NBFCs in the MBA 3rd sem finance specialization

1. NON BANKING FINANCIAL
INSTITUTIONS

2. Meaning of NBFCs
• The non-banking financial institutions are
the organizations that facilitate bank-related
financial services to customers but does not
have banking licenses.
• They are involved in activities such as
lending, investing, trading in securities,
asset management, and various other
financial activities.
• It is a company registered under the
companies Act, 1956. It is governed by the
directions issued by Reserve Bank of India

3. Why are they Formed?
• NBFCs in India have progressed from simpler restrictions to rigorous
and broad regulations and toward rationalization by the recently
amended NBFC regulatory framework. Given these high levels of
regulation, NBFCs have emerged as favored choices for meeting
lending demands, as their cheap cost of operations gives them an
advantage over banks.
• During the first stages of their development, this business of
financing was regulated by the Companies Act. At that time a
need was felt that due to the unique and complex nature of
operations and also financial companies acting as financial
intermediaries, there should be a separate regulatory
mechanism

4. Services offered by NBFCs
• Loans and Advances:
• Currency Exchange.
• Retirement Planning.
• Money Markets.
• Insurance Business.
• Chit Business.
• Money Transfer Services

5. Registration / Working of NBFCs
• Incorporate the Company
The first step is to register a public or private limited company under the
Companies Act, with the Ministry of Corporate Affairs (MCA). Obtain a
Certificate of Incorporation and ensure that the company’s main business
objective is to carry out financial activities.
• Meet the Minimum Net Owned Fund (NOF) Requirement
Ensure that the company has a minimum NOF of INR 2 crore (or as per the
latest RBI guidelines). The NOF includes paid-up equity capital and free
reserves, minus accumulated losses and intangible assets.
• Prepare a Detailed Business Plan
Develop a comprehensive business plan outlining the proposed NBFC’s
operations, target market, financial projections, and management team. This
will be required during the application process with the Reserve Bank of
India (RBI).

6. 1. Submit the Application to RBI.
To submit an application for registration as a Non-Banking Financial
Company (NBFC) with the Reserve Bank of India (RBI), you need to
follow a detailed process and provide several required documents.
2. Create an account on the RBI’s online portal: Visit the RBI’s
COSMOS website (https://cosmos.rbi.org.in) and create an account for
your company.
3. Fill out the application form: Log in to your account and fill out the
online application form (Form NBS-1) with the required information
about your company and its directors.

7. • Upload the required documents: After completing the online application
form, you need to upload the following documents:
• Certified copies of Certificate of Incorporation and Certificate of
Commencement of Business.
• Memorandum and Articles of Association (MOA and AOA).
• Board resolution confirming the decision to start an NBFC business.
• Documents related to the company’s directors, such as DIN, DSC, PAN, and
KYC (including identity proof, address proof, and photographs).
• Audited financial statements and Income Tax Returns for the past three
years (if applicable).
• Detailed business plan.
• Banker’s report regarding the company’s Net Owned Fund (NOF), credit
facilities availed, and conduct of the account.
• Any other documents as required by the RBI.

8. 4. Submit the physical copy of the application: After submitting the
online application and uploading the documents, you need to send a
physical copy of the application along with the required documents to
the Regional Office of the RBI.
5. