Non-Banking Finance Company – Gateway to Finance Business in India
Introduction
Non-Banking Financial Company (NBFC) is a gateway for finance business in India. There are two types of NBFC as per licensing policy:
On regulator perspective, again as per the existing structure we can observe around 58 NBFCs, as deposit taking and rest around more than ten thousand NBFCs are non-deposit taking. Further, entire NBFC segment is divided into segments - systematically important and non-systematically important. Any NBFC with assets size of INR 500 Crore or more is termed as Systematically Important. Other than this, special provision and attention is given to all those NBFCs, which have assets size of INR 100 Crore or more.
“Any NBFC with assets size of INR 500 crore or more is termed as Systematically Important.”
Beyond this, again NBFC is further categorised into special category as per its main nature of activities like Investment and Credit Company (ICC), Infrastructure Finance Company (IFC), Infrastructure Debt Fund (IDF), Micro Finance Institution (MFI), Factors, Core Investment Company (CIC), Mortgage Guarantee Company (MGC), Non-operative Financial Holding Company (NOFHC) and Assets Reconstruction Company (ARC).
As part of the process of transferring the regulations of HFCs from the National Housing Bank to the central bank, now the Housing Finance Companies (HFCs) also come under the purview of NBFCs. To cater the market developments and interest of stakeholders in this segment, Reserve Bank of India has further added two categories for NBFC portfolio i.e., Peer to Peer Lending (P2P) and Account Aggregator (AA).
Simplifying the category
a) Investment and Credit Company (ICC)
It is a new amalgamated form of existing - Loan Company (LC), Assets Finance Company (AFC) and Investment Company (ICC). The category came into effect through notification dated 22nd February, 2019 [https://rbi.org.in/scripts/FS_Notification.aspx?Id=11483&fn=14&Mode=0]. It allows ICC with scope of all three functions collectively in one place, be it lending or investment activities or economic productivity related assets finance unlike earlier three different categories. It requires net owned fund of INR 2 crore to start with.
b) Infrastructure Finance Company (IFC)
IFC is a form of NBFC dealing with financing the Infrastructure Project. It shall deploy at least 75% of its total assets in infrastructure loans. It requires net owned fund of INR 300 crore to begin with.
c) Infrastructure Debt Fund (IDF)
It is a NBFC company to facilitate the flow of long-term debt into infrastructure projects. It can raise the resources through issue of Rupee or Dollar denominated bond of minimum 5 years maturity. However, only infrastructure finance companies can sponsor of IDF.
d) Micro Finance Institution (MFI)
It is a NBFC with specific guidelines and instruction on lending business, termed as Qualifying Assets. To remain as MFI, it shall maintain 85% of its business under Qualifying Assets category. Qualifying assets are - the total advances/loan given to client following certain criteria set by Reserve Bank of India.
e) Factor
It is a NBFC engaged in the principal business of factoring. It is guided from Factoring Regulation Act, 2011. Factoring refers the business of acquisition of receivables of assignor, whether by way of making loans or advances or otherwise against the security interest over any receivables.
f) Core Investment Company (CIC)
Any NBFC with assets size of INR 100 Crore or more, subject to its major business vertical being acquisition of shares and securities with conditions given by Reserve Bank of India, is termed and defined as Core Investment Company. 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.
“Any NBFC with assets size of INR 100 crore or more, subject to its major business vertical being acquisition of shares and securities with conditions given by Reserve Bank of India, is termed and defined as Core Investment Company.”
g) Mortgage Guarantee Companies (MGC)
It is also a kind of NBFC wherein at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business, with requirement of minimum net owned fund INR 100 crore. Mortgage guarantee business is a credit default guarantee taken by mortgage lender against borrower’s payment defaults.
h) Non-operative Financial Holding Company (NOFHC)
It is a NBFC, which permits the promoter/promoter groups to set up a new bank. It is a wholly owned non-operative financial holding company, which will hold the bank as well as all other financial services companies regulated by Reserve Bank of India or other financial sector regulators.
i) Assets Reconstruction Company (ARC)
It is a NBFC company with principal business of buying non-performing assets of bank at mutually agreed value and attempts to recover the debts or associated securities by itself. The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002) is principal act to governed this nature of business and licensed by Reserve Bank of India on par as NBFC.
j) Housing Finance Company (HFC)
It is a NBFC with major business of carrying financing of acquisition or construction of house. Earlier it was licensed from National Housing Bank, however, the same is retrenched and is again licensed by Reserve Bank of India.
k) Peer to Peer Lending (P2P)
It is also a form of NBFC but the business model is completely reverse in comparison to traditional NBFC, as discussed above. In fact, it is a technology platform provider, which on boards both the borrower and the lender - on approved policy and methodology; and matches the needy with provider of funds, serving the tripartite agreement, in between parties on this. In this model, platform is not providing any loan/advance in fact the system participant on suo moto making transaction, therefore, P2P lending platform is regularised and supervised as NBFC from regulator perspective.
l) Account Aggregator (AA)
It is an aggregation of financial information of business, as registered with Reserve Bank of India as Account Aggregator, a form of NBFC. The financial information user, financial information provider and applicant have single connecting platform termed as account aggregator that facilitates financial information holder - to speed up and scale the business technology, digitally.
