Non-Banking Financial Company – Micro Finance Institution
How do Non-Banking Companies operate in India?
Non-Banking Financial Company known as NBFCs, is governed and regulated by the provisions of RBI, Ministry of Corporate Affairs, and Companies Act. These are Companies registered under Companies Act 1956 (Now Companies Act 2013). NBFC operates in India to carry on the business of providing Loans & Advances, Acquiring Stocks, Equity Shares, debt, etc.
NBFCs operate to accept the deposit from the public as its main object gets regulated under section 45-I of Reserve bank of India Act. Services provided by NBFCs are flexible and can get modified as per the client’s specific needs and demand.
NBFCs can operate similar to Banks or Financial Institutes in India with few restrictions imposed by RBI such as:
- NBFCs can’t accept demand deposits from any source
- NBFCs cannot issue cheques.
- They are not allowed to carry on the settlement system.
- Deposit under NBFCs cannot have the schemes of deposit insurance or such other facilities.
Incorporation of NBFCs – Non-Banking Financial Company
Following is the procedure for running the business as NBFCs:
- To get registered as NBFCs (Non-Banking Financial Company), Company shall get itself incorporated under Companies Act 2013 or previous registered Companies under the old act can apply for NBFC license.
- There shall be at least 1 director from the background in banking.
- NBFC shall also have one senior banker as its full-time directors.
- A company applying for an NBFC license shall have a minimum net worth of INR 2 Crore.
- The company shall be the one with a clear CIBIL record.
- The company can apply online on the official website of RBI for the grant of NBFC license along with necessary documents.
- A hard copy of the application shall also be given to RBI in its regional branch.
- RBI, after a thorough verification & properly scrutinising the application, shall grant the license to the Company.
Role of NBFCs in boosting Economic Development
Following are the main activities performed by NBFCs that enhance the financial sector in the economy:
- NBFCs, grant loans and advances, help in the development of the Infrastructure sector and the Transport Sector.
- It helps in boosting up economic conditions by generating Employment opportunities by promoting SMEs and Private Industries through lending them a loan for a start-up.
- NBFCs help in creating overall wealth in the Country.
- NBFCs target the economically weaker section of society by providing financial aid to them.
- It is playing a great role as a supplement to bank credit in rural areas, semi-urban, small entrepreneurs, and first-time users.
- NBFCs help in mobilising the funds and convert it from savings into investments.
- It helps in adding the capital stock of the Company.
- NBFCs help in adding foreign grants by enhancing overall economic and financial development.
- NBFCs act as a government’s instrument to break the vicious circle of poverty.
- A large sector of the financial market relies on these NBFCs for raising the capital. Small start-ups are dependent on NBFCs to maintain their liquidity.
How many Types of NBFCs?
NBFCs are categorized into the following types:
- Mutual Benefits Finance Company: They are also known as Nidhi Companies registered under Companies Act 2013/1956 with the main object to pool the funds from its members to invest the same. The main source of funds of Nidhi Companies is to share capital, deposit from the public, and deposit from its members.
- Investment Companies: These are the companies that get registered with the main objects of acquisition of securities.
- Loan Company: These companies get registered with the principal business of providing finance in terms of loans or advances.
- Asset Finance Company: These companies carry on the principal business of financing the physical assets such as automobiles, tractors, lathe, machines, etc., that support the productive and economic activities of the business
- Infrastructure Finance Company: These companies should have a minimum Net Owned Fund of INR 300 Crore and shall obtain the maximum credit rating. These companies deploy at least 75% of their assets in infrastructure loans.
- Infrastructure Debt Fund: These NBFCs provides long term loan and debt facilities to infrastructure projects. These NBFCs raise the fund from issuances of bonds with a minimum of 5 years of maturity.
- Core Investment Companies: These NBFCs get registered with its principal business of acquisition of shares & securities that satisfy the following conditions:
- 90% or more of its total assets shall hold in the form of investment in equity shares, debt or preference shares of group companies out of which investment in equity shall not be less than 60% of its total assets.
- It is allowed to block sale its investment in shares or debt for disinvestment or dilution of its holding.
- It is not allowed to carry on the other business except investing in Bank deposits, Money Market, Government Securities, etc.
- It shall accept Public Funds.
- Housing Finance Company: These NBFCs Micro finance company the acquisition or construction of House, including the development of lands used for constructing a new house.
- Chit Fund Company: They are engaged in the business of management, conducting, and supervision of Chit Schemes. The operations of Chit Funds are governed by the Chit Fund Act 1982, whereas RBI governs Deposit-taking activities of these NBFCs.
- Micro Finance Institution: These NBFCs are Non-Deposit taking Companies with 85% of its assets have to be qualified assets. As per RBI following criteria are required to be satisfied to be recognised as MFIs :
- NBFCs can grant the loan to the rural households with income not exceeding INR 1 Lakh and to urban and semi-urban households with income not exceeding INR 160000.
- The amount of loan granted by it shall not exceed INR 50000 in the first cycle and further INR 1 Lakh.
- The total Indebtedness of the borrower shall not be more than INR 1 Lakh.
- Loan exceeding INR 15000 shall get granted with tenure of more than 24 months.
- Loan granted can extend without collateral security.
- The aggregate amount of Loan given for generation of Income shall not be less than 50% of the total Loan offered by MFIs.
- As per the choice of the borrower, loan granted by MFIs can be repaid weekly, monthly, or even in fortnightly instalments.
Recent amendments by RBI:
- RBI for improving the credit options in Rural and semi-urban areas recently has enhanced the cap of loan limit to INR 125000 from the previous limit of INR 1 Lakh.
- It has also decided to increase the income limit of rural households from INR 1 Lakh to INR 125000 & for urban or semi-urban households from INR 160000 to INR 2 Lakhs.
RBI’s guidelines for NBFCs
Company has to comply with the following guidelines after getting registered as an NBFC (Non-Banking Financial Company):
- NBFCs can’t accept the deposit repayable on demand.
- NBFCs can accept the deposit of tenure of 12 months to 60 months.
- Interest charged shall not be more than the prescribed limit of RBI.
- Any change in the composition of the company or similar information shall furnish to RBI.
- The public shall take the unsecured deposit.
- The company needs to comply with the annual return requirement and shall file its audited balance sheet every year.
- Statutory return in form NBS-1 shall be furnished to RBI every year for the deposits accepted by the Company.
- Such NBFCs with Public deposit exceeding INR 20 Crore and Net Worth exceeding INR 100 Crore shall file half yearly return.
- Such companies need to take or update its credit rating in every 6 months from RBI.
- NBFCs have to compulsorily maintain its 15% or more public deposit in the form of Liquid Asset.