This remarkable growth has been credited to the increasing demand for small loans and microlending. NBFCs have managed to fill the gaps that small- and medium-sized enterprises (SMEs) faced in terms of acquiring funding for their business from traditional banks. By lending to SMEs, NBFCs have empowered them in terms of growth and expansion.
An NBFC is a business entity registered under the Companies Act 1956 and is engaged in the following business.
Providing loans and advances
Acquisition of stocks, shares, securities, debentures, and bonds issued by the local authority/government and similar marketable securities
Insurance, hire-purchase, leasing, and chit business. However, this definition does not include an institution
whose primary business is industrial activity, agricultural activity, or the purchase or sale of any goods (other than securities).
that engage in or provide any services such as the purchase, sale, or construction of immovable property.
In short, an NBFC company is like a financial institution offering banking and financial services. However, unlike banks, NBFCs do not possess a banking license.
The following are the salient features of an NBFC company
NBFCS are not permitted to offer higher lending rates on deposits and should be within the ceiling rate stipulated by the Reserve Bank of India (RBI). Moreover, the interest paid should be on a monthly basis.
NBFCs can accept or renew public deposits, ranging from a minimum of 12 months to a maximum of 60 months.
RBI does not guarantee deposits offered by NBFCs, nor are the deposits provided by insurance.
An NBFC firm is not allowed to provide its depositors with any benefits.
NBFCs have been playing a significant role in serving sections of society that traditional banks generally do not cater to. Some of the key functions of an NBFC are as follows.
Lending to people, families, and companies who would not be eligible for conventional bank loans through retail financing.
Finance for infrastructure projects such as power plants, telephone networks, bridges, and highways that are necessary for economic development and progress.
To assist people and companies through hire purchase services in acquiring assets like cars, machinery, and equipment without having to pay cash upfront.
Offering trade finance solutions, including bill discounting, factoring, and letters of credit to firms to facilitate both local and international trade transactions.
Through asset management services, an NBFC company enables individuals and organizations can participate in a variety of asset types, including debt, real estate, and stocks,
Offering venture capital to promising high-growth and early-stage companies.
Providing microloans and other financial services to low-income individuals and small businesses in rural and unbanked areas.
Offering investment banking services that support companies in obtaining funding and implementing strategic transactions
Facilitating remittances and payments to make it easier for individuals and businesses to send money.
Offering insurance services to individuals and businesses, thus providing financial security and risk protection against a range of unforeseen events.
Non-bank finance companies are categorized based on their deposits, asset size, and activity.
Deposit NBFCs: Allowed to accept deposits from the public.
Non-deposit NBFCs: Are not allowed to accept deposits from the public.
Systemically Important NBFCs: Has an asset size of INR 500 crore or more as per the latest audited balance sheet.
Non-systemically Important NBFCs: Has an asset size of less than INR 500 crore as per the latest audited balance sheet.
Asset finance company: Financеs machinеry, rеquirеs 60% income from assets.
Investment company: Acquires securities from the public and then distributes profits to shareholders.
Loan company: Offers various loans, e.g., housing financing.
Infrastructure finance company: A non-bank finance company that deploys 75% of assets in infrastructure loans. Requires 300 crore Net Owned Fund and ‘A’ rating.
Systemically important core investment company: Invests 90% of its assets in equity and loans to group companies. 60% of the 90% must be invested in equity shares within a maximum of ten years from the issue date.
Infrastructure debt fund: Raises resources through multi-currency bonds for long-term infrastructure projects
Microfinance company: Provides financial assistance in undеrsеrvеd areas.
NBFC (Factor): Buys discounted loans and adjusts repayments for settlement purposes
Mortgage company: 90% of the turnover or income comes from the mortgage guarantee.
Non-operating financial holding company: A unique type of non-bank finance company. Non-operative financial holding company which is fully owned and requires RBI approval.
The key regulatory authority for converting an NBFC to a bank is the RBI. The following criteria have to be fulfilled for NBFCs to convert to banks.
The new bank must have a minimum paid-up capital of INR 200 crore. Within three years of the bank’s business activities, this capital requirement must be raised to INR 300 crores. The new bank’s promoters must contribute 40% of the paid-up capital.
While the capital increases to INR 300 crore within 3 years of the bank starting, the promoters need to raise additional funds, which account for at least 40% of the freshly created capital. The capital will be locked in for a minimum of five years from the date of receiving the capital.
The funds to be first made available for liquidity purposes may be obtained through public or private placements.
The new bank should not provide funding to an industrial house. However, up to a maximum of 10% of the shares of a new private sector bank may be invested by individual companies that are either directly/indirectly affiliated with major industrial houses; these investments should not have management interest in the bank.
The relationship between the bank and the promoters must be independent of each other (unconnected entities). This is to ensure corporate governance standards are adhered to.
The capital adequacy ratio, or CAR, is a percentage that the bank must adhere to in terms of liquidity. Therefore, for conversion of NBFC to bank, the required CAR should be between 8 and 10%.
The bank’s operations should guarantee that priority sector lending is done in accordance with the RBI regulations. Approximately 40% of net bank credit would need to be lent to the priority sector.
The bank may decide to open its head office or registered office anywhere in India. It is necessary to begin at least 25 to 30 percent of operations in rural and semi-rural regions.
The Non-Banking Financial Company (NBFC), which is among the largest players in India’s financial landscape, offers various services including loans, financing and insurance. Their remarkable growth over the years, especially in micro-lending, has filled the gap of funding for SMEs and improved financial inclusion.
NBFCs are classified based on deposits, assets and activity. The conversion of an NBFC into a bank is subjected to strict criteria set by the RBI to ensure regulatory compliance and financial stability.
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