NON-BANKING FINANCIAL

COMPANIES
 WHAT IS AN NBFC?
Sec 45I (c) of the RBI Act defines “financial institution”.
 A non-banking company carrying business of financial institution will be an NBFC.

Activities included in the definition:

 Financing,
 Whether by giving loans, advances or otherwise
 Acquisition of shares, stocks or securities
 Hire purchase
 Insurance – excluded by notification
 Management of chits, etc
 Money circulation schemes

Exclusion to NBFC: If principal business is industrial, trading, etc.,

RBI circulars have specified majority of assets and majority of income as the criteria for defining
NBFC
Principality of activity is what is important: assets and turnover are indicative, but not definite
test of what is an NBFC
PRINCIPAL BUSINESS TEST
Was introduced by a Press Release 1998-99/1269 dated April 8, 1999
Came up with circular dated October 19, 2006 to define “principal
business” as:
 financial assets are more than 50 per cent of its total assets (netted off by
intangible assets)
 Financial assets to include all assets that are financial in nature
 Exception: cash, bank deposits, advance payment of taxes and deferred tax payments
 income from financial assets is more than 50 per cent of the gross income
The criteria of income and assets are cumulative and both should be met
PRINCIPAL BUSINESS TEST CONTD..

However, qualitative Following also to be

factors are also examined:
important as • nature of the business of
principality of an entity,
business cannot • its principal thrust areas,
change year to year • schematic and consistent
distribution of assets,
but figures do resources and activities.
 BANKS VS. NBFCS
Particulars
Definition
Scope of business
Licensing requirements
Major limitations on business
Major privileges
Foreign investment
Banks
Banking is acceptance of deposits
withdrawable by cheque or demand; NBFCs
cannot accept demand deposits
Scope of business for banks is limited by sec
6 (1) of the BR Act
Licensing requirements are quite stringent.
Transfer of shareholding also controlled by
RBI
No non-banking activities can be carried
Can exercise powers of recovery under
SARFAESI and DRT law
Upto 74% allowed to private sector banks
NBFCs
NBFCs are companies carrying financial
business
There is no bar on NBFCs carrying
activities other than financial activities
It is quite easy to form an NBFC.
Acquisition of NBFCs is procedurally
regulated and are subject to approval
Cannot provide checking facilities
None, except 196 NBFC, specified by
Central Government, have powers under
SARFAESI or DRT law
Upto 100% allowed (only 18 activities)
 BANKS VS. NBFCS
Particulars Banks NBFCs
Regulations BR Act and RBI Act lay down stringent Controls over NBFCs are relatively lesser
controls over banks stringent

SLR/CRR requirements Banks are covered by SLR/ CRR NBFC-Ds have to maintain a certain ratio
requirements of deposits in specified securities; no such
requirement for non deposit taking
companies

Priority sector lending requirements Certain minimum exposure to priority Priority sector norms are not applicable
sector required to NBFCs
 REGISTRATION OF NBFC
In order to carry on the business of NBFC, a company has to register itself with the Reserve
Bank of India under section 45-IA of the Reserve Bank of India Act, 1934
Following categories of NBFCs are not required to obtain registration with the RBI
 Core Investment Companies having asset size of less than Rs. 100 crores or not holding public funds
 Housing Finance Companies,
 Merchant Banking Companies,
 Stock Exchanges,
 Companies engaged in the business of stock-broking/sub-broking,
 Venture Capital Fund Companies,
 Nidhi Companies,
 Insurance companies and
 Chit Fund Companies
 INDIA WORKS ON A MULTI-REGULATOR MODEL
Reserve Bank of Ministry of State Registrar of National Housing
IRDA SEBI
India Corporate Affairs Chit Funds Bank

Nidhi Insurance Merchant Broker/ Sub-

NBFCs Chit Funds HFC
Companies Companies Banker broker

Venture Capital Stock

Fund Company Exchanges

IC AFC IDF Factor

AA
LC IFC MFI CIC
TYPES OF NBFCS BY REGULATORY
INTENSITY
Based on acceptance or non- Core Investment
acceptance of deposit Companies

Deposit taking Non - Deposit CIC - SI CIC - NSI

NBFC (D) taking NBFC (ND)

NBFC- ND-SI NBFC –ND-Non SI

 CORE INVESTMENT COMPANIES (CICS)
Whether NBFC?

Yes

Principal business investments?

