NBFCs

Non-Banking Financial Companies
And all there is to know about them

So what are they?
● 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
● 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
Then what are they not?
● Any institution whose “PRINCIPAL BUSINESS” is that of agriculture activity, industrial

activity, purchase or sale of any goods or providing any services and sale/purchase/construction
of immovable property.
● And obviously Banking institutions aren’t NBFCs.
Wait. Principal Business?
● A term used by RBI to distinguish business which conduct small amounts of financial activity
from the NBFCs.
● If financial assets constitute more than 50 per cent of the total assets
● and income from financial assets constitute more than 50 per cent of the gross income, RBI will
register the company as NBFC.
● Other Companies aren’t regulated by the RBI.
Popularly Known as
The 50-50 Test
Should every NBFC be registered with the RBI?
No Non-banking Financial company can commence or carry on business of a non-banking financial
institution without
● obtaining a certificate of registration from RBI

● without having a Net Owned Funds of ₹ 25 lakhs
Regulations always have exceptions This one does too!
To prevent dual regulation, certain NBFCs are exempted from the requirement of registration with
RBI -
● Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with

SEBI
● Insurance Company holding a valid Certificate of Registration issued by IRDA,
● Nidhi companies as notified under Section 620A of the Companies Act, 1956,
● Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
● Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual
Benefit company.
Can NBFCs and Banks carry out similar functions ??
Yes, certainly they do : like giving loans and advances. But the differences exist :
i. NBFC cannot accept Demand deposits
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors
of NBFCs, unlike in case of banks.
Demand Deposits
Those deposits that can be
withdrawn without prior notice.
Summarising it
Tell me the Types now
Basis : Liabilities Basis : Kind of Activity
1. Deposit Accepting (NBFC- 1. Asset Finance Each Type Has its own
D) 2. Investment regulation on
2. Non Deposit Accepting 3. Loan

4. Infrastructure Finance ● Net owned fund
(NBFC-ND)
5. Micro Finance ● CRAR
Non Deposit taking NBFC with 6. Infra - Debt

7. Factors
assets above 100 crore are
categorised as Systematically
Important NBFC (NBFC-ND-
SI)
● I. 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.
● II. Investment Company (IC) : IC means any company which is a financial

institution carrying on as its principal business the acquisition of securities.
● III. 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
● IV. 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 ₹ 300 crore,
● c) has a minimum credit rating of ‘A ‘or equivalent
● d) and a CRAR (Capital to Risky Asset Ratio) of 15%.
● V. 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:-
● (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;
● (d) it does not carry on any other financial activity referred to in Section 45I(c)
and 45I(f) of the RBI act, 1934 except investment in bank deposits, money
market instruments, government securities, loans to and investments in debt
issuances of group companies or guarantees issued on behalf of group
companies.
● (e) Its asset size is ₹ 100 crore or above and
● (f) It accepts public funds
● VI. 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 Finance Companies (IFC) can sponsor IDF-NBFCs.
● Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged

in the principal business of factoring.
● Factoring is a financial transaction and a type of debtor finance in which a
business sells its accounts receivable (i.e., invoices) to a third party (called a
factor) at a discount.[1][2][3] A business will sometimes factor its receivable assets
to meet its present and immediate cash needs.
NOF And CRAR
Capital to Risk Weighted Assets Ratio (CRAR)
NOF
It consist of paid up equity capital, free reserves, The capital adequacy ratio (CAR) is a measure
balance in share premium account and capital of a bank's capital. It is expressed as a
reserves representing surplus arising out of sale percentage of a bank's risk weighted
proceeds of assets but not reserves created by credit exposures.
revaluation of assets. From the aggregate of items
will be deducted accumulated loss balance and book
value of intangible assets, if any, to arrive at owned
funds. Investments in shares of other NBFCs and in
shares, debentures of subsidiaries and group
companies in excess of ten percent of the owned
fund mentioned above will be deducted
Asset Finance Company
They finance the assets such as These assets are used for a productive
machines, automobiles, generators, /economic purpose.
material equipments, industrial
machines etc.
60% of Total Assets in Financing Financing Real/Physical

Real/Physical Assets &
60% of Total Income arises from the aforesaid aforesaid
Assets
Investment Company
50% of Total Assets in

IC means any company which is a Investment Investment Activity
financial institution carrying on as its Activity & 50% of Total Income
principal business the acquisition of arises from the aforesaid
securities aforesaid Assets
Loan Company
Loan Company(LC) Company(LC) 50% of Total Assets in Lending

means any company company which Lending & 50% of Total Income arises
is a financial institution carrying on as from the aforesaid aforesaid Assets
its principal business the providing of
finance whether by making loans or
advances
Infrastructure Finance Co.
IFC means a non‐banking banking Acceptance of public deposit not

finance finance company company allowed.
which deploys at least 75 per cent of
its total assets in infrastructure loans It has a minimum credit rating of ‘A ‘or
equivalent
NBFC -ND-MFI
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. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹
1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;
b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;
c. total indebtedness of the borrower does not exceed ₹ 1,00,000;
d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 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 50 per cent of the total loans
given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
Factoring (NDFC-ND-FACTOR)
NBFC-Factor is a non-deposit taking
NBFC engaged in the principal business Factoring ??
of factoring. The financial assets in the
factoring business should constitute at It is the practice of
discounting receivables to
least 50 percent of its total assets and provide the owner with
its income derived from factoring instant cash. Discounter
takes the risk of collection
business should not be less than 50
of receivable from debtor.
percent of its gross income.
1
Credit Growth (NBFCs vs Commercial Banks)
H
Why exactly are NBFCs becoming favourable ?
Quick and Simpler Better Execution of Infrastructure Lending
lending procedure Digital Technology continues to be strong
Apart from lending to big NBFcs use artificial NBFC’s have an exposure of
customers, NBFCs also intelligence, pattern analysis, Rs 2.2 trillion of the Rs 4
offer smaller loans. These and predictive intelligence to trillion developer market.
small loans are hugely study the repayment NBFCs and HFCs can afford
demanded by middle behaviour of potential riskier loan books than
consumers, who prefer customers. These have banks.
making smaller purchases. helped to reduce the NPA’s
borne by the NBFCs
Operational Incentive
Conventionally, NBFCs avail

50% funds as market
borrowing and the rest 50%
they acquire from banks. This
kind of practice makes funds
cheaper for them
Trend in NP ratio - end of FY17

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Non-Banking Financial Companies

And all there is to know about them

● Any institution whose “PRINCIPAL BUSINESS” is that of agriculture activity, industrial

● obtaining a certificate of registration from RBI

● Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with

i. NBFC cannot accept Demand deposits

2. Non Deposit Accepting 3. Loan

Non Deposit taking NBFC with 6. Infra - Debt

● II. Investment Company (IC) : IC means any company which is a financial

● Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged

60% of Total Assets in Financing Financing Real/Physical

50% of Total Assets in

Loan Company(LC) Company(LC) 50% of Total Assets in Lending

IFC means a non‐banking banking Acceptance of public deposit not

Conventionally, NBFCs avail

Trend in NP ratio - end of FY17

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