Decoding NBFCs and impact of RBI norms

NBFC- Non Banking Financial Companies are financial institutions which offer all kinds of banking services but do not hold a license for being a bank. A NBFC is registered under the Companies Act, 1956. Banking services like loans and credit facilities, hire purchase, insurance, money markets, underwriting, merger activities, etc can be performed by them. Hence, NBFCs perform functions similar to a bank.
 
So, what is the difference between a Bank and a NBFC? One major difference between a bank and a NBFC is that a NBFC cannot accept demand deposits. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
 
As per the RBI Act, 1934, no Non-banking Financial company can carry on the business of a non-banking financial institution without obtaining a certificate of registration from the Bank and without having a Net Owned Funds of Rs. 2 crore. However, certain NBFCs like 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 under the Companies Act, 1956, Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company are exempted from the requirement of registration with RBI.
 
There are a number of categories of NBFCs registered with RBI (reference: RBI website):
i. Asset Finance Company (AFC) : An AFC is a company which is a financial institution that finances  physical assets supporting productive/ economic activity, such as automobiles, tractors, lathe machines, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business is the aggregate of financing real/physical assets supporting economic activity.
 
ii.Investment Company (IC): IC is a financial institution which carries on the acquisition of securities as its key business,
 
iii.Loan Company (LC) : LC is a financial institution that carries on the providing of finance as its principal business, whether by making loans or advances or otherwise but does not include an Asset Finance Company.
 
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 Rs. 300 crore, c) has a minimum credit rating of ‘A’ or equivalent and d) a CRAR 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;
b. its investments in the equity shares 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. it does not carry on any other financial activity referred to in 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 Rs 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.
 
vii. 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 Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000;
b.total indebtedness of the borrower does not exceed Rs. 50,000
c. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;
d. loan to be extended without collateral;
e. aggregate amount of loans, given for income generation, is not less than 75 per cent of the total loans given by the MFIs;
f. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
 
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vii. 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.
NBFCs and RBI Norms
NBFCs have played an important role in the financial growth of the Indian economy, especially in terms of financial inclusion. NBFCs (non-banking financial companies) have been more successful than banks in fuelling the rural economy with loans. They have been lot more innovative & have mastered the art of enriching rural India and churning out profits as well. But, NBFCs have always been on the edge of the sword with respect to the regulations by RBI for these financial institutions. The amendments in the regulations for NBFCs have been like whammies on the non-banking financial companies sector which have affected their growth. The amendment to the Companies Act, 2013 almost disoriented the bond markets for NBFCs. 
The RBI’s Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2014, require the NBFCs to obtain prior written approval for all kinds of Merger and Acquisition activities including investments which would transfer rights to the investors.
 
The New M&A norms (ref: RBI)
The RBI has directed all the NBFCs to obtain a prior written permission to carry out the following: 
(i) Any takeover or acquisition of control of an NBFC, whether by acquisition of shares or otherwise;
(ii) Any merger /amalgamation of an NBFC with another entity or any merger / amalgamation of an entity with an NBFC that would give the acquirer / another entity control of the NBFC;
(iii) Any merger/amalgamation of an NBFC with another entity or any merger/ amalgamation of an entity with an NBFC which would result in acquisition/ transfer of shareholding in excess of 10 percent of the paid up capital of the NBFC.
(iv) Approaching the Court or Tribunal under Section 391-394 of the Companies Act, 1956 or Section 230-233 of Companies Act, 2013 seeking order for mergers or amalgamations with other companies or NBFCs.
All NBFCs imply all the NBFCs irrespective of deposit taking or non-deposit taking institution. Earlier directions of 2009 included only the deposit taking institutions. The scope of directions as per the 2014 act is wider. A written permission is required by the NBFCs not only for amalgamation, mergers or takeovers but also for investments which would transfer significant rights to rights to the investors.
Hence, any NBFC listed on any stock exchange will have to follow the SEBI guidelines and the requirements under the Companies Act will have to be met. This will escalate the cost of investment for the NBFCs. The day when these regulations were announced, shares of NBFCs declined. Although RBI wants to ensure a better management of NBFCs but the question arises –
Will these strict regulations bring about a better change in the workings of the NBFCs or will it rally their growth trajectories?
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Decoding NBFCs and impact of RBI norms

by Jnika Tuteja time to read: 6 min
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