Yes
No It is an Investment Company and regulations applicable to
Qualifies to be a CIC?
such companies will become applicable

Yes
No
Net assets The company is not required to obtain registration with the
>Rs. 100 crores? RBI and prudential norms will not be applicable

Yes No
The company is not required to obtain registration with the
Co has public funds?
RBI and prudential norms will not be applicable
Yes

Net assets
>= 500 crores?
No

Non-Systemically Important Non Banking Financial (Non-Deposit Accepting or Systemically Important Non Banking Financial (Non-Deposit Accepting or Holding)
Holding) Companies Companies
 CORE INVESTMENT COMPANIES (CIC)
Business Model: Holding stake in Group companies & funding them
➢ Difficulty in ascertaining: only for holding/ trade
➢ absence of clarity in the system-investment only for holding—business of acquisition of shares.
➢ has systemic implications on account of access to Public Funds
➢ A different footing than others-constraints-Regulatory Framework
➢ Not less than 90% of its net assets in group companies – (investment in equity, preference
shares, bonds, debentures, debt or loans)
➢ Not less than 60% in –equity or convertible within a period of 10 years to equity
➢ Net Assets: Total assets—cash& bank balances, investment in money market instruments, money
market mutual funds, advance payment of taxes, deferred tax)
 CORE INVESTMENT COMPANIES (CIC)
Business Model: Holding stake in Group companies & funding them
➢ Only for holding.
➢ No trading (except for dilution or disinvestment)
➢ Not to carry on any other financial activity(except investment in bank deposits, money market
instruments, government securities, bonds, debentures of group companies—granting of loans to
group companies, issue of guarantees on behalf of group companies)
➢ Not holding/accepting public deposits.
 SYSTEMATICALLY IMPORTANT CORE INVESTMENT COMPANIES
(SI-CIC)
Total assets > Rs 100 crores
➢ Either individually or with other CICs in the Group
➢ Raises or holds public funds
➢ Total Assets: All assets appearing on the asset side
➢ Public Funds: funds raised through public deposits, CPS, debentures, ICDs, bank finance –other
than instruments convertible into equity shares within a period not exceeding 10 years
 MUTUAL BENEFIT COMPANY/ NIDHI COMPANY
➢ Fundamental Principal: to mobilise savings from members
➢ Notified u/S 620A of the Companies Act, 1956
➢ Members to be allotted atleast10 shares
➢ Lends money only to members
➢ Only individuals to be members
➢ No dealing with non members.
 CHIT FUNDS
➢ Chit Funds Act, 1982.
➢ Regulated by State Governments
➢ Subscribers in a Group contribute instalments for a certain no of months
➢ Return of money –auctions / tender (provides a lump sum to the needy)
➢ Money borrowed by a subscriber is against his own future contribution
 INFRASTRUCTURE DEBT FUNDS
➢ Taking over loans extended to infrastructure projects created through PPP route AND
➢ Completed one year of operations
➢ Tripartite agreements amongst IDF, Concessionaire and the Project authority
➢ Sponsor by NBFC-IFCs only
➢ Minimum NOF –Rs 300 crs
➢ Existence for atleast 5 years
 FACTORS
Business of acquisition of Receivables or financing by way loans or any other means
➢ Financial assets in Factoring -75% of total assets + income from Factoring -75% of gross
income.
➢ NOF-Rs. 5 crs
ACCOUNT AGGREGATORS – NOVEL CONCEPT

In press release of the RBI dated 2nd July, 2015 it expressed the intent to set up new kind of
NBFC which would carry out the business of accounts aggregator

Notified on 2nd September, 2016

IMPORTANT DEFINITIONS (1/3)
Account Aggregator
“Account Aggregator” means a non-banking financial company as notified under in sub-
clause (iii) of clause (f) of section 45-I of the Act, that undertakes the business of an
account aggregator, for a fee or otherwise, as defined at clause (iv) of sub-section 1 of
section 3 of these directions.

“business of an account aggregator” means the business of providing under a contract, the
service of, retrieving or collecting such financial information pertaining to its customer, as
may be specified by the Bank from time to time; and consolidating, organizing and
presenting such information to the customer or any other financial information user as may
be specified by the Bank;

Provided that, the financial information pertaining to the customer shall not be the property
of the Account Aggregator, and not be used in any other manner.
 IMPORTANT DEFINITIONS (2/3)
Financial Assets means
 bank deposits including fixed deposits, saving deposits, recurring deposits and current deposits,
 Deposits with NBFCs,
 Structured Investment Product (SIP),
 Commercial Paper (CP),
 Certificate of Deposit (CD),
 Government Securities (Tradable),
 Equity Shares, Bonds, Debentures,
 Mutual Fund Units, ETFs,
 Indian Depository Receipts,
 CIS (Collective Investment Schemes) units,
 Alternate Investment Funds (AIF) units,
 Insurance Policies,
 Balances under the National Pension System (NPS),
 Units of Infrastructure Investment Trusts,
 Units of Real Estate Investment Trusts,
 Any other asset as may be identified by the Bank for the purposes of these directions, from time to time
IMPORTANT DEFINITIONS (3/3)
Financial Sector regulator means
 Reserve Bank of India
 Securities and Exchange Board of India
 Insurance Regulatory and Development Authority
 Pension Fund Regulatory and Development Authority

