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RECENT RBI INITIATIVES IN THE FINANCIAL SYSTEM
MARKETING AND DISTRIBUTION
CREDIT APPRAISAL TECHNIQUES
TYPES OF INVESTMENTS
NBFCs - Types of NBFCs and Their
Roles
3.0 Objectives
This chapter will be helpful in understanding the different types of NBFCs, their roles in the financial system including their contribution in promoting inclusive growth, the recent changes in the Companies Act, 2013, the major amendments thereof, RBI guidelines for NBFCs and Chapters III-B and III-C of RBI Act, 1934.
3.1 Introduction
Non-Banking Financial Companies (NBFCs) are an integral part of the Indian financial system having contributed significantly to credit growth of the vital sectors of the economy. They play a proactive and complementary role to the banking system by enhancing competition, broadening access to financial services and diversifying the financial sector. They are progressively evolving into a vital part of our financial system and serving the vital objective of sustained and inclusive economic developments. NBFCs are typically into funding of:
Construction equipments
Commercial vehicles and cars
Gold loans
Microfinance
Consumer durables and two wheelers
Loan against shares etc.
3.2 Non-Banking Financial Companies (NBFCs)
The Reserve Bank of India Act, 1934 (RBI Act) defines a “non-banking financial company’’ as:
(
i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the Bank may specify.
As defined under section 45-I (e) of the RBI Act, a “non-banking institution’’ means a company, corporation or cooperative society. Further, the Act defines a ‘‘company’’ as a company as defined in section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of section 591 of that Act. It may be noted that the RBI Act has not included the Companies incorporated under the Companies Act, 2013 in the definition. However, as the Companies Act, 2013 has since replaced the Companies Act, 1956, it might be implied that the Companies incorporated under the new Act are also covered in the definition.
An NBFC is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agricultural activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of the immovable property. A
non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other matter is also a non-banking financial company (Residuary Non-Banking Company).
In terms of Section 45-IA of the RBI Act, a non-banking financial company can commence or carry on the business of non-banking financial institution subject to:
(a) Obtaining a certificate of registration from the RBI;
(b) Having net owned funds of a minimum of ` 200 lakhs.
3.3 Status of NBFCs Vis-á-Vis Banks
While the functions of NBFCs and that of banks look similar, they differ in the following certain important aspects: (i) from the monetary policy point of view, banks are the only institutions capable of creating credit; (ii) the scheme of Deposit Insurance and Credit Guarantee Corporation (DICGC) of India (DICGC insures principal and interest up to ` 5 lakhs for any depositors of a bank) is not applicable for depositors of NBFCs.
(iii) NBFCs are not permitted to accept the demand deposits; (iv) NBFCs are not covered as a part of a Payment Settlement System of RBI; and (v) NBFCs-D are not subject to Cash Reserve Ratio (CRR) requirements, but they have to maintain 15% of their public deposit liabilities in Government and other approved securities as liquid assets.
NBFCs have made a niche market in customers of personal segment (catering to their needs of consumer loan, gold loan, vehicle loan) and for large corporate borrowers involved in infrastructure finance (by providing them loans/lease of equipments needed for their projects) NBFCs are also extending personal loans to employees of Municipality, Corporation, etc. against check-off facility from their salary accounts, extended by their employers. Many NBFCs avail loan from banks for onward lending to their customers, and this puts them in a position where they are compelled to charge higher interest to their borrowers.
3.4 Exemptions From Registration With RBI
In terms of powers given to RBI, to obviate dual regulation, certain categories of NBFCs as mentioned below, which other regulators regulate, 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 IRDAI.
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.
Stock Exchange or a Mutual Benefit Company.
3.5 NBFC Framework
Scale Based Regulation (SBR): A Revised Regulatory Framework For NBFCs
Pursuant to the announcement made in the ‘Statement on Development and Regulatory Policies’ dated December 4, 2020, a discussion paper titled ‘Revised Regulatory Framework for NBFCs-A Scale-based Approach’ was issued for public comments on January 22, 2021. This was subsequently reviewed as on 19th October 2023. Based on the inputs received, it has been decided to put in place a revised regulatory framework for NBFCs.
It has been decided to first issue an integrated regulatory framework for NBFCs under SBR.
Over the years, the NBFC sector has undergone considerable evolution in terms of size, complexity and interconnectedness within the financial sector. Many entities have grown and become systemically significant. A need was therefore felt to align the regulatory framework for NBFCs keeping in view their changing risk profile.
