Non-Banking Financial Corporation, commonly abbreviated as NBFCs, stand as distinct entities that operate in parallel with traditional banks. These Non-Banking Financial Corporations have assumed a crucial role in the modern financial landscape, despite not holding banking licenses. NBFCs are pivotal entities that provide a wide range of financial services, addressing the diverse needs of businesses and individuals alike. From extending credit facilities and loans to facilitating investments and wealth management, NBFCs offer a versatile array of financial solutions.
What is NBFC?
The operational oversight of NBFCs falls under the purview of both the Ministry of Corporate Affairs and the Reserve Bank of India (RBI). This dual regulatory framework ensures that NBFCs play a vital role in the financial sector, providing essential services while maintaining the necessary checks and balances to uphold financial stability and consumer protection.
Different types of Non-Banking Financial Corporations (NBFCs)
Feature | Bank | NBFC |
---|---|---|
Defination | A financial institution that is licensed to accept deposits and make loans | A financial institution that provides banking-like services but does not have a bank license |
Regulated by | Reserve Bank of India (RBI) | Reserve Bank of India (RBI) |
Can accept deposits? | Yes | No, except for certain types of deposits such as fixed deposits for a period of more than 12 months |
Can make loans? | Yes | Yes |
Part of the payment and settlement system? | Yes | No |
Subject to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements? | Yes | No |
Maximum foreign investment allowed | 74% | 100% |
Different Types of NBFCs
NBFCs can be categorized into two main groups:
- Based on their Business Activities
- Based on their Acceptance of Deposits
The different types of Non-Banking Financial Corporations (NBFCs) in India based on the nature of their activity:
On the Nature of Their Activity:
- Asset Finance Company: These NBFCs primarily provide financing for the purchase of physical assets like vehicles, machinery, and equipment.
- Loan Company: Loan companies focus on providing loans and advances to individuals and businesses. They can specialize in various types of loans, including personal loans, business loans, and more.
- Mortgage Guarantee Company: These NBFCs specialize in providing mortgage guarantee services to lenders, typically banks, to mitigate the risk of loan defaults by borrowers.
- Investment Company: Investment companies primarily engage in investment activities, including trading in securities, stocks, and bonds. They may also provide advisory services.
- Core Investment Company (CIC): CICs are a specialized category of NBFCs that primarily invest in the equity shares of other group companies. They are regulated by the Reserve Bank of India (RBI).
- Infrastructure Finance Company: Infrastructure Finance Companies specialize in financing infrastructure projects such as power, transportation, and telecommunications, contributing to the development of critical infrastructure.
- Micro Finance Company: Micro Finance Companies focus on providing microloans and financial services to low-income individuals and small businesses, often in underserved areas.
- Housing Finance Company: Housing Finance Companies specialize in offering home loans and related financial services, enabling individuals to purchase or construct homes.
On the Basis of Deposits:
- Deposit Accepting Non-Banking Financial Corporations: These NBFCs are authorized to accept deposits from the public, making them similar to traditional banks in terms of deposit services.
- Non-Deposit Accepting Non-Banking Financial Corporations: Non-deposit accepting NBFCs, as the name suggests, do not accept public deposits and primarily rely on other sources of funding, such as borrowing and capital infusion.
NBFC in India
India has a diverse landscape of NBFCs (Non-Banking Financial Corporation) that cater to various financial needs. Here are some NBFC examples of well-known NBFCs in India:
- Bajaj Finance Limited: One of the largest and most prominent NBFCs in India.
- HDFC Ltd (Housing Development Finance Corporation Limited): HDFC Limited also operates as an NBFC, providing housing loans, deposits, and other financial services.
- Muthoot Finance: One of the leading gold loan NBFCs in India. It offers quick and convenient gold loan solutions to customers.
- Shriram Transport Finance Company Limited: a significant player in the commercial vehicle finance sector.
