NON BANKING FINANCIAL INSTITUTION
A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a
financial institution that does not have a full banking license or is not supervised by a
national or international banking regulatory agency. NBFC facilitate bank-related
financial services, such as investment, risk pooling, contractual savings, and market
brokering. Examples of these include insurance firms, pawn shops, cashier's check
issuers, check cashing locations, payday lending, currency exchanges, and microloan
organizations.
CRITERIA FOR NBFC LICENSE
• The company must be registered in accordance with the Companies Act.
• The corporation should be either a Limited Company or a Private Limited
Company (PLC).
• The company's Net Owned Fund must be at least Rs. 2 crores.
• The principal business of the applicant should be financial activities. If the
financial flow of the business is more than 50% of the total capital asset, then
that company can get NBFC registration.
• It should have at least 1 Director from the financial field or a senior banker as a
Director.
• The CIBIL (Credit Information Bureau Limited) records should be clean.
Types of NBFC Not to be Registered under RBI:
There are certain businesses that are involved in providing financial activities but do
not need to obtain a registration with RBI. These types of entities are regulated by
other financial sector regulators, and to avoid dual regulation, they are not required to
obtain an NBFC License from RBI. They are:
• Insurance Companies: These are regulated by the Insurance Regulatory and
Development Authority of India (IRDA),
• Housing Finance Companies: Being regulated by the National Housing Bank
(NHB),
• Stock-Broking Companies: These are regulated by the Securities and Exchange
Board of India (SEBI),
• Merchant Banking Companies: Again being regulated by SEBI,
• Mutual Funds: SEBI is the regulator,
• Venture Capital Companies: SEBI is the regulatory authority,
Prepared by: Vineet Singh
MA in Economics
• Companies running Collective Investment Schemes: SEBI is the regulator,
• Chit Fund Companies: These are regulated under the Chit Fund Act and by the
respective State Governments,
• Nidhi Companies: Being regulated by the Ministry of Corporate Affairs (MCA).
Types of NBFC
NBFC Registration can be either Deposit Accepting or Non-Deposit Accepting ones. If
they are Non-Deposit Accepting NBFCs, ND is suffixed to their name, as in NBFC-ND.
The NBFCs with an asset size of Rs.100 Crore or more are known as Systematically
Important NBFC. The types of NBFC have been named so because they can impact the
financial stability of the country. The Non-Deposit Accepting Systematically Important
NBFCs are known as NBFC-NDSI.
Under the broad categories of Deposit Accepting and Non-Accepting NBFCs, they may
be further divided into below 8 categories:
1. Investment & Credit Company
ICC-NBFC is any financial institution carrying on as its principal business – asset
finance, the provision of finance whether by making loans or advances or
otherwise, for any activity other than its own, and the acquisition of securities. And
is not included in any other types of NBFC as defined by RBI in any of its Directives.
a) Asset Finance Company: An AFC is a financial institution which carries on the
financing of various assets for individuals and the businesses supporting
productive/economic activity, as its principal business. For example,
automobiles, tractors, machinery, heavy industrial equipment, large power
generator sets, lathe machines, earthmoving & material handling equipment,
production & farming equipment, moving on own power, and general-purpose
industrial machines. The income arising from these should not less be than 60%
of its total assets.
b) Investment Company: The financial institution whose principal business is the
acquisition of securities. That is it takes money from the public which is invested
in various securities and financial products. Then the company deducts its
operational cost from the earned profit and the balance is distributed to its
shareholders. Bajaj Alliance General Insurance Company, IDFC, HDFC mutual
fund are examples of some Investment company.
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MA in Economics
c) Loan Company: NBFC – LC is a financial institution that offers a loan for various
purposes except for AFC. The loan is offered not for assets but for other
purposes such as working capital finance etc. But includes the Housing Finance
Firms. LIC Finance Ltd, PNB Housing Finance Firm, HDFC are some examples of
the NBFC – LC.