As a result, a revised regulatory framework for NBFCs was put in place for NBFCs, effective from October, 19th 2023.
Regulatory Structure for NBFCs
Regulatory/NBFCs infrastructure 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-TL).
As the regulatory structure envisages scale base as well as activity based regulation, the following prescription shall apply for the NBFCs.
(a) Base Layer
The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ` 1,000 crore and (b) NBFCs undertaking the following activities –
(i) NBFC-Peer to Peer Lending Platform (NBFC-P2P),
(ii) NBFC-Account Aggregator (NBFC-AA),
(iii) Non-Operative Financial Holding Company (NOFHC) and
(iv) NBFC not availing public funds and not having any customer interface.
(b) Middle Layer
The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFCs-D), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ` 1,000 crore and above and (c) NBFCs undertaking the following activities
(i) Standalone Primary Dealer (SPD),
(ii) Infrastructure Debt Fund-Non-Banking Financial Company (IDF- NBFC),
(iii) Core Investment Company (CIC),
(iv) Housing Finance Company (HFC) and
(v) Non-Banking Financial Company-Infrastructure Finance (NBFC- IFC).
(c) Upper Layer
The Upper Layer shall comprise of those NBFCs which are specifically identified by the RBI as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
(d) Top Layer
The Top Layer will ideally remain empty. This layer can get populated if the RBI is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.
Categorisation of NBFCs carrying out specific activity:
(a) NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will be in the Base Layer of the regulatory structure.
(b) NBFC-D, CIC, IFC and HFC will be included in the Middle Layer or the Upper Layer (and not in Base Layer) as the case may be, SPD and IDF-NBFC will always remain in the Middle Layer.
(c) The remaining NBFCs viz. Investment and Credit Companies (NBFC-ICC), Micro-Finance Institutions (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies could lie in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework.
(d) Government owned NBFCs shall be placed in the Base Layer, or the Middle Layer as the case may be. They will not be placed in the Upper Layer till further notice.
From October 1, 2022, all references to NBFC-ND (i.e., non-systemically important non-deposit taking NBFC) shall mean NBFC-BL and all references to NBFC-D (i.e., deposit -5-taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) shall mean NBFCML or NBFC-UL, as the case may be.
Statutory Auditors are required to certify the asset size (as on March 31) of all the NBFCs in the Group every year. The certificate shall be furnished to the Department of Supervision of the RBI under whose jurisdiction the NBFCs are registered.
Classification of NBFCs
NBFCs have been classified based on the kind of liabilities they access, the type of activities they pursue, and of their perceived systemic importance:
(a) Liabilities-Based Classification
Liability-based Non-Banking Financial Companies (NBFCs) are those NBFCs that accept public funds, either directly or indirectly, to support their operations. These funds create liabilities on their balance sheets. Their classification is based on whether they raise funds through deposits or other forms of borrowing.
Deposit-Taking NBFCs (NBFC-D) - These NBFCs are authorized to accept public deposits. They must comply regulatory guidelines to ensure depositor protection.
Non-Deposit-Taking NBFCs (NBFC-ND) - They do not accept public deposits, instead they raise funds thro borrowing, such as issuing debentures, obtaining loans from banks / financial institutions
NBFCs are classified based on liabilities into two categories, viz., Category ‘A’ companies, (NBFCs having public deposits or NBFCs-D), and Category ‘B’ companies, (NBFCs not having public deposits or NBFCs-ND). NBFCs-D are now subject to requirements of capital adequacy, liquid assets maintenance, exposure norms (including restrictions on exposure to investments in land, building and unquoted shares), Assets & Liability Management (ALM) discipline, reporting requirements.
Both the above categories are discussed elaborately in subsequent units.
(b) Activity-Based Classification
Presently, NBFCs are classified in terms of activities into 11 categories, as mentioned in the below table:
Table 3.1 : Classification of NBFCs by Activity
Type of NBFCActivity
1.Investment and Credit Company (ICC)
2.NBFC-Infrastructure Finance Company (NBFC-IFC)
Lending and investment.
Lending of infrastructure loans.
3.Core Investment Company (CIC)Investment in equity shares, preference shares, debt, or loans of group companies.
4.NBFC-Infrastructure Debt Fund (NBFC-IDF)
5.NBFC-Micro Finance Institution (NBFC-MFI)
Facilitate flow of long-term debt to infrastructure projects.
Making collateral free, small ticket loans to small borrowers and to economically disadvantaged groups.
6.NBFC-FactorAcquisition and financing of receivables.
