NBFC PDF

5. NBFC INTRODUCTION TO NBFC - NBFC is a financial Institution that is into lending or investment or collecting monies under any scheme or arrangement. - But does not include any institutio...

5. NBFC INTRODUCTION TO NBFC - NBFC is a financial Institution that is into lending or investment or collecting monies under any scheme or arrangement. - But does not include any institutions which carry on its principal business as agriculture activity, industrial activity, trading and purchase or sale of immovable properties. - However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets held by the financial system. - The Government of India has introduced several reforms to liberalize, regulate and enhance this industry. - The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance. - These measures include (to name a few) launching different categories of Non Banking Finance Companies (NBFCs), Asset Reconstruction Companies (ARCs) and Micro Finance Institutions (MFIs). With a combined push by both government and private sector, India is undoubtedly one of the world’s most vibrant capital markets. NBFC - A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 or any previous company law, engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/ securities issued by Government. - It can also be further into leasing, hire-purchase, insurance business, chit business - But it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. - NBFCs lend and make investments and hence their activities are akin to that of banks; however there are few differences such as:  NBFC cannot accept demand deposits.  NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.  Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs. BMCC SY BBA _ Intro to Financial Institutions _ Compiled by – Prof. Onkar Pathak (CS, M. Com, NET) Page 1 REGISTRATION WITH RBI A company desirous of commencing business of NBFC should comply with the following: i. it should be a company (either private or public) registered under the Companies Act & ii. having the net owned fund such amount as the Bank may, by notification in the Official Gazette, specify: iii. Every non-banking financial company shall make an application for registration to the Reserve Bank in such form as the RBI may specify. iv. Before applying for registration, NBFC should have minimum one director from NBFC background or senior Bankers as full-time director in the company, having clean CIBIL score and who understands the NBFC business model. v. The RBI may, after being satisfied with certain conditions, grant a certificate of registration subject to such conditions which it may consider fit to impose. FINANCIAL COMPANIES EXEMPT FROM NBFC LICENSE: The following types of entities that are involved in the principal business of financial activity do not require NBFC License: - Housing Finance Companies – Regulated by the National Housing Bank - Insurance Companies – Regulated by Insurance Regulatory and Development Authority of India (IRDA); - Stock Broking, Merchant Banking, Venture Capital Companies, Mutual Funds – Regulated by SEBI - Nidhi Companies – Regulated by the Ministry of Corporate Affairs (MCA); - Chit Fund Companies – Regulated by the respective State Governments. TYPES OF NBFC LICENSE: Before applying for NBFC License, the type and category of NBFC license must first be determined. The following are the categories of NBFC Companies: 1. Asset Finance Company (AFC): An Asset Finance Company is a company which is a financial institution carrying on as its principal business the financing of physical assets such as automobiles, tractors, machines, generator sets, earth moving and material handling equipments and general purpose industrial machines. 2. Investment Company: An Investment Company is any company which is a financial institution carrying on as its principal business the acquisition of securities (shares / stocks / bonds / other financial securities). BMCC SY BBA _ Intro to Financial Institutions _ Compiled by – Prof. Onkar Pathak (CS, M. Com, NET) Page 2 3. Loan Company: Loan Company is 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 Infrastructure Finance Company is a non-banking finance company that:  deploys at least 75 per cent of its total assets in infrastructure loans  has a minimum Net Owned Funds of Rs. 300 crore  maintains a minimum credit rating of ‘A ‘or equivalent  has Capital to Risk Assets Ratio of 15%. 5. Systematically Important Core Investment Company - Accepts Public Funds: The company can take money from the general public, meaning it can accept deposits from people. - Asset Size Requirement: The total value of everything the company owns (its assets) must be at least Rs. 100 crores. This is a measure of its financial size. - Investment Focus: At least 90% of the company's total assets must be invested in things like:  Stocks (equity shares)  Preference shares (a type of stock with fixed dividends)  Loans (money lent) to other companies within its group (related companies). - Equity Investment Requirement: Of all its total assets, at least 60% must be specifically invested in stocks of its group companies. This means it needs to own a significant amount of shares in companies that are part of the same business group. - No Other Financial Activities: The company should only focus on investing in its group companies and not engage in any other types of financial activities (like lending money to individuals or offering other financial services). 