2. Infrastructure Finance Company
It is an NBFC which –
• Deploys 3/4th of its total assets in infrastructure loans
• Has a minimum Net Owned Fund of Rs? 300 crores
• Has been ranked at least “A” in its credit rating or similar
• CRAR of at least 15%
Some examples are GMR infrastructure ltd, Hindustan Construction Company, etc.
3. Systematically Important Core Investment Company
An NBFC which:
• Holds at least 90% of its total assets in the form of investment in shares, stocks,
debt, or loan group company.
• Out of 90%, 60% should be invested in equity shares or those which compulsorily
convert later in equity shares, within a period not exceeding 10 years from the
date of issue.
• Does not trade in its investments in shares, debt, or loans in group companies
except through block sale for the purpose of dilution or disinvestment.
• It is not involved in any activity referred to in section 45(c) or 45(f) of RBI act
1934.
• The asset size is Rs. 100 crore or more.
• That accepts public funds.
4. Infrastructure Debt Fund in Types of NBFC
IDFs raise resources through bonds for long-term infrastructure projects. The bonds
are issued in multiple currencies with a minimum 5–year maturity for investors. It
facilitates the flow of long term debt into infrastructure projects. Only IFC-NBFCs
can sponsor IDF-NBFCs.
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MA in Economics
5. Microfinance Institution
NBFC-MFI is an ND-NBFC (Non-Deposit Accepting NBFC) with not less than 85% of
its assets in the nature of qualifying assets that satisfy the following criteria:
• loan disbursed by it to a borrower having a rural household annual income not
exceeding Rs. 60,000 or urban and semi-urban household income not exceeding
Rs. 1,20,000,
• the loan amount is not more than Rs. 35,000 in the first cycle and Rs. 50,000 in
subsequent cycles,
• the total indebtedness of the borrower is not more than Rs. 50,000, d. duration
of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000
with prepayment without penalty, e. loan to be extended without any security,
• the aggregate amount of loans, given for income generation, is not less than 75%
of the total loans given by the MFIs,
• the loan is repayable on weekly, fortnightly, or monthly installments at the
option of the borrower.
• Bandhan Financial Service Ltd, Ujjivan Financial service are some examples.
6. Factors as Types of NBFC
In India, this type of NBFC is rarely found. Such companies normally buy loans or
advances at a much-discounted rate from lenders and after that, they adjust the
repayment table of the debtor to ensure facile settlement adding small profit.
It does not include normal lending by a bank against the security of receivables, etc.
An NBFC-Factoring company should have a minimum NOF of Rs. 5 Crore. And its
financial assets in the factoring business should compose of at least 75% of its total
assets. And its income received from factoring business should not be less than 75%
of its gross income.
7. Mortgage Company in Types of NBFC
NBFC-MGCs are FI for which:
• At least 90% of the business turnover is of mortgage guarantee, Or
• At least 90% of the gross income is from the mortgage guarantee business, Or
• NOF is Rs. 100 crores.
Prepared by: Vineet Singh
MA in Economics
8. Non- operative Financial Holding Company
It is a separate category of NBFCs, set-up of a new bank opened by the promoters.
It is a wholly-owned Non-operative financial holding company. Permitted by the RBI
under applicable regulatory prescription. To set up or hold the bank as well as
another financial service.
DIFFERENCE BETWEEN NBFC AND BANK :
BASIS NBFC BANK
Meaning An NBFC is a company that Bank is a government authorized
provides banking services to financial intermediary that aims at
people without holding a providing banking services to the
bank license. general public.
Incorporated Companies Act 1956 Banking Regulation Act, 1949
under
Demand Deposit Not Accepted Accepted
Foreign Allowed up to 100% Allowed up to 74% for private sector
Investment banks
Payment and Not a part of system. Integral part of the system.
Settlement
system
Maintenance of Not required Compulsory
Reserve Ratios
Deposit Not available Available
insurance facility
Credit creation NBFC do not create credit. Banks create credit.
Transaction Not provided by NBFC. Provided by banks.
services
Prepared by: Vineet Singh
MA in Economics
