Non-Banking Financial Corporation of India NBFC www.deekpay.com

What is a non-banking financial company

A NBFC (Non-Banking Financial Company) is a financial institution that provides financial services similar to those of a bank but does not hold a banking licence. Indian NBFCs (Non-Banking Financial Companies) are companies registered under the Companies Act, 1956 and are engaged in the business of lending, instalments, leasing, insurance business, receiving deposits in certain cases, contractual funds, acquisition of shares and stocks etc.

The functions of the NBFC are carried out by the Ministry of Corporate Affairs andReserve Bank of India(RBI) co-management.NBFC plays an important role in the economy by providing credit and other financial services to parties not normally served by traditional banks.

Prominent NBFCs in India

Notable NBFCs in India that offer investment options, loans, money transfer services, leasing and instalment options are Bajaj Finserv, Power Finance Corporation Limited, Mahindra & Mahindra Financial Service, Shriram Transport Finance Company, Muthoot Finance Ltd etc.

Functions of non-banking financial companies

NBFC contributes to the economic growth of the country by catering to the needs of segments of society that are not served by traditional banks. These could be high-risk sectors or individuals such as low-income farmers or MSMEs.

The following are the main functions of NBFC:

Provides retail financing to individuals, families and businesses that may not qualify for traditional bank loans. Provides infrastructure financing for projects necessary for economic growth and development, such as roads, bridges, power plants and telecommunication networks. Hire-purchase services to help individuals and businesses acquire assets such as vehicles, machinery and equipment without upfront payments. Trade finance solutions for businesses to facilitate domestic and international trade transactions, such as letters of credit, factoring and bill discounting. Asset management services enable individuals and institutions to invest in various asset classes, such as equities, debt and real estate. Venture capital funding is provided for early-stage and high-growth potential companies. NBFC-MFI (Microfinance Institution) provides microloans and other financial services to low-income individuals and small businesses in rural and unbanked areas. Investment banking services to help businesses raise capital and execute strategic transactions. Facilitation of payments and remittances to enable individuals and businesses to transfer funds seamlessly. Insurance services provide individuals and businesses with risk protection and financial security against various contingencies.

Types of NBFCs in India

NBFCs can be divided into two broad categories:

Depending on the nature of their business Depending on deposits

Depending on the nature of their business:

Asset finance companies Loan companies Mortgage Guarantee Company Investment Company Core investment companies Core Investment Company Infrastructure finance companies Microfinance companies Housing Finance Corporation

Based on deposits:

Deposit-taking non-banking financial companies Non-banking financial companies that do not accept deposits

Requirements to be met to obtain an NBFC licence

Requirements to be met to obtain an NBFC licence

The basic requirements to be fulfilled to apply for an NBFC licence are as follows:

A company must be registered under the Companies Act. This means that the company should be a limited company or a private limited company (PLC). The minimum net own funds of the company must be Rs. 20 million.

Services provided by NBFCs in India

The services provided by NBFC include:

Personal Loans. Vehicle loans. Housing loans. Gold loans. Credit card services. Microfinance. Insurance services. Services related to leasing and instalment purchases. Services related to investment and asset management.

Financial institutions that do not require an NBFC licence

Certain entities are involved in financial activities but are not required toRBIRegistration. Since these entities are subject to otherfinancial regulatorregulated and therefore they do not require NBFC registration or NBFC regulation by RBI. These entities are listed below:

Insurance companies regulated by the Insurance Regulatory and Development Authority of India (IRDA). Housing Finance Companies regulated by the National Housing Bank. Stock broking companies regulated by the Securities and Exchange Board of India. Commercial banking companies regulated by the Securities and Exchange Board of India. Mutual Funds regulated by the Securities and Exchange Board of India. Venture Capital Firms regulated by the Securities and Exchange Board of India. Firms operating collective investment schemes regulated by the Securities and Exchange Board of India. Chit fund companies regulated by the state governments. Nidhi companies regulated by the Ministry of Corporate Affairs (MCA).

Read more:Financial Regulatory Authority of India

Reserve Bank of India guidelines for NBFCs

The Reserve Bank of India has issued a number of circulars and policies to regulate NBFCs and protect the interests of depositors and investors.

Minimum Net Own Funds (NOF): NBFCs need minimum net own funds to maintain a loss buffer and absorb financial shocks. The minimum amount varies depending on the type of NBFC and its activities. Capital Adequacy Ratio (CAR): Similar to banks, NBFCs are required to maintain a minimum CAR, which is the ratio of their capital to risk-weighted assets. This ensures that they have sufficient capital to cover potential losses. Liquidity Requirement: NBFCs are required to maintain a minimum level of liquid assets, such as cash and government securities, to service short-term obligations. This helps them to avoid liquidity crunch. Income recognition and asset classification: The Reserve Bank of India has prescribed norms for income recognition and asset classification to ensure accurate financial reporting and timely recognition of non-performing loans. Concentration limits: NBFC cannot take excessive exposure to individual borrowers or groups of borrowers to avoid concentration risk.

Process of obtaining an NBFC licence in India

According to the Reserve Bank of India, any company whose income from financial assets is more than 50% of its total income and whose financial assets are more than 50% of its total assets can be termed as NBFC.

Once an applicant company believes they meet this criterion, they can apply for an NBFC licence online.

Applicants must provide certain documents and complete forms.

The Reserve Bank of India will then assess the 'suitability' status of the promoters and senior management of the NBFC to ensure their integrity and whether they fulfil the selection criteria.

Other records such as the company's CIBIL records are also evaluated.

The following are additional criteria that must be met for a company to be granted an NBFC licence:

The company must be registered as a public or private company. Must have a minimum NOF of at least Rs. 10 crore. One-third of the directors must have finance-related work experience. Compliance with regulations and codes under capital compliance and FEMA laws. Upon completion of all these checks, RBI will issue an Application Reference Number (ARN) which can be used to check the status of the application.

If eligible, RBI will issue an NBFC licence to the company. The NBFC is then required to submit periodic financial and prudential reports to RBI for monitoring and oversight.

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