ND-NBFC

Table of content

1.0       INTRODUCTION TO NON-BANKING FINANCE COMPANY  (NBFC)

2.0       REGULATION AND SUPERVISION OF NBFC BY RESERVE BANK OF INDIA (RBI)

3.0       RBI REGULATORY FRAMEWORK FOR NBFC

4.0       MONITORING FRAMEWORK FOR NON-DEPOSIT TAKING NBFC

5.0       FORMING A NBFC AND COMMENCING BUSINESS

6.0       REGISTRATION REQUIREMENT OF NBFC WITH RBI

INTRODUCTION TO NON BANKING FINANCE COMPANY (NBFC)

A Non Banking Finance Company (NBFC) as the name suggests is a company involved in financing activities but is that which is not a bank. A NBFC not being a bank is not regulated by the principal legislation in India for regulating banks viz. The Banking Regulation Act 1949, but is instead directly regulated by the central bank of India itself viz. Reserve Bank of India through its Department of Non-Banking Supervision (DNBS).

A ‘NBFC’ is defined under sec. 45-I(f) of the Reserve Bank of India Act 1934. As per the definition ‘NBFC means:-

Although the RBI Act 1934 defines ‘NBFC’, however it does not define the term ‘principal business’. For this purpose, the RBI Master Circular on Miscellaneous Instructions to All Non-Banking Financial Companies vide RBI/2013-14/46 DNBS(PD).CC.No 344./03.02.001/2013-14 dated 1st July, 2013 clarifies that the definition of ‘Principal Business’ given, vide Press Release 1998-99/1269 dated April 8, 1999 may be followed :“The company will be treated as a non-banking financial company (NBFC) if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.”

The Reserve Bank has defined the term ‘principal business’ via press release so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it and other trading, manufacturing or industrial companies are not brought under its regulatory jurisdiction. This test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

A company which does not satisfy the 50-50 test is not an NBFC. Its principal business would be non-financial activity and it would be a non-banking non-financial company. The Companies Acceptance of Deposits Rules, 1975, governs acceptance of deposits by a Non-Banking Non-inancial Company. The Registrar of Companies in the State Governments administers the schemes.

 

The RBI regulates and supervises Non-Banking Financial Companies under the RBI Act 1934. It lays down directions and policies to regulate, supervise and exercise surveillance over NBFCs. Also, companies desirous of commencing business as NBFC have to register with RBI unless exempted by it. Registration of an NBFC with the RBI basically authorizes it to conduct the business of NBFC. The RBI can penalize NBFCs for violating the provisions of the RBI Act, 1934 or the directions or orders issued by it under the Act. It can also cancel the Certificate of Registration issued to the NBFC, or prohibit them from accepting deposits and alienate their assets or file a winding up petition.

NBFCs perform varied types of financing activities and thus can be identified as being of different types. A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by 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. Therefore, there are many categories of NBFCs depending on the activity performed by them and can be listed as follows as defined in the various RBI directions:

  1. Asset Finance Company (AFC)

An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively. (Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998)

  1. Investment Company (IC)

IC means any company which is a financial institution carrying on as its principal business the acquisition of securities. (Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998)

  1. Loan Company (LC)

LC means 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. (Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998)

  1. 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%.

  1. Systemically Important Core Investment Company (CIC-ND-SI)

CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

  1. 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 issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finanace Companies (IFC) can sponsor IDF-NBFCs.

  1. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

NBFC-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 NBFC-MFI should have Minimum Net Owned Funds of Rs.5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore) and having not less than 85% of its net assets as “qualifying assets”

  1. 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 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

  1. Mortgage Guarantee Company

MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is Rs 100 crore. 

  1. Residuary NBFC

A non-banking institution, which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is a Residuary non-banking company.

  1. Miscellaneous NBFC

A “miscellaneous non-banking company” means a company carrying on all or any of the types of business referred to in paragraph 2 of the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 which are as follows:

(1) Collecting whether as a promoter, foreman, agent or in any other capacity monies in one lump sum or in instalments by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement by whatever name called, and utilising the monies so collected or any part thereof or the income accruing from investment or other use of such monies for all or any of the following purposes –

(2) managing, conducting or supervising as a promoter, foreman or agent of any transaction or arrangement by which the company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscribers shall in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement be entitled to the prize amount;

Explanation

For the purposes of this sub-paragraph, the expression “prize amount” shall mean the amount, by whatever name it be called, arrived at by deduction from out of the total amount subscribed at each instalment by all subscribers,

(3) Conducting any other form of chit or kuri which is different from the type of business referred to in sub-paragraph (2) above;

(4) undertaking or carrying on or engaging in or executing any other business similar to the business referred to in sub-paragraph (1) to (3).]