6. Infrastructure Debt Fund - IDFs are investment vehicles which can be sponsored by commercial banks and NBFCs in India in which domestic/offshore institutional investors, specially insurance and pension funds can invest through units and bonds issued by the IDFs. - IDFs would essentially act as vehicles for refinancing existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure projects. - IDF-NBFCs would take over loans extended to infrastructure projects which are created through the Public Private Partnership (PPP) route and have successfully completed one year of commercial production. - When loans from banks are taken over, it will be done through a Tripartite Agreement involving three parties:  IDF (Infrastructure Development Fund): This is the fund or institution taking over the loans.  Concessionaire: This is the company or entity responsible for carrying out the project and repaying the loan.  Project Authority: This is the organization or body overseeing the project. BMCC SY BBA _ Intro to Financial Institutions _ Compiled by – Prof. Onkar Pathak (CS, M. Com, NET) Page 3 7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI) “Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)” means a non- deposit taking NBFC that fulfils the following conditions: a. Minimum Net Owned Funds of ₹ 5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at ₹ 2 crore). b. Not less than 75% of its net assets are in the nature of “qualifying assets.” (Only the assets originated on or after January 1, 2012 shall have to comply with the Qualifying Assets criteria. c. Qualifying assets fulfill the following conditions: - Loan size: The loan amount should be up to ₹60,000 for income generating activities or ₹50,000 for other purposes ¹. - Interest rates: Interest rates should not exceed the RBI-prescribed ceiling. - Repayment tenure: The loan tenure should not exceed 24 months. BENEFITS OF AN NBFC a. Competitive Interest Rates: Rate of interest is one of the main aspects of all types of loans. NBFC have brought down the interest rates to either equal to bank lending rates or at times even lower to bank rates. With all the other benefits when rate of interest is also lowered, borrowers found this easier and more affordable. This has also resulted in lower EMI (Equated Monthly Instalment) for borrowers. Based on the income, credit scoring and repayment, rate of interest is charged on the borrowers However it is at competitive rates. b. Quick Processing: At banks, it is very important that the applicant should fulfil the eligibility criteria but NBFC are lenient in this aspect. This makes loan approval easier, smoother process and quicker. Most of the times, people apply for loan when they are in immediate need of money. NBFCs have taken this as an opportunity to meet the demand by quickly processing the loans at competitive rate of interest. At times, borrowers are even ready to compromise on the interest rates if the loan amount is huge and if they could get it approved quickly. c. Less Rules and Regulations: As NBFC are incorporated under the Companies Act, (though regulated by the Reserve Bank of India), the rules and regulations for lending are not as stringent as banks. This helps borrowers to get loans easily. In view of less complicated loan processing requirements, borrowers are highly satisfied. Of course, the risk of default is high with NBFC and thus interest rates and other charges will be according priced by the NBFC. Even the loan amount approved will be quite lesser than the collateral value. This is due to the high risk of default. NBFCs do not have statutory reserve ratios and can open branches at will. d. Loan available for Individuals with Poor Credit Rating: Individuals with poor credit rating generally will not get loans from banks. The reason for this is banks consider borrowers are high-risk individuals if the credit scoring is low. Unless the credit score is above 600 -650, it is very difficult to get a loan sanctioned from banks. On the other hand, loans will be offered to individuals with low credit score by NBFCs but most of the time the interest rates for such borrowers will be higher than market rates. BMCC SY BBA _ Intro to Financial Institutions _ Compiled by – Prof. Onkar Pathak (CS, M. Com, NET) Page 4 HOUSING FINANCE COMPANIES - Housing Finance Company (HFC) is a type of non-banking financial institution which is primarily engaged in the business of providing home loans and other related products. Unlike other Non-Banking Financial Companies which are governed under the regulatory framework of RBI, HFCs are regulated by the National Housing Bank (NHB). - Collateral securities are accepted against loans advanced by HFCs which include the property for which loan has been granted and some other collaterals as well. Since properties serve as the underlying asset on which financing is given, the amount of loan advanced depends upon the value of the collateral offered. The value of the collateral ensures that the lender is secured and has covered itself from the risk of default. - Usually after a loan has been granted, HFCs do regular property valuation to understand how the property value is changing. There is a need for revaluation at regular intervals so that the lender is assured of little or no deviation in the Loan to Value (LTV) ratio and also that the property is valued at its current fair market value. - A Housing Finance Company (HFC) is a company registered under the Companies Act, 2013 or any earlier enactment which primarily transacts or has as one of its principal objects, the transacting of the business of providing finance for housing, whether directly or indirectly. - In addition to its being a company registered under the Companies Act, an HFC also requires registration with National Housing Bank (NHB) for commencing or carrying on the business of housing finance. - The National Housing Bank was set up under the National Housing Bank Act, 1987. Housing Finance Companies are governed by the said Act and by Circulars, Guidelines, Notifications and Directions issued by National Housing Bank. BMCC SY BBA _ Intro to Financial Institutions _ Compiled by – Prof. Onkar Pathak (CS, M. Com, NET) Page 5