Non-Banking Financial Company (NBFC)

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WHAT IS NON-BANKING FINANCIAL COMPANY( NBFC) ?

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What is Non-Banking Financial Company (NBFC)

• 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/secu
  rities 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/construct
  ion of immovable property.
• 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 also a non-banking financial
  company which is known as Residuary non-banking
  company.

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WHAT ARE THE DIFFERENT TYPES AND CATEGORIES OF
NBFC REGISTERED WITH RBI
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NBFC
1. Asset Finance Company (AFC)
4. Infrastructure Finance Company
2. Investment Company (IC)
3. Loan Company (LC)
5. Systemically Important Core Investment Company
7. Micro Finance Institution 
6. Infrastructure Debt Fund
8. NBFC-Factors
9. Mortgage Guarantee Companies
10. NBFC- Non-Operative Financial Holding Company
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NBFC REGISTRATION

• As per Section 45-IA of the RBI Act, 1934, no
  company can commence or carry on business of a
  non-banking financial institution
• without obtaining a certificate of registration
  and without having a Net Owned Funds of Rs. 200
  lakhs.
• Net owned funds is the balance of owned funds
  minus the amount of investment in shares of
  subsidiaries, companies in the same group and all
  other NBFCs, book value of debentures, bonds,
  outstanding loans and advances including hire
  purchase and lease finance made to and deposits
  with subsidiaries and companies in the same
  group.
• Owned funds is the aggregate of paid-up equity
  capital , preference shares which are
  compulsorily convertible into equity, free
  reserves , balance in share premium account and
  capital reserves representing surplus arising out
  of sale proceeds of asset, excluding reserves
  created by revaluation of asset, after deducting
  therefrom accumulated balance of loss, deferred
  revenue expenditure and other intangible assets.
• Application for becoming an NBFC must be made in
  the requisite form to Regional Office of the
  Reserve Bank of India.

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• Loan Company.
• Investment Company.
• Equipment Leasing Company.
• Hire purchase Finance Company.
• Residuary Non- Banking company.

Registered and Regulated by RBI

• Mutual Benefit finance Company.(Notified Nidhis)
• Mutual Benefit Companys ( Potential Nidhis)
• Miscellaneous Non- Banking Company. (Chit Funds)

NBFC
Not Registered and regulated by RBI but RBI
issues directions relating to deposit acceptance
activity.

• Insurance Company.
• Stock Exchange, stock brokers, merchant banking
  company.
• Housing finance company.
• Micro Finance Company.

Exemptions from RBI regulations including
requirement of registration.
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BUSINESS WHICH CANNOT BE REGISTERED AS NBFC

• Following businesses cannot be registered as
  NBFC
• Any institution whose principle business is of
  agriculture.
• Or any business who is engaged in industrial
  activity.
• Or any institution which is engaged in purchase
  or sale of any goods (other than securities).
• Or which is providing any services.
• Or which is engaged in sale/purchase/construction
  of immovable property.
• Or any company whose principle business is
  receiving deposits under any scheme or
  arrangement in one lump-sum or in instalments by
  way of contributions or in any other manner.