  1. Mutual Benefit Financial Company (MBFC) and Mutual Benefit Company (MBC)

A “mutual benefit financial company” means any company which is a financial institution notified by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956).

A “mutual benefit company” means a company not notified under section 620A of the Companies Act, 1956 (1 of 1956) and carrying on the business of a non-banking financial institution, –

  1. Housing Companies

A housing finance institution as defined in Section 2(d) of the National Housing Bank Act, 1987.

  1. Insurance Companies

A company doing the business of insurance and holding a valid certificate of registration issued under Section 3 of the Insurance Act, 1938.

Companies doing financial business but which are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements, such as, registration, maintenance of liquid assets, statutory reserves, etc. Exemption from registration is given to these companies to avoid dual registration. The types of NBFCs according to their nature of activities and the concerned regulators are:  

Type of NBFC

Regulator

1. Insurance Companies

Insurance Regulatory and Development Authority (IRDA)

2. Merchant Banking Companies, Venture Capital Companies, Stock Broking companies

Securities and Exchange Board of India (SEBI)

3. Housing Finance Companies

National Housing Bank (NHB)

4. Nidhi companies

Department of Companies Affairs (DCA)

5. Chit Fund Companies

Regulated under the Chit Fund Act, 1982, (Central Act) and implemented by the State Governments

The Bank has issued notifications from time to time exempting some entities from the requirements of Chapter III B of the RBI Act, 1934 or part thereof. Housing Finance Companies are exempt from the provisions of Chapter IIIB of the RBI Act 1934. Other entities like Chit Funds, Nidhi companies, Mutual Benefit companies, Insurance companies, Merchant Banking companies, Stock Broking companies, etc., are granted exemption from the requirements of registration, maintenance of liquid assets and statutory reserves.

The Department of Non Banking Supervision (DNBS) of the Reserve Bank of India (RBI) presently regulates the NBFCs irrespective of whether they accept public deposits or not.

Chapter IIIB, III-C and Chapter V of Reserve Bank of India (RBI) Act 1934 and the RBI Directions, Circulars, Master Circulars, Notifications and Guidelines issued from time to time are the principal framework for NBFCs.

 

RBI has issued the following directions with respect to NBFCs:

  1. Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 1998
  2. Non Banking Financial (Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions 2007
  3. Non Banking Financial (Non Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions 2007
  4. Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008
  5. Reserve Bank of India (Non Banking Financial Companies) Returns Specifications 1997
  6. Residuary Non Banking Companies (Reserve Bank) Directions 1987
  7. Miscellaneous Non Banking Companies (Reserve Bank) Directions 1977
  8. Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003
  9. Mortgage Guarantee Companies Investment (Reserve Bank) Directions, 2008
  10. Mortgage Guarantee Companies Prudential Norms (Reserve Bank) Directions, 2008
  11. The Non-Banking Financial Companies (Deposit Accepting) (Approval of Acquisition or Transfer of Control) Directions, 2009
  12. Infrastructure Debt Fund-Non-Banking Financial Companies (Reserve Bank) Directions, 2011
  13. Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) (Reserve Bank) Directions 2011
  14. Non-Banking Financial Company –Factors (Reserve Bank) Directions, 2012

All non-deposit taking non-banking financial company (NBFCs – ND)  not accepting / holding public deposits and having an asset size of Rs. 500 crore and more as per the last audited balance sheet will be considered as a systemically important NBFC – ND (NBFC-ND-SI).

Non-deposit taking NBFCs with asset size of less than Rs 500 crore are known NBFC-ND and are not systematically important.

The NBFCs-ND-SI are required to submit:

(i) Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for the company – NBS 7

(ii) Monthly Return on Important Financial Parameters of the company

(iii) Asset- Liability Management (ALM) returns:

(iv) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,

(v) Statement of structural liquidity in format ALM [NBS-ALM2] Half Yearly

(vi) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly

The non deposit taking NBFCs having assets of more than Rs.50 crore and above but less than Rs 100 crore are required to submit Quarterly return on important financial parameters of the company. Basic information like name of the company, address, NOF, profit / loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between Rs 50 crore and Rs 100 crore

All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.

