Non Banking Financial Companies (NBFC)

NBFC stands for ‘Non-Banking Financial Company’. Its principal business is lending, investment in various types of  shares  / stock / bonds / debentures / securities, leasing, hire-purchase, insurance and chit business.

NBFCs are different from other banks in following aspects

1. NBFC’s are different from other banks in the sense that they can’t indulge in agricultural activity, industrial activity, trading activity or sales/purchase/construction of immovable property.
2. Financial activity such as loan/advances should be other than its own.
3. NBFCs cannot accept demand deposits.
4. They do not form part of payment and settlement system and cannot issue cheques drawn on itself.
5. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

           Role of NBFC's 

• Focus is on serving low income group and Micro Small and Medium Enterprises (MSME's).
• Increase financial inclusion by providing finance to credit starved section of the society
• They act in complementary and supplementary manners to banks

     Different types of NBFCs are listed below

• Asset Finance Company (AFC)

An AFC is a company whose principal business is financing of physical assets supporting productive/economics activity and income arising therefrom should not be less than 60% of its total assets and total income respectively.

Example: Birla Global Asset Finance Company Limited.

• Investment Company(IC)

Investment Company has a principal business as an acquisition of securities.

Example:  Barclays Capital, Capital Group, F.I.L Fund Management Private Limited.

• Loan Company(LC)

Loan Company is a financial institution whose principal business is providing of finance by making loan or advances or otherwise for any activity other than its own but does not include Asset Finance Company.

Example: DHFL, Magma Fincorp.

• 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%.

Example: IDFC,  IIFCL.

• Systemically Important Core Investment Company

It is an NBFC carrying on the business of acquisition of shares and securities.

It must satisfy following conditions.

a)      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.

b)      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

c)      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

d)       Its asset size is Rs 100 crore or above and accepts public funds.

Example: TATA capital. Religare Enterprise.

• Infrastructure Debt Fund(IDF)

IDF’s principal business is to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity.

Example: INDIA  INFRADEBT  LIMITED

• Micro Finance Institutions(MFI)

MFI is a non-deposit taking NBFC having not less than 85%of its assets in the nature of qualifying assets which satisfy the following criteria

a)      loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000.

b)      loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles

c)      total indebtedness of the borrower does not exceed Rs. 50,000;

d)      tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;

e)      loan to be extended without collateral;

f)       aggregate amount of loans, given for income generation, is not less than 75 per cent of the total loans given by the MFIs;

g)      loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower

              Example: SKS Microfinance Ltd.

• 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.

            Example: CANBANK FACTORS LTD.