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REASON WHY FORMATION OF NBFC BECAME AN INTEGRAL
PART OF THE SOCIETY
They complemented the Banking Sector in reaching
out credit to the unbanked sector of the society
i.e. micro, small, medium enterprises. They have
a sector specific expertise that allows them to
have edge over there competitors. Less
time-consuming process of registration of NBFC.
Their ground-level understanding of their
clients credit needs. Low cost of establishing
the NBFC as compared to other financial
institutions. They provide support for
economically weaker sections of the
society. They play a critical role in
development of infrastructure, transport and
employment generation.
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CLASSIFICATION OF NBFCs BASED ON ACTIVITIES
UNDERTAKEN FY 2017-18
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CLASSIFICATION OF NBFCs BASED ON ACTIVITIES
UNDERTAKEN FY 2017-18
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FUTURE OF NBFC IN INDIA
FUTURE OF NBFC IN INDIA
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FUTURE OF NBFC IN INDIA
With the ongoing stress on Public Sector Banks
due to increase in bad debts, their ability to
lend is deteriorating their demand and providing
an opportunity to NBFC to increase their
presence. The success of NBFC can be seen by
their effective risk management capability, wider
reach to the clients, control over the bad debts,
better and understanding of the customer segment.
The latent credit demand of emerging India will
allow NBFCs to fill the gap especially where
traditional banks are unable to serve.
Additionally to improve micro-economic
conditions, high credit penetration, increase in
consumption will allow NBFCs to grow at a
healthy rate. As per the report of the CAGR it
has been estimated that NBFCs will grow at the
rate of 25-33 over the next five years.
Strong urban demand, high credit penetration,
will drive the growth in consumer finance
segment. Partnership with Payment Banks, Bill
payment provider and other financial institutions
such as insurance and asset management companies
will help in their growth. With the reach of NBFC
with the strong understanding of the market will
them in proving themselves to be a better
alternative as compared to traditional ways of
banks. The number of start-ups in India has
grown significantly from merely 2 in 2013 to 40
in 2017. These firm either operate as NBFCs
/intermediaries for banks and NBFCs or P2P
lending marketplace for connecting the individual
borrowers and lenders directly. Rapid increase
in the number of customers over the past few
years, speed, simplicity, convenience and timely
credit to borrowers which are regarded as
ineligible as per the Bank criteria has increased
the demand of NBFC. The growing importance of
NBFC segment in Indian Financial system has led
to a change the framework of NBFC on continuous
basis. The regulations of NBFC has gone through a
cyclical phase from simplified regulations to
stringent regulations and finally now towards
rationalisation.
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DIFFERENCE BETWEEN NBFCs AND BANKS
BANKS
NBFC

• NBFCs cannot accept demand deposit.
• NBFCs cannot issue drawn cheque on itself.
• Deposits done with NBFCs are not insured.
• Controls over NBFCs are relatively lesser
  stringent.

• A Bank can accept demand deposit.
• A Bank can issue drawn cheque on itself.
• Deposits done in Banks are insured by Deposit
  Insurance and Credit Guarantee Corporation.
• BR Acts and RBI Acts lay down stringent control
  over Banks.

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WHAT IS NBFC TAKEOVER?
What is Takeover?

• The term takeover can be defined as to purchase
  of one company by the other company. The takeover
  can take place only when the two of the companies
  are already registered. In this process two
  companies are involved i.e.
• Target company.
• Acquirer Company.

Acquirer Company Acquirer Company is said to be
that company which is acquiring the target
company.
Target Company Target Company is the company
which is being targeted to be acquired by the
other company which is already existing.
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TAKEOVER CAN BE DONE IN 2 WAYS
Friendly takeover friendly takeover as the
name insists is the takeover which takes place
between the companies with their mutual consent.
Acquirer Company gives offer to the target
company for being acquired and the same offer is
being accepted by the target company and the
process of takeover take place.
Hostile Takeover Hostile takeover is totally
different from friendly takeover. In this process
the acquirer company secretly tries to acquire
the acquirer company. Generally this kind of
takeover takes place only when the management of
the acquirer company is not willing to accept the
offer of takeover.
What is NBFC Takeover?
Likewise, takeover of any other company takeover
of NBFC can also take place. All the rules and
regulations regarding the takeover of NBFC is
governed regulated by Reserve Bank of India. In
simple words takeover can be said to be takeover
of NBFC when any other NBFC acquires the other
NBFC. Similarly it can also be done in two
different ways i.e. friendly takeover and hostile
takeover.

• CONS
• The amount paid for goodwill is often less as
  compared to its actual price.
• Conflict in new management.
• Cultural clashes in two companies.
• Reduce of employees morale.
• Hidden liabilities of Target Company.

• PROS
• Increase in profitability of Target Company.
• Decrease in competition.
• Increase in sales/revenue.
• Expansion in distribution network.
• Economies of scale.

Pros and Cons of Takeover
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RBI REGULATIONS REGARDING TAKEOVER OF NBFC

• The RBI has specified some norms when takeover
  takes place which are required to be followed by
  NBFCs and they are
•  Takeover or acquisition of any NBFC requires the
  prior approval of RBI whether there is change in
  management or not.
• The approval taken from RBI should be a written
  approval.
• If on acquisition there is a transfer on
  shareholding for more than 10 of NBFC then prior
  approval of RBI will be required.
• If there is change in shareholding for more than
  26 for the reason of buyback/reduction in share
  capital then no approval of RBI is required, but
  this reduction/buyback should have been approved
  by the competent authority.
• If there is change in the directors of the
  company i.e. more than 30 change is taking place
  in directors then the prior written approval
  shall be required.
• Any change in director of the company requires a
  prior public notice is at least 30 days prior to
  the announcement of such change.