Registered Market Player in NBFC Vertical
I. Statistically:
As on date, the registered market player in this NBFC vertical numerically seen as below:
| S. No | Category | Number | Data as on | Reference |
|---|---|---|---|---|
| 1. | Investment and Credit Company (ICC) | 9327 | 31st Jan, 2021 | NTC Finance Pvt Ltd Smart Prism Fincap Pvt Ltd |
| 2. | Infrastructure Finance Company (IFC) | 9 | 31st Jan, 2021 | Tata Cleantech Capital Limited Indian Railway Finance Corporation Limited |
| 3. | Infrastructure Debt Fund (IDF) | 4 | 31st Jan, 2021 | India Infradebt Limited Kotak Infrastructure Debt Fund Limited |
| 4. | Micro Finance Institution (MFI) | 94 | 31st Jan, 2021 | Asirvad Micro Finance Limited M Power Micro Finance Private Limited |
| 5. | Factors | 7 | 31st Jan, 2021 | India Factoring & Finance Solutions Pvt Ltd Pinnacle Capital Solutions Pvt Ltd |
| 6. | Core Investment Company (CIC) | 64 | 31st Jan, 2021 | GMR Airports Limited Tata Capital Limited |
| 7. | Mortgage Guarantee Company (MGC) | No entity list published on Reserve Bank of India public domain, but 1 Company i.e. India Mortgage Guarantee Corporation Private Limited is in Market for this nature of business | ||
| 8. | Non-operative Financial Holding Company (NOFHC) | No list is published by Reserve Bank of India on this category at public domain | ||
| 9. | Assets Reconstruction Company (ARC) | 28 | 31st Jan, 2021 | Indiabulls Asset Reconstruction Private Limited Encore Assets Reconstruction Company Private Limited |
| 10. | Housing Finance Company (HFC)@ | 17 | 11 has abstract authority to accept the Public Deposit and balance 6 need to take prior approval | LIC Housing Finance Limited PNB Housing Finance Limited L & T Housing Finance Limited |
| 11. | Housing Finance Company (HFC)# | 85 | Non-Deposit Taking | Magma Housing Finance Limited Tata Capital Housing Finance Limited Fullerton India Home Finance Company Limited |
| 12. | Peer to Peer Lending (P2P) | 21 | 31st Jan, 2021 | Etyacol Technologies Private Limited “Cashkumar” Bigwin Infotech Private Limited “Paisa Dukan” |
| 13. | Account Aggregator (AA) | 4 | 31st Jan, 2021 | Finsec AA Solutions Pvt Ltd NESL Assets Data Limited |
| S. No | Particulars | Number |
|---|---|---|
| 1. | NBFCs holding Certificate of Registration (CoR) for accepting Public Deposits as on 31st Jan, 2021 Example: a) Fullerton India Credit Company Limited, b) Shriram Transport Finance Company Limited, c) Bajaj Finance Limited, d) The Delhi Safe Deposit Company Limited | 58 |
| 2. | Non-Deposit Taking NBFC Systematically Important (NBFC-ND-SI) as on 31st Jan, 2021 Example: a) Adani Capital Private Limited, b) Aditya Birla Finance Limited, c) MAS Financial Services Limited, d) Unimoni Financial Services Limited | 292 |
| 3. | Non-Deposit Taking NBFC Non-Systematically Important (NBFC-ND-NSI) as on 31st Jan, 2021 Example: a) Downtown Finance Private Limited, b) Punjab Lease Financing Limited, c) Deccan Credit & Investment Private Limited, d) DFL Finance Limited | 9123 |
II. Graphically: NBFC Composition in India
Overview of Sectoral Share:
The data above gives a clear insight as it shows Investment and Credit Company (ICC) as the most popular product among entrepreneurs. An ICC carries on its principal business – asset finance, i.e., financing the assests involved in economic activities; investment in shares and other securities; lending the advances/loan to a needy person or an entity in market, based on its best credit assessment methodology adopted by the Board.
“ICC is category formed after harmonisation of Investment Company (IC), Assets Finance Company (AFC) and Loan Company (LC).”
Other reason to have huge number of ICC in the market is due to the investment commitment of INR 2 crores as Net Owned Fund, which is comparatively lesser than the other category registration.
