisfy the qualification criteria yet NBFC are merciful right now. This makes advance endorsement simpler, smoother process and faster. A large portion of the occasions, individuals apply for credit when they are in quick need of cash. NBFCs have accepted this as an open door to satisfy the need by rapidly handling the advances at a serious pace of intrigue.
- Fewer Rules and regulations – As NBFC are incorporated under the Companies Act, (however controlled by the Reserve Bank of India), the principles and guidelines for loans are not as stringent as banks. This encourages borrowers to get advances without any problem.
- Loan Available for Individuals with Poor Credit Rating – People with poor credit rating by and large won’t get advances from banks. The purpose behind this is banks consider borrowers are high-risk people if the credit scoring is low. Except if the credit rating is over 600 – 650, it is exceptionally hard to get an advance endorsed from banks. Then again, advances will be offered to people with low credit rating by NBFCs however often the financing costs for such borrowers will be higher than market rates. Due to these previously mentioned points of interest, most of the NBFCs are escalating.
Requirements of registration with RBI
A company incorporated under the Companies Act, 1956 and covetous of beginning business of non-banking money financial institution as characterized under Section 45 I(a) of the RBI Act, 1934 ought to conform to the following –
- Should be a company registered under Section 3 of The Companies Act, 1956.
- It should have a minimum net owned fund of 2 crores.
Registration Process with Reserve Bank of India[3]
After incorporation of the company, the NBFC must obtain a certificate of registration. Before applying, it should ensure the following:
- It should have min. 1 director from NBFC background as a full-time director in the company.
- CBIL records should be clean.
- Understanding of NBFC/ Finance Business.
In terms of Section 45-IA of the RBI Act, 1934, an NBFC can carry on business only after obtaining a certificate of registration from the RBI.
Action taken against persons/companies falsely claiming to be an NBFC regulated by RBI
It is illegal for any such company to make a false claim of being regulated by RBI and deceiving the public to collect deposits. Doing such an act can attract liability for penal action under the Indian Penal Code. Information in this regard may be forwarded to the police and RBI.
Judicious regulations applicable to NBFCs
The RBI has issued directions on prudential norms vide-
- Non-Banking Financial Companies Prudential Norms Directions, 2007.
- Non-Systemically Important Non-Banking Financial Companies Prudential Norms Directions, 2015.
- Systemically Important Non-Banking Financial Companies Prudential Norms Directions, 2015.
Applicable regulations vary based on the deposit acceptance of the NBFC.
Guidelines that an NBFC must follow[4]
- They can’t receive deposits payable on demand.
- Public deposits taken by the company should be for min. 12 months and max. 60 months.
- Interest charged can’t be more than the limit as prescribed by the RBI.
- Public Deposits will be unsecured.
- Every year the company must submit an audited Balance Sheet.
- Every year the company must submit a statutory return on the deposits provided in the NBS-1 form.
- The credit rating must be submitted to RBI in every 6 months.
- The company has to maintain a minimum of 15% of the public deposits in Liquid Assets.
If the NBFC defaults in the payment of any amount taken, the consumer can go to the National Company Law Tribunal or the Consumer Forum to file a suit against the Company.
“The views of the authors are personal“
Reference
[1] https://en.wikipedia.org/wiki/NBFC_%26_MFI_in_India#cite_note-1
[2] https://www.coursehero.com/file/p7fj91r/and-Non-Banking-Financial-CompaniesNBFCs-are-financial-intermediaries-and-the/
[3] https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92
[4] https://cleartax.in/s/non-banking-financial-company-nbfc