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GOLD LOAN BY NBFC
As the NBFC is being regulated by the Reserve
Bank of India. The Reserve Bank of India has now
provided a stringent guideline for NBFC for
governing the loan provided by these NBFC against
the Gold Jewellery. These guidelines will be
helpful in bringing transparency between the
Lenders and borrowers. Views of Industry
Experts Industry Experts are of the view that
it will be more beneficial if the borrowers
borrow the money from Banks rather than borrowing
from Non-Banking Financial Intuitions. As gold
loan companies. As the Banks provide gold loan at
the rate of 12-16 but the interest rate provided
by NBFCs are 20-26 which is much higher than
the rate provided by the Banks.
As on 17th March, 2017 RBI in consultation with
the Income Tax Department has clarified that No
NBFC shall be allowed to give more than ?
20,000/- as a loan against the gold. Earlier this
limit was of ?1, 00,000 but now this limit has
been reduced to ? 20,000. The main aim behind
reducing this threshold limit is to make the
economy cashless and more focus should be paid on
digital payment.
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RBI GUIDELINES

• NBFC before opening branch for more than 1000
  should take prior approval of Central Bank.
• And if any existing NBFC which is already in
  existence and having more than 1000 branches
  shall take prior approval of RBI before opening
  any further branches.
• NBFCs should have a proper security system for
  the pledged golds of the customers, if no proper
  security systems have been made no further
  branches can be opened.
• In case if the pledged gold is more than 20 grams
  by a single owner at once or on cumulative basis
  then the NBFC is required to keep records of
  owner verification.
• NBFCs cannot give misleading advertisements.
• RBI stated that NBFC cannot allow loan for more
  than 60 of the gold value pledged with the NBFC.

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FOREIGN DIRECT INVESTMENT IN NBFC
EVOLUTION OF FDI
In 1997, guidelines were introduced for
permitting foreign investment in the nonbanking
financial services sector under FIPB approval
route including norms subject to compliance with
minimum capitalization requirement ranging from
USD 5 million to USD 60 million based on
percentage of foreign investment. However, the
same was introduced only as a new sector
classification without specific list of business
activities covered therein. Subsequently, the
Government prescribed the list of 14 activities
that would be covered under the said non-banking
financial services sector. In the year 2000, a
paradigm shift occurred in the FDI policy regime,
wherein, except for a negative list, all the
remaining activities were placed under the
automatic route and caps were also gradually
raised in a number of sectors / activities.
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Extant FDI Regulatory Framework For NBFCs

• Fund based activities
• Merchant Banking
• Underwriting
• Portfolio Management Services.
• Stock Broking.
• Asset Management.
• Venture Capital.
• Custodian Services.
• Factoring.
• Leasing Finance.
• Housing Finance.
• Credit Card Business.
• Micro Credit .
• Rural Credit

• Non-fund based activities
• Investment Advisory Services.
• Financial Consultancy.
• Forex Broking .
• Credit Rating Agencies.
• Money Changing Business

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COMPLIANCES BY NBFC
Transparency
Regulations
Policies
Rules
COMPLIANCES
Law
Requirements
Standards
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Annual Compliances
1. Unaudited March Monthly Return - On or before
30th June.
2. Audited March Monthly Return - Upon completion.
3. Statutory Auditor Certificate on Income
Assets - On or before 30th June.
4. Information about Company having FDI/Foreign
Funds - On or before 30th June.
5. Resolution for non-acceptance of Deposit Fund
- Before commencement of new financial year.
6. File Annual Audited Balance Sheet and PL
Account - One month from the date of sign off.
7. Declaration from the Auditors to act as
Auditor of the Company - Annual basis.
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Monthly Compliances
Monthly Return - By 7th of every month.
Periodical Compliances

• Appointment of the Director - Within 30 days of
  appointment of the Director.
• 2. Resignation of the Director - Within 30 days
  of resignation of the Director.
• 3. Adoption of any notification in the ensuing
  Board Meeting filing the certified copy with
  RBI.