India is a developing economy and is undergoing rapid expansion, both in terms of the strong growth of existing financial firms and new entities entering the market. The sector comprises commercial banks, insurance companies, cooperatives, pension funds, mutual funds, and other smaller entities. The government of India has introduced several forms to liberalize, regulate and enhance this industry. The government and Reserve Bank of India have taken various steps to facilitate easy access to finance. One such step includes launching Non-Banking Finance Companies. Over the years they have played a dominant role in mobilization and disbursal of funds.
A Non- Banking Financial Company (NBFC) is a company registered under the Companies Act,2013 engages in the business of loans and advances, acquisition of shares /stocks/bonds/debentures/securities issued by the government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but 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.
A non-banking institution whose principal business is to receive deposits under any scheme or arrangement in a lump sum or installments by the way of contributions or in any other manner, is also a non-banking financial company. Financial activity as the principal business is when a company’s financial assets constitute more than 50 percent of the total assets and income from financial assets constitute more than 50 percent of the gross income. A company which fulfills both these criteria will be registered as NBFC by RBI.
TYPES OF NBFCs
NBFCs are categorized as follows:-
*Asset Finance Companies(AFC) – An AFC is a financial company whose principal business is the financing of physical assets such as automobiles, tractors, lathe machines, generator sets, etc.
*Investment Company(IC) – IC means any company which is a financial institution carrying on as its principal business of acquisition of securities.
*Loan Company(LC) – The principal business of a Loan Company is providing finance whether by making loans or advances or otherwise for any activity other than its own but not including Asset finance Companies.
*Systemically Important Core Investment Company(CIC-ND-SI) – It is an NBFC that carries on a business of acquisition of shares and securities upon satisfaction of certain conditions which are laid down.
*Infrastructure Debt Fund – It is a company registered as NBFC established so that the long term debts can be invested in the infrastructure projects.
*Non-Banking Financial Company(NBFC Factors) – It is an NBFC that does not take deposits and is engaged in the principal business of factoring.
*Mortgage Guarantee Company(MGC) – It is a financial institution whose 90% of the turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned funds is 100 crore.
BENEFITS OF INCORPORATING NBFCs
1.Competitive Interest Rates – One of the main aspects in people’s minds while taking a loan is he interest rate. NBFCs have brought down the interest rates equal to banks or at times even lower to bank rates to have a concrete standing in this area.
2.Fast Processing – The loan approval process of NBFCs is a lot easier, quicker, and lenient than that of a bank. It is beneficial for the people who are in urgent need of money as its approval process is less time-consuming.
3.Less Rules and Regulations – They have less complicated loan processing requirements because NBFCs are incorporated under the Companies Act, hence the rules and regulations for lending are not as stringent as banks, which keeps the borrowers highly satisfied.
4.Loan available for individuals with lower credit rates – The loans are also offered to individuals having lower credit rates by NBFCs when such individuals do not get loans from banks. However, the interest rates for such borrowers are usually higher than the market rates.
INCORPORATION OF NBFCs
*The enactment of Companies Act,2013 impacted many areas including banks and NBFCs. However, no change was brought under the new act in the provisions relating to the incorporation of NBFCs. Accordingly, NBFCs are incorporated under Companies act,2013, or Companies Act,1956.
*The procedure for incorporating a Non- Banking Financial Company is the same as any other company. An online application form RUN has to be filled for the approval of the name and should contain the principal activity which has to be carried on by the business. The principal business of the NBFCs stated in the MOA should be lending credit, making investments in various types of stocks and shares, leasing, hire purchase, insurance business, chit business, etc.
*It must be ensured that the authorized share capital of the NBFC is not less than Rs. Two crore as the net owned funds of an NBFC should not be less than Rs. Two crores.
REGISTRATION PROCESS WITH RESERVE BANK OF INDIA
After incorporation of the company, the NBFC must obtain a certificate of registration. Before applying for registration, the company should ensure the following:
1.It should have minimum one director from NBFC background or senior bankers as full-time director in the company
2.Clean CIBIL records
3.Understanding of NBFC/Finance business
In terms of section 45-IA of the RBI Act,1934, a Non-Banking Financial Company can commence or carry on the business of a non-banking financial institution only after
1.Obtaining a certificate of registration from the Reserve Bank of India and
2.Having a Net Owned Funds of Rs Two Crores.
According to research and studies, it has been proved that NBFCs are outperforming banks. The continuous better performance from the NBFCs has given rise to an uptick of 15% customer satisfaction as compared to the banking customers. The same is agreed by the RBI according to the recent Financial Stability Reports. Though both banks and Non- banking Financial Companies are financial intermediaries and the services provided by them are nearly the same, in some cases and for certain classes of people, NBFCs are considered more beneficial and should be chosen as a source of borrowing money.