Chapter 9

Non-Banking
Financial Companies Dr. Krishna Murari
 A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act 1956,
engaged in the business of loans and advances,
acquisition of shares/ stocks/ bonds/ debentures/
securities issued by Government or local authority or
other marketable securities of a like nature, leasing,
Concept of hire-purchase, insurance business and chit fund
business.
NBFC
the definition clearly excludes any institution whose
principal business is of the nature of agriculture
activity, industrial activity, purchase or sale of any
goods (other than securities) or providing any services
and sale/purchase/construction of immovable
property.
Regulatory structure & Classification of NBFCs
 NBFCs REGULATED BY RBI
Deposits taking NBFCs (NBFCs-D): NBFCs-D are subject to requirements of capital
adequacy, liquid assets maintenance, exposure norms (including restrictions on exposure
to investments in land, building and unquoted shares), ALM discipline and reporting
requirements. As on February 28, 2017, there were 186 NBFCs-D operating in India.

Non-deposit taking NBFCs (NBFCs-ND) with assets less than ₹ 500 crore: In
contrast to NBFCs-D, until 2006 NBFCs-ND were subject to minimal
regulation. As on February 28, 2017, there were 11,349 NBFCs-ND operating
in India.
Non–deposit taking systemically important NBFCs (NBFCs-ND-SI) with assets ₹ 500 crore
and above: Prudential regulations, such as capital adequacy requirements and exposure
norms along with reporting requirements, ALM have been made applicable to these
NBFCs-ND-SI. As on February 28, 2017, there were 239 NBFCs-ND-SI operating in India.
 An AFC is a company which is a financial institution
carrying on as its principal business the financing of
physical assets supporting productive/economic activity.

Examples of such physical assets are automobiles,

Asset tractors, lathe machines, generator sets, earth moving
and material handling equipment, moving on own
Finance power and general-purpose industrial machines.

Company Examples of asset finance companies include L& T

Finance Ltd., Tata motors finance Ltd., Shriram Transport
(AFC) Finance Company Limited etc. As on February 28, 2017,
409 assets finance companies are operating India.
Source- https://www.rbi.org.in/Scripts/BS_NBFCList.asp
x
accessed on March 31, 2017
 IC means any company which a financial institution is
carrying on as its principal business of acquisition of
securities.

In other words, an investment company is a company

Investment whose main business is holding and managing

securities for investment purposes.

Company
(IC) These ICs invest money on behalf of their clients
(investors) who, in return, share in the profits and
losses arising out of doing such business.

Example- Bajaj Allianz; Equity India; Indian Investment

Centre; Sarabhai Holding Pvt. Ltd.; Tata Investment
Corporation Ltd.
 LC is a financial institution engaged in the
principal business of providing finance
whether by making loans or advances or
otherwise for any activity other than its own.

Loan
Company These loan companies should not necessarily
be an Asset Finance Company.

(LC)
Examples- Shriram Transport Finance
Company Limited.; Bajaj Finance Limited.;
Mahindra & Mahindra Financial Services
Limited.; Muthoot Finance Ltd. etc.
 • IFC is a non-banking finance company which
generally operates in the business of financing the
infrastructural loans.
• infrastructure sectors may include Transport, Energy,
Infrastructur water sanitation, communication and social &
commercial infrastructure projects.
e Finance • There were 9 IFCs operating in India as on February
28, 2017 namely L&T Infrastructure Finance
Company Company Limited; SREI Infrastructure Finance Ltd;
TATA Cleantech Capital Limited; Indian Railway
(IFC) Finance Corporation Ltd; Indian Renewable Energy
Development Agency Limited; Power Finance
Corporation Ltd.; Rural Electrification Corporation
Ltd.; PTC India Financial Services Ltd.; India
Infrastructure Finance Company Limited.
 • CIC-ND-SI is that category of NBFCs which have
their assets predominantly as investments in
Systemically shares for holding stake in group companies but
not for trading, and do not carry on any other
Important financial activity.
• These companies should have a minimum 90%
Core of their assets in the group companies either in
the form of equity, preference shares or
Investment convertibles bonds or loans.
Company • Further the component of equity holdings
should not be less than 60% of their assets.
(CIC-ND-SI) • Its asset size is ₹ 100 crore or above.
• It accepts public funds*
 • IDFs are investment vehicles which are
sponsored by commercial banks and NBFCs in
India. IDFs issue units and bonds especially in
insurance and pension funds (mutual funds).
• IDFs essentially act as vehicles for refinancing
Infrastructur the existing debt of infrastructure companies.
e Debt Fund • Only banks and Infrastructure Finance
companies can sponsor IDF-NBFCs.
(NBFC-IDF) • There were 3 NBFC-IDF operating in India as on
February 28, 2017 namely India Infra Debt
Limited; L & T Infra Debt Fund Limited and IDFC
Infra Debt Fund Limited.
 • An NBFC-MFI is a non-deposit taking NBFC, with Minimum Net Owned
Funds of ₹ 5 crore (however for NBFC-MFIs registered in the North
Eastern Region of the country, it will be ₹ 2 crore). Besides this, not less
than 85% of its net assets should be qualifying assets.

