NON BANKING FINANCIAL COMPANY (NBFC) - India

  • Overview
  • Type of NBFCs
  • Registration Process
  • Key Regulations & Compliance

Introduction

Non-Banking Financial Company (NBFC) is company registered under the Companies Act, 1956 or Companies Act, 2013. Their business modules include 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, Hire-Purchase, Insurance Business, Chit Business. Non-Banking Financial Companies offers various banking services like lending and make investments without having banking license.

When a company’s financial assets constitute more than 50 percent of the total assets and income from financial assets constitute more than 50 percent of the gross income, then they can registered as Non-Banking Financial Company (NBFC) by Reserve Bank of India. As per section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Reserve Bank of India and without having a Net Owned Fund of twenty-five lakh rupees or such other amount, not exceeding hundred crore rupees.

Process of Registration of Non-Banking Financial Companies

Company who wants to get register as an NBFC is required to apply online and submit a physical copy of the application for registration along with the necessary documents to the Regional Office of the Reserve Bank of India.

  • The application can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in
  • Then click on "CLICK" for Company Registration on the login page of the COSMOS Application
  • A window showing the Excel application form available for download would be displayed. The company can then download suitable application form for NBFC from the website, key in the data and upload the application form
  • The company may note to indicate the correct name of the Regional Office in the field “C-8” of the “Annex-I Identification Particulars” in the Excel application form.
  • The company would then get a Company Application Reference Number for the Certificate of Registration application filed on-line.
  • Thereafter, the company has to submit the hard copy of the application form (indicating the online Company Application Reference Number, along with the supporting documents, to the concerned Regional Office
  • The company can check the status of the application from the above mentioned secure address, by acknowledgement number

Following NBFC’s are exempted from the requirement of registration with RBI

  • Venture Capital Fund / Merchant Banking companies / Stock broking companies registered with SEBI
  • Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956
  • Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
  • Housing Finance Companies regulated by National Housing Bank
  • Stock Exchange or a Mutual Benefit company.

Types of Non-Banking Financial Company

Basically The Non-Banking Financial Companies are categorized in terms of the type of liabilities into Deposit and Non-Deposit accepting Non-Banking Financial Company:

  • Deposit Non-Banking Financial Companies: NBFCs that can accept deposits from the public, such companies are called Deposit NBFCs.
  • Non-Deposit Non-Banking Financial Companies: NBFCs that cannot accept deposits from the public, such companies are called Non-deposit NBFCs

As per the Assets Size NBFCs are categorised in following Types:

  • Systemically Important: NBFCs whose asset size is of INR 500 crore or more as per last audited balance sheet are considered as systemically important NBFCs.
  • Non-Systemically Important: NBFCs whose asset size is below INR 500 crore as per last audited balance sheet are considered as systemically important NBFCs.

As per their activity they conduct different types of NBFCs are as follows:

  • Asset Finance Company (AFC): It is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment's, moving on own power and general purpose industrial machines.
  • Investment Company (IC): It is a financial institution carrying on as its principal business the acquisition of securities.
  • Loan Company (LC): It is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
  • Infrastructure Finance Company (IFC): It is a Non-Banking Financial company
    • which deploys at least 75 per cent of its total assets in infrastructure loans,
    • has a minimum Net Owned Funds of INR 300 crore,
    • has a minimum credit rating of ‘A ‘or equivalent
    • has CRAR of 15%.
  • Systemically Important Core Investment Company (CIC-ND-SI): It is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:
    • it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies
    • its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets
    • it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment
    • it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies
    • its asset size is ₹ 100 crore or above and
    • it accepts public funds.
  • Infrastructure Debt Fund: It is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
  • Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): It is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:
    • loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding INR 1,00,000 or urban and semi-urban household income not exceeding INR 1,60,000
    • loan amount does not exceed INR 50,000 in the first cycle and INR 1,00,000 in subsequent cycles
    • total indebtedness of the borrower does not exceed INR 1,00,000
    • tenure of the loan not to be less than 24 months for loan amount in excess of INR 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
  • Non-Banking Financial Company – Factors (NBFC-Factors): It is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.
  • Mortgage Guarantee Companies (MGC): It financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is INR 100 crore.
  • NBFC- Non-Operative Financial Holding Company (NOFHC): It is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