- Bajaj Finserv: offers financial services, including loans, insurance, and investment products.
- Mahindra & Mahindra Financial Services Limited: This NBFC is a subsidiary of Mahindra Group and provides financial solutions for the rural and semi-urban sectors, including vehicle loans and SME financing.
- Aditya Birla Finance Limited: offers a range of financial services, including personal loans, business loans, and wealth management.
- L&T Finance Holdings Limited: offers a variety of financial products, including loans, insurance, and mutual fund distribution.
- Tata Capital Limited: provides a wide range of financial services, including loans, wealth management, and consumer finance.
- Reliance Capital Limited: Operates in sectors such as asset management, insurance, and lending.
Requirements to Obtain an NBFC License:
In order to obtain an NBFC license in India, a company must fulfill certain fundamental requirements, including:
- Company Registration: The company seeking an NBFC license must be registered under the Companies Act, which means it should be either a Limited Company or a Private Limited Company (PLC).
- Minimum Net Owned Fund (NOF): The minimum Net Owned Fund (NOF) of the company must be Rs.2 crore. NOF includes the paid-up equity capital and free reserves of the company, minus certain specified items.
Required Documentation for Establishing an NBFC
To initiate the process of incorporating an NBFC (Non-Banking Financial Company), an array of documents must be submitted. These documents encompass essential details and records pertinent to the organization and its compliance with regulatory norms. Here is a distinct breakdown of the documents required for NBFC incorporation:
- Management Details: Comprehensive information about the company's management structure.
- Certified Copy of Certificate of Incorporation: A validated copy of the Certificate of Incorporation issued to the company.
- Certified Copy of Certificate of Commencement of Business: An authenticated copy of the Certificate of Commencement of Business signifying the initiation of operations.
- Certified Copy of Updated Memorandum of Association (MoA): An updated and certified copy of the Memorandum of Association, outlining the company's objectives and governing framework.
- Certified Copy of Updated Articles of Association (AoA): A certified copy of the Articles of Association reflecting the company's internal regulations.
- Copy of PAN Card or CIN: Copies of the Permanent Account Number (PAN) card or the Corporate Identification Number (CIN) issued to the organization.
- Directors' Profiles: Detailed profiles of each director, duly filled and signed separately by each director.
- Certificate of Experience: Certificates of experience from non-banking financial corporation where each director has acquired relevant experience.
- CIBIL Data for Directors: CIBIL data applicable to the company's directors.
- Financial Statements: The financial statements of the relevant unincorporated bodies for the last two years, if applicable.
- Board Resolutions: Resolutions passed by the board of directors, including approval of the application contents and submission process, as well as declarations regarding the organization's deposit history and NBFC activities.
- Fair Practices Code Document: A certified copy of the board resolution required for formulating the 'Fair Practices Code.'
- Statutory Auditors Certificates: Certificates from statutory auditors certifying various aspects, including the absence of public deposits, the absence of NBFC operations, and the net owned fund as of the application date.
- Authorized Share Capital Details: Information about the authorized share capital of the company.
- Shareholding Pattern: Details of the recent patterns of shareholding, including percentages.
- Banking Details: Copies of fixed deposit receipts, bankers' certificates confirming no loans or debts, and account balances supporting the calculation of Net Owned Funds.
- Banking Information: Details of the company's banking relationships, including full postal addresses, credit or loan facilities, bank accounts, and balances.
- Financial Records: For existing companies, submission of the last three years' Profit & Loss accounts, audited balance sheets, auditors' reports, and directors' reports.
- Business Plan: A comprehensive business plan for the next three years, outlining specific business directions, market segments, income and asset patterns, cash flow projections, and balance sheets.
- Startup Capital Evidence: Documentary evidence demonstrating the source of the company's startup capital.
- Income Tax Returns and Bank Statements: Self-attested copies of income tax returns and bank statements.