Market Scenario
NBFC segment is a very vital player in Indian Banking and Financial Service Industry serving the unbanked and underbanked individuals and entities to boost ease of speedy and convenient credit facilities. The segment aims at reaching out to every nook and corner of the country to serve the stakeholders with affordable credit facilities. RBI also acknowledges the importance of meeting the stakeholders’ requirements of funds. Latest report on market contribution, share and return on this portfolio from the Regulator would show the potential of the segment. However, according to some report from private entities, there lies huge potential and growth in this segment.
NBFC idea was conceptualised in year 1964 - from Reserve Bank of India Act, 1934 amendment, but still except few, most of NBFCs are underdog performer or family based financial institution camp. Moreover, currently, the same has been coming up with better innovative idea and visibility considering the financial inclusion ambition of Reserve Bank of India. In comparison to earlier times, now NBFC is active and well contributor on market credit supply. Similarly, the regulator has opened various doors of opportunity to existing NBFC for its scaling either its adoption of Information Technology mandatorily by registered entity or tie-up with Bank for co-lending model recently.
Developments
Recently Regulator Reserve Bank of India has made several developments focusing on NBFC sector be it its–
- a) Relief Package: Government of India has provided COVID-19 relief package to pass it on to the end users for the finance provided by NBFCs.
- b) Inclusion in Priority Lending: Further, the Finance Minister has announced to include NBFC on priority segment of lending to Banks. In fact, it helps NBFCs to raise Banking Fund to operate its business with no as such liquidity crunch. It shows the importance and market coverage of NBFC in Banking and Financial Service Industry of India.
- c) Offering NBFC to Open Up Bank: Over and above it, Government of India through Reserve Bank of India is making statement to come forward and open Bank to all the existing NBFCs, on the selection criteria set by Expert Advisory Committee. Reserve Bank of India has observed around 50 NBFCs across India, similar to Banks in terms of Assets Size and Capital Requirement.
- d) Co-Lending Model with Banks: Recently the Reserve Bank of India, revised the co-lending model allowability to all NBFCs in the market, whereas earlier it was restricted to systematically important NBFCs only. It means, earlier NBFCs, which had assets size of INR 500 crore or more could do co-lending business with Banks, but now it is open for all. New window is open for NBFCs to expand the working skills and size of business, which is welcome step of Reserve Bank of India.
- e) Revision of Regulatory Framework: Recent important development to note is - the proposed revision of regulatory framework for NBFC, wherein the entry-level net owned fund is revised to INR 20 crore in place of existing INR 2 crore. The step is to make entry level stringent. The proposed revised regulatory framework is with RBI for discussions and finalisation. Therefore, as per existing framework, the entry level net owned fund requirement is INR 2 crore. The link of proposed revised regulatory framework notification is https://rbi.org.in/scripts/FS_PressRelease.aspx?prid=51011&fn=14.
Scaling Business to Next Level
The next stage discussed in following points:
a) Planning to enter into Finance Business
This category of people or corporate are in planning stage and accordingly, keeping the view of Regulator can plan the registration process with RBI. As the title of this article suggests -NBFC is gateway of Finance Business in India- one can get basic learning idea on NBFCs – type, category and ancillary aspects of conclusively this portfolio. Only corporate, having valid certificate of registration issued by Reserve Bank of India, can-engage in finance business.
b) Already with NBFC Business
Existing NBFCs have equal challenges and opportunities. Challenges in terms of “Proposed Revised Regulatory Framework” and “Ongoing Pandemic Business Scenario”, and Opportunities in the form of “Planning for securing Bank license that of universal bank preferably, else that of small finance bank”.
Organisations, today, are struggling due to Covid-19 pandemic. Those, which are able to survive, seem to have already planned their survival mechanism. Going forward, such organisations need to make use of proposed regulatory framework, as and when it is implemented. With these two aspects strongly in hold, organisations should target to scale their businesses to next level. Such organisations can plan to apply for getting the license of Small Finance Bank or Universal Bank as the case may be.
“It is always a welcome move to promote an eligible market player either in Universal Bank or in Small Finance Bank, subject to fulfilment of criteria mention on licensing guidelines of Reserve Bank of India.”
Conclusion
Finance Businesses are promising as always. Tried and tested thereon; subject to growth, revenue and returns of investment. So many international market players are entering into this untapped market through its traditional NBFC business or modern technology based NBFC. The hundred per cent allowability of Foreign Direct Investment on financial intermediaries’ services is intended to call international players, so that the competition of market increases. In nutshell, consumer benefits and choices have increased and overall financial inclusion programme of RBI is progressing.
“It is always a welcome move to promote an eligible market player either in Universal Bank or in Small Finance Bank, subject to fulfilment of criteria mention on licensing guidelines of Reserve Bank of India.”