Acts and Regulations Applicable on NBFC

  • Companies Act, 2013: Before commencing the business every NBFC is required to get registered under Companies Act and must follow below mentioned important compliances
S.No Compliance/Obligation Due-Date(if applicable) Filing Authority
1. Annual Return under E-Form MGT-7 Within sixty days of Annual General Meeting Registrars of Companies (ROC)
2. Filing of AOC-4 NBFC Within thirty days of Annual General Meeting Registrars of Companies (ROC)
3. If there is any change in Directors E-form DIR 12 Within thirty days of the change of Director Registrars of Companies (ROC)
4. MGT 14 within 30 days from the date of passing of resolution Registrars of Companies (ROC)
5. ADT-1 Within fifteen days from the Appointment of Auditor Registrars of Companies (ROC)
6. MBP-1 Within 30 days from the holding of first Board Meeting Registrars of Companies (ROC)
7. INC 22 Within 30 days from change of registered office address Registrars of Companies (ROC)
  • HR and Labour Laws
    • Shop and Establishment Act: This act provides compliances to regulate the position of work and job in shops and Commercial Establishment and matters related to the wages, working hours, holidays, holidays, and all other types of service conditions of employees working in NBFCs.
    • Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013: The key objective of this act is to provide protection against sexual harassment of women at workplace and for the prevention and redressal of complaints of sexual harassment. Companies have to send an annual report which includes the number of cases filed along with their disposal and submit it to the District Officer.
    • Employee Provident Fund (EPF Act): This Act provides provisions related to contributions in Provident Fund. Under this act employers and employees contributed their parts and deposited it to employees account.
  • Goods and Service Tax Act (GST)
    These are following important obligations for NBFC under GST Act:
    • NBFC is required to obtain GST registration in India in every state in which it has a branch.
    • Inter-state supplies of services between the different branches of a NBFC are liable for IGST.
    • GST rate for services related to NBFCs is 18%.
  • Banking and Finance
    Non-Banking Financial Companies must comply with the various Guidelines and Prudential Norms issued by Reserve Bank of India and other authorities:
S.No. Applicable on Compliance/Obligations Due-Date
(if applicable)
Filing link (If applicable) / Authority
1 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Approval for extension of preparation of Balance sheet NA Department of Non-Banking Supervision of the Bank
2 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Information with respect to change of address, directors, auditors With in one form the occurrence of any change Department of Non-Banking Supervision of the Bank
3 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Fair Practices Code for applicable NBFC NA Department of Non-Banking Supervision of the Bank
4 NBFC-MFIs Comply with Code of Conduct of Self-Regulatory Organization (SRO) NA Department of Non-Banking Supervision of the Bank
5 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Prior approval from the RBI for any takeover or acquisition of control, any change in the shareholding, any change in the management NA Department of Non-Banking Supervision of the Bank
6 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Prior Public Notice about change in control / management Before 30 days of change NA
7 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Constitution of Committees of the Board
  • Audit Committee
  • Nomination Committee
  • Risk Management Committee
NA Department of Non-Banking Supervision of the Bank
8 NBFC-ND-SI, NBFC-D, NBFC-F, NBFC-IDF, NBFC-MFI, NBFC-IFC Approval for opening of branch/subsidiary/joint venture/representative office or undertaking investment abroad NA Reserve Bank of India

A. Returns to be submitted by NBFCs-D

S.No. Name of the Return Periodicity Due on
1 NBS1 (Return for Financial Indicators) Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
2 NBS2 (Return for Prudential Norms) Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
3 NBS3 (Return for Liquid Assets) Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
4 ALM (NBFC-D): NBFCs-D having public deposit of > ₹20 crore Or asset size of > ₹100 crore Half yearly 30th April/ 30th Oct.
5 Branch Information return Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
6 Statutory Auditor Certificate Annually One month from the date of finalization of Balance Sheet (Not later than 31st December)
7 Reporting to Central Repository of Information on Large Credits (CRILC) Quarterly 21st April/ 21st July/ 21st Oct/ 21st Jan
8 Reporting of Special Mention Account status (SMA-2 return) Weekly NA

B. Returns to be submitted by NBFCs-ND

S.No. Name of the Return Periodicity Due on
1 NBS7 (Return on Prudential Norms) Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
2 NBFCs-ND-SI 500cr (Return for Important Financial Parameters) Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
3 ALM-1 (Statement of short term dynamic liquidity) Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
4 ALM-2 & 3 (Statement of structural liquidity & Statement of Interest Rate Sensitivity) Monthly 10th of every month
5 ALM-(NBFC-ND-SI) (Statement on Assets Liability Mismatch) Annual 15th April
6 Branch Info return Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
7 Reporting to Central Repository of Information on Large Credits (CRILC) Quarterly 21st April/ 21st July/ 21st Oct/ 21st Jan
8 Reporting of Special Mention Account status (SMA-2 return) Weekly NA
9 Statutory Auditor Certificate Annual One month from the date of finalization of Balance Sheet. Not later than 31st December

C. Details of returns to be submitted by NBFC-ARC

S.No. Name of the Return Periodicity Due on
1 ARC Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan.
2 Statutory Auditor Certificate Annual One month from the date of finalization of Balance Sheet. Not later than 31st December

D. Details of returns to be submitted by NBFC-ND-having asset size of ₹ 100 to ₹ 500 crore

S.No. Name of the Return Periodicity Due on
1 NBS-8 (Return for Financial Indicators) Annual 30th May
2 Statutory Auditor Certificate Annual One month from the date of finalization of Balance Sheet. Not later than 31st December

E. Details of returns to be submitted by NBFC-ND-having asset size below ₹ 100 crore

S.No. Name of the Return Periodicity Due on
1 NBS-9 (Return for Financial Indicators) Annual 30th May
2 Statutory Auditor Certificate Annual One month from the date of finalization of Balance Sheet. Not later than 31st December.