Micro • Qualifying assets are loans provided by the NBFCs that meets certain
specifications such as:

Finance • loan disbursed by an NBFC-MFI to a borrower with a rural

household annual income not exceeding ₹ 1,00,000 or urban and
semi-urban household income not exceeding ₹ 1,60,000;
Institution • loan amount does not exceed ₹ 50,000 in the first cycle and ₹
1,00,000 in subsequent cycles;
(NBFC- • total indebtedness of the borrower does not exceed ₹ 1,00,000;
• tenure of the loan not to be less than 24 months for loan amount
MFI) more than ₹ 15,000 with prepayment without penalty;
• loan to be extended without collateral;
• aggregate amount of loans, given for income generation, is not less
than 50 per cent of the total loans given by the MFIs;
• loan is repayable on weekly, fortnightly or monthly instalments at
the choice of the borrower
 • NBFC-Factor is a non-deposit taking NBFC engaged in
the principal business of factoring.
• Factoring is a financial transaction in which a business
sells its accounts receivable (i.e., invoices) to a third
Non-Banking party (called a factor) at a discount, to finance its
working capital requirement immediately.
Financial • The financial assets in the factoring business should
Company – constitute at least 50 percent of its total assets and its
income derived from factoring business should not be
Factors less than 50 percent of its gross income.
• There were 6 companies operating in India as NBFC-
(NBFC- Factor as on February 28, 2017 namely Canbank
Factors Limited, IFCI Factors Ltd. (Formerly Foremost
Factors) Factors Limited) (Converted to NBFC-Factor w.e.f.
27.12.2013); Bibby Financial Services (India) Pvt. Ltd.;
SBI Global Factors Ltd. [Formerly: Global Trade
Finance Limited]; India Factoring & Finance Solutions
Pvt Ltd, and Pinnacle Capital Solutions Private Limited.
 • MGC means a company which primarily transacts the
business of providing mortgage guarantee. The term
mortgage guarantee means a guarantee provided by an
MGC for the repayment of an outstanding housing loan
and interest accrued thereon up to the guaranteed
Mortgage amount to a creditor institution, on the occurrence of a
trigger event.
Guarante • MGCs are financial institutions for which at least 90% of
e the gross income is from mortgage guarantee business
and net owned fund is ₹ 100 crore.
Companie • MGCs cannot accept public deposits and avail external
commercial borrowings.
s (MGC) • India’s first Mortgage Guarantee Company, India Mortgage
Guarantee Corporation (IMGC) was established in June
2012. It is a joint venture of National Housing Bank (NHB),
Genworth Financial, International Finance Corporation
(IFC) & Asian Development Bank (ADB). IMGC provides
lenders with an insurance against a possible default in
home loans.
 • The Chit fund Companies, although governed by the
Miscellaneous Non-banking Companies (MNBCs)
(Reserve Bank) Directions, 1977, issued by the
Miscellaneou Reserve Bank regarding acceptance of deposits, are
regulated by the Registrar of Chits of the respective
s non- State Governments.
banking • Furthermore, MNBCs, not accepting public deposits
have been exempted from submitting returns to the
companies Reserve Bank since December 27, 2005.
• The chit funds are governed by Chit Funds Act, 1982
MNBCs (Chit which is a Central Act administered by state
governments. Those chit funds which are registered
Fund) under this Act can legally carry on chit fund
business.
 NBFCs Regulated by other Regulators
Mutual Benefit Finance Any company which is notified by the central government as Nidhi company under section
Ministry of Corporate Affairs of
Companies (Nidhis and 620 A of companies Act 1956. It is a NBFC doing the business of lending and borrowing with
Govt. of India
Potential Nidhis) its members or shareholders.

Microfinance institutions (MFIs) have been providing financial services to the poor as last Ministry of Corporate Affairs of
Micro finance companies
mile connectivity Govt. of India

Housing loans are given not only for construction, but also for extension, improvements etc.
Housing Finance Companies National Housing Bank
Loans are given for furnishing houses and also for paying stamp duties.

