NBFCs are registered under the Companies Act, 1956 engaged in the -

 Business of loans and advances

 Acquisition of shares/stocks/bonds/debentures/securities issued by the Govt. or local
authority or other marketable securities of like nature.
 Leasing, hire purchase, issuance business, chit business

On 2021 RBI proposed a tighter regulatory framework for NBFCs. RBI created a 4-layer
structure (top, upper, middle, base) with a progressive increase in intensity of regulations.
RBI has also proposed classification of Non-Performing Assets of base layer NBFCs from
180 days to 90 days overdue.
Asset finance companies is a type of NBFCs which was merged with loan companies and
investment companies to form a new category called NBFC - Investment & Credit Company
(NBFC - ICC). As per regulations, Non-Banking Financial Company – Investment and
Credit Company (NBFC-ICC)” means any company which is a financial institution
carrying on as its principal business – asset finance, the providing of finance whether
by making loans or advances or otherwise for any activity other than its own and the
acquisition of securities, and granted a CoR under Section 45IA of the Reserve Bank
of India Act, 1934 (2 of 1934); and is not any other category of NBFCs as defined by
the Reserve Bank in any of its Master Directions.
According to Scale Based Regulation: Revised Regulatory Framework for NBFCs (RBI
Notification - Oct 22, 2021) Regulatory Structure for NBFCs shall comprise of four layers
based on their size, activity, and perceived riskiness. NBFCs in the lowest layer shall be
known as NBFC - Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be
known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL)
respectively. The Top Layer is ideally expected to be empty and will be known as NBFC -
Top Layer (NBFC-TL). NBFC - ICC could lie in any of the layers of the regulatory structure
depending on the parameters of the scale based regulatory framework.
Any existing NBFC-ICC, intending to undertake factoring business, shall make an
application to the Reserve Bank for grant of CoR under the Act if it satisfies the
following eligibility criteria:
(a) not accepting or holding public deposits;
(b) total assets of Rs. 1,000 crore and above, as per the last audited balance sheet;
(c) meeting the NOF requirement as prescribed in regulation 3 of these regulations;
regulatory compliance.
Any existing NBFC-ICC, which does not satisfy the above conditions but intends to
undertake factoring business, shall approach the Reserve Bank for conversion from
NBFC-ICC to NBFC-Factor. Application for such conversion shall be submitted with
all supporting documents meant for new registration as NBFC-Factor, together with
the surrender of original Registration Certificate issued by the RBI.
NBFC-Factors or eligible NBFC-ICCs which have been granted CoR under the Act
shall conduct the factoring business in accordance with the Act and rules and
regulations framed under the Act or the directions and guidelines issued by the
Reserve Bank from time to time.
At present the central bank has capped the investment limit of deposit-taking NBFC - ICC in
any other company to 20 per cent of its owned fund. However, no limit has been assigned as
to how much this category of NBFC can invest in its own subsidiary.  The text of the
regulation from RBI said:

“40. Restrictions on investments in land and building and unquoted shares

(1) No NBFC-ICC, which is accepting the public deposit, shall invest in

a. Land or building, except for its own use, an amount exceeding ten per cent of its owned
fund;

b. Unquoted shares of another company, which is not a subsidiary company or a company in

the same group of the non-banking financial company, an amount exceeding twenty per cent
of its owned fund.

Provided that the land or building or unquoted shares acquired in satisfaction of its debts shall
be disposed of by the non-banking financial company within a period of three years or within
such period as extended by the bank, from the date of such acquisition if the investment in
these assets together with such assets already held by the non-banking financial company
exceeds the above ceiling;”

“A deposit-taking NBFC-ICC shall invest in unquoted shares of another company which is

not a subsidiary company or a company in the same group of the NBFC, an amount not
exceeding twenty per cent of its owned fund,” the RBI said in a statement.

Moreover, this new category will attract risk weight from the banks according to the ratings
assigned to it by the rating agencies registered with Securities and Exchange Board of India
and accredited by RBI.

At present, all NBFCs attract a uniform risk weight of 100 per cent on their bank exposures.
Only, Asset Finance Companies (AFCs), Infrastructure Finance Companies (NBFCs-IFC),
and Infrastructure Development Funds (NBFCs-IDF) had the privilege of attracting risk
weight in accordance with the ratings assigned by rating agencies.

The relaxation in risk weights is expected to make credit cheaper for better-rated NBFCs. The
leeway means banks will be required to hold less capital against loans to some of the better-
performing NBFCs. Similarly, the banks will have to set aside more capital if they are
lending to NBFCs that do not have high ratings.
The RBI has increased the minimum net owned fund (NOF) requirement for NBFC-ICC
from INR 2 crores to INR 10 crores. For NBFC-MFI and NBFC-Factor, the NOF
requirement has been increased from INR 5 crores to INR 10 crores.