Financial service provider means

 bank, banking company,
 non-banking financial company
 asset management company
 Depository
 depository participant
 insurance company
 insurance repository and
 such other entity as may be identified by the Bank for the purposes of these directions, from time to time;
HIGHLIGHTS OF THE DIRECTIONS (1/2)

➢The business to be taken by companies registered with the Reserve Bank as NBFC – AA.
➢The Net Owned Fund should not be less than ₹ 2 crore.
➢Business of an AA will entirely be Information Technology (IT) driven
➢Financial assets whose records are stored electronically will be considered
➢Entities being regulated by financial sector regulators will be considered
➢Pricing of services to as per AA’s Board approved policy
➢No financial asset related customer information pulled out by the AAs from the financial service
providers should reside with the AAs.
HIGHLIGHTS OF THE DRAFT DIRECTIONS (2/2)

AA shall
➢not to undertake any other business other than the business of AA.
➢share information only with the customer to whom it relates or any other person
authorized by the customer.
➢not support transactions in financial assets
➢have a Citizen Charter that will explicitly guarantee protection of the rights of a customer.
➢not part with any information that it may come to acquire from/ on behalf of a customer.
➢have adequate safeguards built in their IT systems to ensure that they are protected
against unauthorised access, alteration, destruction, disclosure or dissemination of
records and data
ASSET AGGREGATION AN NBFC ACTIVITY?
The activity of asset aggregation is a fee based business.
It does not involve any movement of money either to or from the aggregator.
The aggregator is simply aggregating information, and not the financial assets of the
customer.
There is no pooling of money at all with the AA.
It is questionable as to how a fee based activity as this could be an NBFC activity,
requiring registration with the RBI?
 STATISTICS
All Activities
Item
2014-15 2015-16 2016-17 Over 95% of the registered NBFCs are either
Number of Cos 21140 21140 21140 Investment Companies or Loan Companies
Income
1. Financial Income 1354797 1555869 1782554
A. Fund-based Income 1301879 1490330 1712745
(a) Interest 1012186 1165742 1318462
(i) On Loans and Advances 820343 966281 1086499
(ii) Others 191844 199461 231963
(b) Dividends 25158 30949 13650
(c) Net Profit/Loss in Share Dealings 54872 63713 74910
(d) Net Earnings From Hire Purchase Financing 22668 14752 28657
(e) Lease Rentals 5204 6741 8081
(f) Other Fund-based Income 181790 208433 268985
B. Fee-based Income 52918 65539 69809
(a) Brokerage 834 1041 1191
(b) Merchant Banking 1888 2065 1975
(c) Other Fee-based Income 50195 62433 66644
2. Non-Financial Income 5135 3776 1896
3. Non-Operating Surplus(+)/Deficit(-) 18930 35722 54714
AFC CIC-SI IDF IFC Factor MFI LC + IC
4. Total Income (1 + 2 + 3) 1378863 1595368 1839164

Data source: RBI

FDI IN NBFCS
Before Now
FDI in NBFCs under automatic route only for following • For financial entities regulated by
activities: financial sector regulators, like, RBI,
SEBI, NHB, PFRDA, IRDA – 100% under
(i) Merchant Banking (ii) Underwriting (iii) Portfolio automatic route
Management Services (iv) Investment Advisory Services •For other than regulated financial
(v) Financial Consultancy (vi) Stock Broking (vii) Asset entities – Under approval route
Management (viii) Venture Capital (ix) Custodian
Services (x) Factoring (xi) Credit Rating Agencies (xii)
Leasing & Finance (xiii) Housing Finance (xiv) Forex
Broking (xv) 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 (xvi)
Money Changing Business (xvii) Micro Credit (xviii) Rural
Credit
FDI IN NBFCS
Before Now

Capitalisation requirements: Capitalisation norms – As

specified by respective
(i) US $0.5 million for foreign capital up to 51 % to be brought up front. regulators
- For NBFCs, Rs. 2 crores,
(ii) US $ 5 million for foreign capital more than 51 % and up to 75% to for HFCs, Rs. 10 crores
be brought up front. etc.

(iii) US $ 50 million for foreign capital more than 75% out of which US $
7.5 million to be brought up front and the balance in 24 months.

(iv) Non-Fund based activities: US$ 0.5 million to be brought upfront for
all permitted non-fund based NBFCs irrespective of the level of foreign
investment. Following were regarded as Non-fund based activities:

(a) Investment Advisory Services (b) Financial Consultancy (c) Forex

Broking (d) Money Changing Business (e) Credit Rating Agencies