However, all the NBFCs (other than those exempted) are required to be registered with RBI and also make sure that they continue to be eligible to retain the Registration. Further, all NBFCs (including non-deposit taking) should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934. The certificate shall also indicate the asset / income pattern of the NBFC for making it eligible for classification as AFC, Investment Company, or Loan Company. 

NBFCs – ND – SI shall maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) of 10% which was changed to 12% as on March 31, 2010 and 15% as on March 31, 2011.

Under section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in Section 45 I(a) of the RBI Act, 1934. However NBFCs which are regulated by other regulators, are given specific exemption by the Reserve Bank from its regulatory requirements, such as, registration, maintenance of liquid assets, statutory reserves, etc.

To be registered with the RBI as NBFC and commencing business of NBFC, a company should comply with the following conditions:

  1. it should be a company registered under Section 3 of the Companies Act, 1956
  2. It should have a minimum net owned fund of Rs 200 lakh. (The minimum net owned fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is different)

The company is required to submit its application for registration in the prescribed format along with necessary documents for RBI’s consideration.

The applicant NBFC for registration is required to apply online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India. The application can be submitted online by accessing RBI’s secured website

Requirements to be complied with and documents to be submitted to RBI by Companies for obtaining certificate and Registration from RBI as NBFC

An indicative list of basic documents/ information to be furnished along with the application for registration submitted by NBFC to RBI is given below. All documents/information is to be submitted in duplicate.

  1. Minimum NOF requirement Rs. 200 lakh.   
  2. Application to be submitted in two separate sets tied up properly in two separate files and properly page numbered.
  3. Identification particulars.      
  4. Statement on prudential norms.         
  5. Information about the management  
  6. Details of change in the management of the company during last financial year till date if any and reasons thereof.          
  7. Certified copies of Certificate of Incorporation and Certificate of Commencement of Business in case of public limited companies.     
  8. Certified copies of up-to-date Memorandum and Articles of Association of the company. 
  9. Details of clauses in the memorandum relating to financial business.         
  10. Details of changes in the Memorandum and Articles of Association duly certified.    
  11. Copy of Permanent Account Number (PAN)/Corporate Identity Number (CIN) allotted to the company.      
  12. ‘Statement on Prudential Norms’ to be submitted duly signed by the director/Authorized signatory and certified by the statutory auditors.      
  13. ‘Directors’ profile’ to be separately filled up and signed by each director. Care should be taken to give details of bankers in respect of firms/companies/entities in which directors have substantial interest.    
  14. In case the directors are associated with or without substantial interest (indicate %of holding in each company firm) in other companies, indicate clearly the activity of the companies and details of their regulators if any.        
  15. Certificate from the respective NBFC/s where the Directors have gained NBFC experience.         
  16. Copy of PAN and Director Identification Number (DIN) allotted to the Directors.        
  17. Credit Information Bureau (India) Limited (CIBIL) Data pertaining to Directors of the company         
  18. Financial Statements of the last 2 years of Unincorporated Bodies, if any, in the group where the directors may be holding directorship with/without substantial interest.         
  19. Certificate of compliance with section 45S of Chapter IIIC of the RBI Act, 1934 regarding unincorporated bodies with which director/s of the company are associated.       
  20. Whether any prohibitory order was issued in the past to the company or any other NBFC/RNBC with which the directors/promoters etc. were associated? If yes, details there of.       
  21. Whether the company or any of its directors was/is involved in any criminal case, including under section 138(1) of the Negotiable Instruments Act? If yes, details thereof. 
  22. Board Resolution specifically approving the submission of the application and its contents and authorizing signatory.        
  23. Board Resolution to the effect that the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of Reserve Bank of India in writing.     
  24. Board resolution stating that the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI.           
  25. Certified copy of Board resolution for formulation of “Fair Practices Code”         
  26. Statutory Auditors Certificate certifying that the company is/does not accept/is not holding Public Deposit.      
  27. Statutory Auditors Certificate certifying that the company is not carrying on any NBFC activity.  
  28. Statutory Auditors Certificate certifying net owned fund as on date of the application.          
  29. Details of Authorised Share Capital and latest shareholding pattern of the company including the percentages. Documentary evidence for change in shareholding pattern, if undergone. If there are any NBFC corporate share holders, certificates from their statutory auditors regarding the adequacy of statutory NOF post investment. Also, provide details about the line of activity of other corporate stake holders.          
  30. Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF          
  31. Details of infusion of capital if any during last financial year together with the copy of return of allotment filed with Registrar of Companies.        
  32. Details of the bank balances/bank accounts/complete postal address of the branch/bank, loan/credit facilities etc. availed.           
  33. Details of unsecured loans if any, raised by the company from others (including the directors) during the year and if these fall in the exempted category of Public deposits certified by the Auditor.          
  34. A certificate of Chartered Accountant regarding details of group/associate/subsidiary/holding/related companies is submitted. (‘Companies in the group” have  been exhaustively defined in para 3(1) b of

