NBFCs in India - Types, History and Regulation - PDF

NBFC Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose principal...

NBFC Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose principal business is that of agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. HISTORY OF NBFCS IN INDIA: Different types of Committees to Review existing framework of NBFCs: James S. Raj Committee  In early 1970s Government of India asked Banking Commission to Study the Functioning of Chit Funds and Examining activities of Non- Banking Financial Intermediaries. In 1972, Banking Commission recommended Uniform Chit Fund Legislation to whole country.  Reserve Bank of India prepared Model Bill to regulate the conduct of chit funds and referred to study group under the Chairmanship of James S. Raj.  In June 1974, study group recommended ban on Prize Chit and other Schemes. It recommended the Parliament to enact a bill which ensures uniformity in the provisions applicable to chit funds throughout the country.  Accordingly, Parliament enacted two acts: Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and Chit Funds Act, 1982. HISTORY OF NBFCS IN INDIA: Different types of Committees to Review existing framework of NBFCs: Chakravarty Committee:  During Planning Era, Reserve Bank of India tried best to 'Manage Money's and evolve 'Sound Monetary' system but not much appreciable success in realizing social objectives of monetary policy of the country.  In December 1982, Dr Manmohan Singh, Governor of RBI appointed committee under the Chairmanship of 'Prof. Sukhamoy Chakravarty' to review functioning of monetary system in India.  Committee recommended assessment of links among the Banking Sector, the Non-Banking Financial Institutions and the Un-organised sector to evaluate various instruments of Monetary and Credit policy in terms of their impact on the Credit System and the Economy.  During this time, the number of NBFCs grew from 7,000 in 1981 to around 30,000 in 1992. TYPES OF NBFCS IN INDIA 1. Asset finance companies (AFC), 2. Loan companies (LC), 3. Investment companies (IC)  Investment and Credit Company (ICC) Merging three categories of NBFCs viz asset finance companies (AFC), Loan companies (LC), Investment companies (IC) into a new category called NBFC - ICC. ICC means any company which is a financial institution carrying on as its principal business asset financing, the providing of finance whether by making loan and advances or otherwise for any activity other than its own and the acquisition of securities; and is not any other category of NBFC as defined by RBI in any of its master directions. TYPES OF NBFCS IN INDIA Infrastructure Finance Company (IFC)  Infrastructure finance companies deploys a minimum of three-fourths of their total assets in infrastructure loans. The net owned funds are more than 3 billion and a minimum crediting rating of 'A' and the Capital to Risk- Weighted Assets Ratio is 15%. 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 raise resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs. NBFC-Factors  NBFC Factors has principal business of factoring.  Factoring is a financial transaction and a type of debtor finance TYPES OF NBFCS IN INDIA Gold Loan NBFCs in India  Over the years, gold loan NBFCs witnessed an upsurge in Indian financial market, owing mainly to the recent period of appreciation in gold price and consequent increase in the demand for gold loan by all sections of society, especially the poor and middle class to make ends meet.  Though there are many NBFCs offering gold loans in India, about 95 per cent of the gold loan business is handled by three Kerala based companies, viz., Muthoot Finance, Manapuram Finance and Muthoot Fincorp.  Growth of gold loan NBFCs eventuating from various factors including Asset Under Management (AUM), number of branches, and also the number of customers etc.  Growth of gold loan NBFCs occurred both in terms of the size of their balance sheet and their physical presence that compelled to increase their dependence on public funds including bank finance and non-convertible debentures.  Aggressive structuring of gold loans resulting from the uncomplicated, undemanding and fast process of documentation along with the higher Loan to Value (LTV) ratio include some of the major factors that augment the growth of Gold loan NBFCs TYPES OF NBFCS IN INDIA Residuary Non-Banking Companies (RNBCs)  Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company.  These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. TYPES OF NBFCS IN INDIA Account Aggregators (AA)  Account Aggregators are a new class of NBFC instituted by the Reserve Bank of India in 2016.  An account aggregator NBFC takes the business of account aggregation for a fee or otherwise.  The NBFC once registered with the RBI, should only provide account aggregation and data to financial institutions based on customer consent. The actual mechanism should follow the consent architecture laid down by the RBI.  The account aggregators are expected to make loan applications easier for users by providing data access to financial institutions. TYPES OF NBFCS IN INDIA  RBI has given operating licences to four account aggregators and in-principle approvals to three NBFC account aggregators. The full list of companies is as follows: AAs with An Operating License 1. CAMS FinServ 2. Cookiejar Technologies Pvt Ltd. (Product titled Finvu) 3. FinSec AA Solutions Private Limited (Product titled OneMoney) 4. NESL Asset Data Limited AAs with In-Principle Approval 1. Jio Information Solutions Limited 2. Perfios Account Aggregation Services Pvt Ltd 3. Yodlee Finsoft Pvt Limited NEW CATEGORIZATION OF NBFCS Reserve Bank of India through a circular in October 2021,has categorized the NBFCs into three layers:  Base layer – This layer covers NBFCs which are non-systematically important, i.e., they have a lesser risk and impact on the financial system. It also covers peer-to-peer lending platforms, Account Aggregators (AA), and non- operative financial holding companies. The asset size for NBFCs in the base layer has been increased from INR 500 crores (~US$66.45 MM) to INR1000 crores (~US$132.90 MM)  Middle layer – This layer covers systematically important non-deposit taking NBFC and deposit taking NBFC having an asset size of more than INR1000 crores (~US$132.90 MM). It also covers NBFC-HFCs, NBFC- IFCs, IDF-NBFCs, and Core Investment companies (CICs).  Upper layer – This layer covers the top ten NBFCs based on asset size, as well as other systematically important NBFCs based on size, interconnectedness, complexity, liabilities, etc.