Directions Applicable To NBFCs

The Reserve Bank of India has issued a new directive, which applies to all the banks including non-banking financial companies (NBFCs) and non-banking institutions (NBIs). The bank has also advised that any such credit should be provided only under exceptional circumstances. To be registered as an NBFC with the Reserve Bank of India (RBI), a firm must meet the ’50–50 criteria,’ which states that financial assets must account for more than half of total assets, and revenue from these assets must account for more than half of gross income. Furthermore, let us overlook the classification of NBFCs as equipment leasing and hire purchase finance companies. 

Classification of NBFCs as Equipment Leasing and Hire Purchase Finance Companies

To get the required equipment to run a cash-strapped firm, equipment leasing offers a flexible, creative alternative to purchase. Leasing is utilised for various equipment, including planes, automobiles, restaurant cooking equipment, and computers.

An equipment-leasing firm (the lessor) often purchases equipment or other fixed assets in a conventional equipment-leasing agreement. It subsequently enters into a contract with the business that will utilise the asset (the lessee, such an institute, should have a net-owned fund of at least 200 lakh. NBFCs, while not banks, play a significant role in addressing expanding credit and lending demand. The classification of NBFCs as equipment leasing and hire purchase finance companies to make fixed payments to the lessor for a specific period in exchange for the use of the asset.

Here is the  classification of NBFCs as equipment leasing and hire purchase finance companies

*The Hire-Purchase is a type of lease arrangement in which the lessor’s counterpart, the hiree, acquires the asset and rents it to the lessee’s counterpart, the hirer, in return for a predetermined number of monthly payments, including interest and principal.

In the event of a hire-purchase arrangement, the hirer is obliged to pay the interest together with the principal amount. The interest is normally imposed on the amount originally paid by the hirer on the acquisition of the investment and not on the reducing balance.

NBFC Controversy

There is a growing demand for credit, loans, and other financial services, according to advocates of NBFCs. In addition to corporations, customers include individuals, particularly those who might not meet the more stringent criteria set by traditional banks. Proponents of NBFCs claim that they not only provide alternative credit sources, but also more efficient ones. Disintermediation is the process by which NBFCs eliminate the middleman — the role that banks frequently play — to let customers deal directly with them, lowering costs, fees, and rates. To keep the economy running smoothly, it is essential to provide financing and credit.

Pros

• a different way to get money and credit
• Direct communication with customers, with no intermediaries to get in the way.
• For investors, high returns are available.
• Availability of financial resources

Cons

• Not subject to any kind of oversight or regulation
• Operations that are not transparent
• A threat to the financial and economic systems as a whole

Still, critics are concerned that non-banking financial institutions aren’t held accountable to regulators and can conduct business without adhering to traditional banking rules and regulations. The Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) may be in charge of monitoring them if they are public companies or brokerages, respectively. They may, however, be able to get away with less openness in some situations.

Direction Applicable to NBFCs

 *Classification as an NBFC

The Reserve Bank of India has clarified that for a company to be classified as an NBFC, to decide on its principal business, it will have to satisfy the two tests of assets and income. The financial assets should be more than 50% of the total assets (netted off by intangible assets), and the income from financial assets should be more than 50% of the gross income. These tests need to be satisfied for a company to be regarded as an NBFC.

*The designation of a non-banking financial corporation (NBFC)

The Reserve Bank of India has stated that a firm must meet the two asset and income standards to be categorised as an NBFC and decide on its primary activity. Financial assets should account for more than half of total assets (net of intangible assets), and financial asset income should account for more than half of gross revenue. For a firm to be classified as an NBFC, it must pass these standards.

*Premature encashment and maturity time

Public deposits have a minimum maturity time of 12 months and a maximum maturity period of 60 months. Premature encashment or loan against deposits within three months is prohibited, save in the event of the depositor’s death. For early deposit repayment, detailed accommodations are created, including no-interest payments, interest payments at reduced rates, etc. “Problem” NBFCs and “small” public deposits are given special treatment.

The NBFC must have a Debenture Redemption Reserve equal to 50% of the Debentures issued through public issuance.

Difference Between NBFCs and Banks

As per the classification of NBFCs as equipment leasing and hire purchase finance companies- According to the Banking Regulation Act 1949, banks are firms registered under the Companies Policy development Act and are licenced by the RBI to conduct banking operations (acceptance of deposits and withdrawable checks for lending or investment). The name should incorporate the words “bank,” “banker,” or “banking.”

NBFCs are financial institutions incorporated under the Companies Policy development Act and registered with the RBI under the RBI Act.

They cannot open accounts with check facilities or use the name “Bank.”

NBFCS are divided into two categories.

1. Not taking deposits since the RBI is not conducting a thorough investigation.
2. The RBI regulates 2-Companies that take public deposits.

State governments control unregulated entities and money lenders

under the State Money Lenders Act.

Real-World Example of NBFCs

Quicken Loans and Fidelity Investments are examples of NBFCs, which are companies that provide financial services. Peer-to-peer (P2P) lending, on the other hand, has been the fastest-growing nonbank lending segment. Because of the ability of social networking to connect like-minded people from all over the world, P2P lending has grown rapidly. To connect potential borrowers with investors willing to invest their money in loans that can generate high returns, P2P lending websites like LendingClub Corp. (LC), StreetShares, and Prosper were created. Borrowers on the peer-to-peer (P2P) network tend to be self-employed individuals or small business owners who do not want to do business with a traditional bank. Investing small amounts in a variety of borrowers allows investors to build a diverse portfolio of loans. A report from IBIS World estimates that $938.6 million will be held in Peer-to-Peer Lending Platforms in the US in 2022, an increase of 7.9 per cent over the past year.

Important Points to Remember 

• Companies that provide banking-like services without a banking licence are referred to as “nonbank financial institutions,” or “NBFIs.”
• Financial institutions such as non-bank financial cooperatives (NBFCs) are not subject to the same banking regulations and oversight as traditional financial institutions such as banks.
• Non-bank financial institutions (NBFCs) include investment banks and mortgage lenders, as well as insurance companies, hedge funds, private equity funds, and P2P lenders
• Many new non-bank financial institutions (NBFCs) have emerged since the Great Recession, helping to fill the credit gap left by traditional financial institutions.

Conclusion-

With the classification of NBFCs as equipment leasing and hire purchase finance companies, the future appears to be very important, and only those that can meet the challenge will be able to survive in the long term. NBFCs, on the other hand, must focus on their fundamental strengths while working on their deficiencies to survive and flourish. It subsequently enters into a contract with the business that will utilise the asset (the lessee, such an institute, should have a net-owned fund of at least 200 lakh. Furthermore, to thrive in this very competitive financial industry, they must be extremely active and continually seek new goods and services.