The process of establishing a Non-Banking Financial Corporation (NBFC) involves several key steps:
- Company Registration: To begin, the company must be duly registered under either the Companies Act, 1956, or the Companies Act, 2013.
- Minimum Net Owned Funds: The company is required to have a minimum net owned fund of at least Rs. 2 crore.
- Qualified Director: It is essential to have at least one Director with a background in finance or who is a Senior Banker. This Director should also serve as a full-time director within the company.
- Clean CIBIL Record: The company should maintain a clean and favorable record with CIBIL, indicating sound financial conduct.
- Online Application: Once the aforementioned conditions are met, the applicant can proceed to apply for incorporation through the Reserve Bank of India's (RBI) official website.
- Submission of Online Application: The applicant must fill out and submit an online application form via the RBI website.
- Document Upload: Alongside the application form, the applicant is required to upload all necessary documents on the online portal.
- CARN Number Generation: Upon successful completion of the above steps, a unique CARN (Company Application Reference Number) will be generated.
- Submission of Hard Copy: Additionally, the applicant must send a hard copy of the completed application, which was submitted online, to a regional branch office of the Reserve Bank of India.
- License Issuance: Following a comprehensive review and scrutiny of the application, the RBI will issue the NBFC license to the company.
FAQ’s on NBFC
1)How Many NBFCs Exist in India?
- In India, there are approximately 10,000 registered NBFCs overseen by the Reserve Bank of India (RBI), and among them, 89 are recognized as deposit-accepting NBFCs.
2)What Are the Four Tiers of NBFCs?
- The NBFC sector is categorized into four distinct tiers: the Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL).
3)Which is India's Largest NBFC?
- Bajaj Finance Ltd holds the distinction of being India's largest NBFC. It operates as a deposit-accepting Non-Banking Financial Company, registered with the RBI, boasting a substantial total revenue of Rs. 22,413 crore.
4)What Are the Safest NBFCs in India?
- Among the top-rated NBFCs that offer competitive interest rates on fixed deposits and are renowned for their safety measures, PNB Housing Finance (PNBHF), Bajaj Finance, Mahindra & Mahindra Finance Services (Mahindra Finance), and Shriram Finance stand out.
5)How Do NBFCs Secure Funding?
- NBFCs secure their funding through various avenues, including short- and long-term loans, Foreign Direct Investment (FDI), bonds issuance, and loan securitization.
6)Who Regulates NBFCs in India?
- The Reserve Bank of India (RBI) serves as the regulatory authority for NBFCs in India, functioning within the regulatory framework defined in the Reserve Bank of India Act, 1934 (Chapter III-B).
7)Is Paytm Classified as an NBFC?
- No, Paytm is not categorized as an NBFC. However, it operates as a subsidiary of Paytm Entertainment, which is a Non-Banking Financial Institution (NBFC).
8)Is LIC Considered an NBFC?
- Yes, LIC, or the Life Insurance Corporation, operates as a specific type of NBFC known as NBFC-LC (Non-Banking Financial Institution- Local Company), offering loans for various purposes, excluding those related to Asset Finance.
9)Are NBFCs Private Companies?
- Not all NBFCs in India are private companies; they may be registered as either public or private limited companies.
10)Do NBFCs Function as Private Banks?
- No, NBFCs are distinct from banks. While they offer banking services to customers without a banking license, they do not provide credit facilities like traditional banks.
11)How Do NBFCs Differ from Banks?
- NBFCs do not accept deposits that are payable on demand and allow for foreign investments up to 100%. This sets them apart from banks, which typically accept demand deposits.
12)Is RBI Responsible for Overseeing NBFCs?
- Yes, RBI has the responsibility of regulating all NBFCs in India that have been issued a certificate of registration under Section 45 IA of the RBI Act, 1934, to hold or accept deposits from the public.
13)Do NBFCs Extend Loans?
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Certainly, NBFCs offer personal loans among other financial products to borrowers.
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What Is the Asset Size of NBFCs?