Banking Awareness: NBFC

NON BANKING FINANCIAL COMPANIES (NBFC) : Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions typically are restricted from taking deposits from the public depending on the jurisdiction. Nonetheless, operations of these institutions are often still covered under a countries banking regulations.

NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activites. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business.

Examples of NBFC in India - Fusion Microfinance Pvt Ltd, Svatantra Micofin Pvt. Ltd., S. V. Creditcare Network Pvt. Ltd.
Saija Finance Pvt. Ltd, LIC, GIC, UTI,

Difference between banks & NBFCs:
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of bank.

Different types/categories of NBFCs registered with RBI:
 NBFCs are categorized
a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
c) by the kind of activity they conduct.

Within this broad categorization the different types of NBFCs are as follows:
1. Asset Finance Company (AFC) : An AFC is a company which 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 equipments, moving on own power and general purpose industrial machines.

2. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,

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. Infrastructure Finance Company (IFC) : IFC is a non-banking finance company
a) which deploys at least 75 per cent of its total assets in infrastructure loans,
b) has a minimum Net Owned Funds of Rs. 300 crore,
c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-ND-SI) : CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities.

6. 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.

7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets.

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 75 percent of its total assets and its income derived from factoring business should not be less than 75 percent of its gross income.

Salient Features of NBFCs:
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
1. NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
2. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
3. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
4. NBFCs (except certain AFCs) should have minimum investment grade credit rating.
5. The deposits with NBFCs are not insured.
6. The repayment of deposits by NBFCs is not guaranteed by RBI.
7. Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.

Supervision and Inspection of NBFCS by RBI:
The RBI conducts on-site inspection and off-site surveillance of NBFCs. Off-site surveillance is undertaken by calling for periodical returns. These are generally fortnightly, monthly or annual returns.
The on-site inspection is mainly used to ensure that the interest of the depositors is well protected and these funds are not in danger of vanishing through losses or otherwise.

For this purpose, the RBI ensures whether asset classification is done properly, whether provisioning and reserve requirements are done as per requirements, whether books of accounts truly reflect the financial health of the company, whether loan assessment has been made properly etc., and the inspection is carried on once a year or two depending upon the public deposit level of NBFC.

The RBI conducts the inspection under the system known as the alphabets of CAMELS. It stands for
C = Capital Adequacy requirements
A = Asset quality, like standard etc., assets
M = Management, the level and expertise and appraisal capacity of management.
E = Earning capacity of NBFC
L = Liquidity, the level of liquidity and the components of liquidity are verified.
S = Systems and control exist in the NBFC, its effectiveness etc.