Non-Banking Finance Companies (NBFC)

Introduction

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities.
• The workings and operations of NBFCs are regulated by the RBI within the framework of the RBI Act, 1934. Under this act , it is mandatory for an NBFC to get itself registered with the RBI. 

Classification of NBFCs

• Asset Finance Companies: It is defined as a financial institution whose principal business is that of financing the physical assets that correspond to productive/economic activity such as machinery, automobiles, tractors, material handling equipment, power generators, etc.
• Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.
• 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.
• Infrastructure Finance Company (IFC): IFC is a non-banking finance company  which deploys at least 75 percent of its total assets in infrastructure loans. Moreover, it should have minimum Net Owned Funds of ₹ 300 crore, a minimum credit rating of ‘A ‘or equivalent and a CRAR of 15%.
• Systemically Important Core Investment Company: It is  an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:

1. 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;
2. 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;
3. 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;
4. It does not carry on any other financial activity referred to in Section 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 issuances of group companies or guarantees issued on behalf of group companies.
5. Its asset size is ₹ 100 crore or above and it accepts public funds.

• Infrastructure Debt Fund 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 issuance of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs. 

Key Facts About NBFCs:

• NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months.
• They cannot accept deposits which are repayable on demand.
• They cannot offer gifts/incentives or any other additional benefits to the depositors.
• They should have minimum investment-grade credit ratings.
• The repayment of deposits by NBFCs is not guaranteed by the Reserve bank of India.