    Notification No. DNBS.(PD) 219/CGM (US)-2011 dated January 05, 2011 as an arrangement involving two or more entities related to each other through any of the following relationships, viz; subsidiary-parent (defined in terms of AS-21), Joint Venture (defined in terms of  AS 27), Associate (defined in terms of AS 23), promoter-promotee (as provided in the SEBI-Acquisition of shares and takeover) Regulations, 1997) for listed companies, a related party (defined in terms of AS 18) Common brand name, and investment in equity shares of 20% and above.)Details should include names of the company, its activity, whether it is an NBFC or have other regulators like SEBI/IRDA/FMC/NHB/Foreign Regulators. If they are unregulated give the details of their activities, principal banker’s name, address, account no. Whether the names of these companies are appearing in the balance sheet of the applicant company. If not, indicate why they are not appearing. Whether overseas group companies were established under general permission route or under approval from appropriate authority if any. If there are other NBFCs in the group, justification of having another NBFC.     

  35. Brief background note on the activities of the company during the last three years and the reasons for applying for NBFC registration.    
  36. Whether the company has applied to RBI in the past for registration, if rejected, give full details. If not applied to RBI earlier, whether the company was doing NBFI activities without Certificate of Registration. If yes, indicate reasons for same. Whether they have completely stopped NBFI activities now and whether that has been certified by their auditor. Also, submit a letter seeking to be condoned for violation of Sec 45 IA if the company had conducted NBFI business detailing the circumstances.
  37. Last three years Audited balance sheet and Profit & Loss account along with directors & auditors report or for such shorter period as are available (for companies already in existence).      
  38. Business plan of the company for the next three years giving details of its (a) thrust of business; (b) market segment; and (c) projected balance sheets, Cash flow statement, asset/income pattern statement without any element of public deposits.   
  39. Source of the startup capital of the company substantiated with documentary evidence. Provide Self attested Bank Statement/IT returns etc.       
  40. Details of mergers and acquisition with/of other companies if any together with supporting documents.     
  41. Is the company engaged in any capital market activity? If so, whether there has been any non-compliance with SEBI Regulations? (Statement to be certified by Auditors).          
  42. Whether the company was granted any permission by FED to function as Full-fledged Money Changers? If so, copy of the RBI letter granting the permission.   
  43. If there is FDI in the company, its percentage (submit FIRC in support thereof) and whether it fulfills the minimum capitalization norms or not (also submit FC_GPRs). (i) Has the FDI been brought in with FIPB approval (Copy of approval to be submitted)? (ii) Is the foreign entity contributing the FDI subject to supervision in its home country (if yes, name, address and email id of the regulator).(iii) If not, mention legal status, viz, statutes under which it was established, its statutory obligations, procedures under which it was established, whether listed on stock exchange etc. (iv) The particulars of approval of Foreign Exchange Department (FED) if any obtained/copies of Foreign Inward Remittance Certificate in r/o Foreign Direct Investment if any, received by the applicant company are furnished.(v) Activities undertaken, details of regulator of group/associate companies doing financial activities which are regulated either in the home country or elsewhere, if any.(v) If any group/ associate company is operating in India, details such as its activities, its partners or associates, regulator/s etc. may be furnished.     
  44. Declaration  by the company to own electronic infrastructure and its capability regarding electronic submission of data through the internet as and when required by Reserve Bank of India. Email id of the company should also be provided.     
  45. Are there are any incidents of non-compliance with the directions of Revenue Authorities or any other statutory authority by the applicant company, its holding company/ subsidiaries, If yes, give particulars, else report “Nil”          

The RBI specifically mentions that the above checklist of documents is indicative and not exhaustive. The RBI can call for any further documents to satisfy themselves on the eligibility for obtaining registration as NBFC if it determines necessary. In the event of the Bank calling for further documents in addition to those mentioned above, the applicant company is supposed to respond within a stipulated time of one month failing which the original Certificate of Registration application may be returned to the company for resubmission afresh with the required information/documents.