7.NBFC-Non-Operative Financial Holding Company (NBFC-NOFHC)
8.Mortgage Guarantee Company (MGC)
9.NBFC-Account Aggregator (NBFC-AA)
For the setup of new banks in the private sector through its promoters/ promoter groups.
Undertaking mortgage guarantees of loans.
Collecting information about a customer’s financial assets to be provided to the customer or others authorized persons.
10.NBFC-Peer to Peer Lending Platform (NBFC-P2P)
11.Housing Finance Companies (HFCs)
Connect lenders and borrowers through an online platform.
Focused on the housing finance sector to provide financing for the purchase, construction, reconstruction, or renovation repairs of residential dwelling units.
Notes:
1. Standalone Primary Dealers (SPDs) lie in the middle layer.
2. Government NBFCs lie in either base or middle layer.
Source: Reserve Bank of India
(c) Size-Based Classification
Non-deposit taking NBFCs with assets of ` 500 crores and above were labelled as Systemically Important Non-Deposit taking NBFCs (NBFCsND-SI), and prudential regulations such as capital adequacy requirements, exposure norms along with reporting requirements were made applicable to them. Capital Market Exposure (CME) and ALM reporting and disclosure norms were made applicable to them at different points of time.
The different types of NBFCs are discussed below:
(1) Asset Finance Company (AFC): An AFC is a company that is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, generator sets, earthmoving and material handling equipment etc. Principal business for the purpose is defined as the aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income, respectively.
(2) Systemically Important Core Investment Company (CIC-NDSI): CIC-ND-SI is a NBFC carrying on the business of acquisition of shares and securities satisfying the following conditions:
(a) It holds not less than 90% of its total assets in investments in equity shares, preference shares, debts or loans in group companies.
(b) 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 constitute not less than 60% of its total assets.
(c) It does not trade in its investments in shares, debt, or loans in group companies except through block sale for dilution or disinvestment.
(d) Its asset size is ` 100 crores or above.
(
e) It accepts public funds.
(
f) It does not carry on any other financial activity referred to in sections 45-I(c) and 45-I(f) of the RBI Act, 1934, except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuance of group companies or guarantees issued on behalf of group companies.
(
g) Adjusted Net Worth of CIC-ND-SI shall at no point of time be less than 30% of its aggregate risk weighted assets on the balance sheet date and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet.
(3) Loan Company (LC): LC means any company which 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.
(4) Investment Company (IC): IC means any company which is a financial institution carrying on with the acquisition of securities as its principal business.
(5) Infrastructure Finance Company (IFC): IFC is a non-banking finance company that deploys at least 75% of its total assets in infrastructure loans, has a minimum Net Owned Funds (NOF) of ` 300 crores, and has a minimum credit rating of ‘A’ or equivalent and a Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
(6) I nfrastructure Debt Fund (IDF) - Non-Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered as NBFC to facilitate the flow of long-term debt into infrastructure projects. IDF-NBFC raises resources through the issue of Rupee or Dollar denominated bonds of minimum 5 years maturity. Only Infrastructure Finance Companies can sponsor IDF-NBFCs. All NBFCs shall be eligible to IDF-MFs with prior approval of the Reserve Bank of India subject to the following conditions (i) The
NBFC shall have a minimum NOF of ` 300 crores and CRAR of 15 per cent; (ii) Its net NPAs shall be less than 3 per cent of the net advances; (iii) It shall have been in existence for at least 5 years.
(7) Non-Banking
Financial Company-Micro Finance Institutions
(NBFC-MFI): NBFC-MFI 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:
i. 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;
ii. Loan amount does not exceed ` 50,000 in the first cycle and ` 1,00,000 in subsequent cycles;
iii. Total indebtedness of the borrower does not exceed ` 1,00,000;
iv. Tenure of the loan not to be less than 24 months for loan amount over ` 15,000 with prepayment without penalty;
v. Loan to be extended without collateral;
vi. Loan is repayable in weekly, fortnightly, or monthly instalments;
vii. Aggregate amount of loans given for income generation is not less than 50% of the total loans given by the MFIs.
(8) Non-Banking Financial Company-Factors (NBFC-Factors):
NBFC-Factor 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% of its total assets and its income derived from the factoring business should not be less than 50% of its gross income. Some of the NBFC-Factors registered are Canbank factors; SBI Global factors; IFCI factors Ltd., etc.
(9) Mortgage Guarantee Companies (MGCs): MGCs are 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, with net owned funds at ` 100 crores at the time of commencement of business, which shall be reviewed for enhancement after three years.