Providing financial products to reduce or eliminate risks of loss to life and property. It is a Insurance Regulatory and
Insurance Companies
provision which a prudent man makes against inevitable contingencies, loss or misfortune. Development Authority

Securities and Exchange Board of

Stock Broking Companies Providing trading of stocks and others financial instruments in capital and money market
India

Merchant banking companies involves a wide range of activities such as management of

customer services, portfolio management, credit syndication, acceptance credit, counselling, Securities and Exchange Board of
Merchant Banking Companies
insurance, preparation of feasibility reports etc. It is not necessary for a merchant banker to India
carry out all the above-mentioned activities.
Banks vs. NBFCs
Basis Banks NBFCs
Definition banking is acceptance of deposits NBFCs cannot accept demand deposits. NBFCs
withdrawable by cheque or on demand are companies carrying the financial business
Scope of business Scope of business for banks is limited by sec 6 There is no bar on NBFCs carrying activities other
(1) of the BR Act than financial activities
Licensing requirements Licensing requirements are quite stringent. It is quite easy to form an NBFC. Acquisition of
Transfer of shareholding also controlled by RBI NBFCs is procedurally regulated but not approval
required
Major limitations on No non-banking activities can be carried on Cannot provide cheque facilities
business
Major privileges Can exercise powers of recovery under Do not have powers under SARFAESI or DRT law
SARFAESI and DRT law
Foreign investment up to 74% allowed to private sector banks up to 100% allowed
Regulations BR Act and RBI Act lay down stringent controls Controls over NBFCs are relatively much lesser
over banks
SLR/CRR requirements Banks are covered by SLR/ CRR requirements NBFCs must maintain a certain ratio of deposits
in specified securities; no such requirement for
non-deposit accepting companies

Priority sector lending Certain minimum exposure to priority sector Priority sector norms are not applicable to
requirements required NBFCs
Insurance to deposits The deposit is insured with Deposit Insurance No such provision is available to the NBFC
and Credit Guarantee Corporation. depositors.
 • Provide loans and credit facilities
• Support investments in property
• Facilitate trading in money market instruments
• Provide funding of private education
Advantages • Provide Wealth management such as Managing
of NBFCs in portfolios of stocks and shares
• Provide retirement planning
India • Advise companies in merger and acquisition
• Prepare feasibility, market or industry studies
for companies
Regulatory & Prudential guidelines for NBFCs
• Requirement of Minimum NOF of ₹ 200 lakh
• Deposit Acceptance- It has been decided to harmonize the limit for acceptance
of deposits across the sector by reducing the same for rated AFCs from 4 times to
1.5 times of NOF
• Prudential Norms- The current prudential regulation with respect to NBFCs
mainly comprises the following elements:
a) Norms relating to Income Recognition, Asset Classification and Provisioning
norms;
b) Capital to Risk Weighted Assets Ratio (CRAR); and
c) Credit Concentration Norms
• Norms at b) and c) are applicable to only NBFCs–D and NBFCs-ND-SI.
• Asset Classification - At present, an asset is classified as Non-
Performing Asset when it has remained overdue for a period of six
months or more for loans; and overdue for twelve months or more in
case of lease rental and hire purchase instalments, as compared to 90
days for banks.
• In the interest of harmonisation, the asset classification norms for
NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks
• Leverage Ratio: The leverage ratio of an applicable NBFC (other than
NBFC-MFIs and NBFC-IFCs) shall not be more than 7 at any point in
time.
• Accounting Standards: Accounting Standards and Guidance Notes
issued by ICAI to be followed if they are not inconsistent with any of
the Directions by RBI.
Contd..

Accounting of Investments: The Board of Directors shall frame investment policy for the company and
shall implement the same, including criteria to classify the investments into the current and long-term.

Asset Classification: Assets to be classified as: (i) Standard assets; (ii) Sub-standard assets; (iii)
Doubtful assets; and (iv) Loss assets.

Standard Asset provisioning: Every applicable NBFC shall make provision for standard assets at 0.25%
of the outstanding liabilities.

Multiple NBFCs: All NBFCs belonging to a group shall be aggregated to check the limit of Rs. 500 crore
asset size.

Disclosures: Every applicable NBFC shall separately disclose provisions for bad and doubtful debts and
provisions for depreciation in investments, in the balance sheet.

Loans against NBFCs own shares prohibited: No applicable NBFC is allowed to lend against its own
shares.
Role of NBFCs in Financial
Inclusion

Role of
Role of NBFCs in Capital Market
NBFCs in
Role of NBFCs in Factoring
Economic
Developmen
Role of NBFCs in Vehicle
Financing / Second hand Vehicle
Financing
t
Role of NBFCs in Infrastructure
Financing
 Challenges to NBFCs in India

Regulatory tightening
Increasing NPAs and Increased competition Funding / resource
and convergence (with
lower recovery of loans viz. from banks mobilization challenges
banks)

Lower leveraging Inadequate and Challenge of meeting

capacity due to higher unsupportive legal 75/25 core factoring
Increased cost of
risk weights and higher framework which renders asset/income, while
borrowings/ funds
capital adequacy recovery of dues very maintaining profitability
requirement. difficult and expensive. of operations.