F. Other Returns by concerned NBFCs

S.No. Name of the Return Periodicity Due on
1 Return on FDI Half yearly 30th April/ 30th Oct.
2 Overseas Investments Quarterly 15th April/ 15th July/ 15th Oct./ 15th Jan

Note: Filing link for Returns

iii. Master Directions - Mortgage Guarantee Companies (Reserve Bank) Directions, 2016
Every Mortgage Guarantee Company which has been granted Certificate of Registration under the scheme of Registration of Mortgage Guarantee Companies by the Reserve Bank of India must follow the compliances of this Master Direction.

Major Compliances includes

  • Registration as Mortgage Guarantee Company
  • Mortgage Guarantee Company shall be required to comply with various prudential guidelines including income recognition, asset classification, provisioning, classification and valuation of investments and prudential exposures that are issued by the Reserve Bank from time to time
  • A mortgage guarantee company shall keep one or more registers in which shall be entered the particulars of guarantee provided by the company

Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016
Every Core Investment Company must follow the direction issued by the Reserve Bank of India to regulate the Credit System. Core Investment Company is Non-Banking Financial Company carrying on the business of acquisition of shares and securities.

  • Core Investment Company is required to get Certificate for the Reserve Bank within a period of three months from the date of becoming a CIC.
  • The Board of Directors must frame investment policy and implement the same.
  • Core Investment Company must adhere to the set of liquidity risk management guidelines
  • Required to take approval from the Reserve Bank of India for extension of balance sheet.
  • Required to follow corporate governance requirements as per the Companies Act, 2013

Guidelines on Liquidity Risk Management Framework
Non-Banking Financial Company Deposit Taking or Non-Deposit Taking shall adhere to the liquidity risk management guidelines. It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered. These guidelines will not apply to Type 1 NBFC-ND, Non-Operating Financial Holding Companies and Standalone Primary Dealers.

Risk-Based Internal Audit (RBIA) Framework
All Deposit Taking Non-Banking Financial Companies (NBFCs), All non-deposit taking NBFCs (including Core Investment Companies) with asset size of INR 5,000 crore and above shall implement an independent and effective internal audit function which provides vital assurance to the Board and its senior management regarding the quality and effectiveness of the entity’s internal control, risk management and governance framework. The essential requirements for a robust internal audit function includes sufficient authority, proper stature, independence, adequate resources and professional competence. Entities shall implement the RBIA framework by March 31, 2022.

Penalty for Non-Compliance

  • If NBFC's fails to fulfill any of the compliance or fails to comply with any direction issued by the Reserve Bank of India, the Reserve Bank of India may cancel a certificate of registration granted to a Non-banking Financial Company.
  • The Reserve Bank of India may also impose on non-complaint non-banking financial company a penalty not exceeding twenty-five thousand rupees as per the provision of Section 58(G)(1)(a).

Conclusion

In India, the Non-banking Financial Companies (NBFC's) acquire a new meaning and shown robust growth in recent years. The NBFC's is such corporations which are not banks, and yet carry lending activities almost at par with banks. They may also accept deposits from the public, however, these deposits are term deposits and not call deposits.

An analysis of the past financial performance of NBFCs suggests that they're emerging as a crucial source of credit to micro and little enterprises and infrastructure. the expansion of monetary technology platforms presages even greater scope and opportunities for the NBFC sector. the various players within the current market of public-to-public (P2P) / business-to-business (B2B) / business-to-consumers (B2C) lending offer novel opportunities for NBFCs to grow further and are available out as a progressively important part of India’s economic aspect.

KEY ABBREVIATIONS

  • NBFC-ND-SI- Non-Banking Financial Company - Systemically Important Non-Deposit taking Company
  • NBFC-D- Non-Banking Financial Company -Deposit taking Company
  • NBFC-F - Non-Banking Financial Company - Factors
  • NBFC-IDF- Non-Banking Financial Company - Infrastructure Debt Fund
  • NBFC-MFI - Non-Banking Financial Company - Micro Finance Institution
  • NBFC-IFC - Non-Banking Financial Company - Infrastructure Finance Company
  • NBFC-ND - Non-Banking Financial Company - Non-Deposit taking
  • NBFC-ARC- Non-Banking Financial Company - Asset Reconstruction Company
  • NOHFC - Non-Banking Financial Company - Non-Operative Financial Holding Company
  • NBFC- MGC - Non-Banking Financial Company - Mortgage Guarantee Companies
  • Type I - NBFC-ND - NBFC accepting public fund/ not intending to accept public funds in the future and not having customer interface/ not intending to have customer interface in the future.

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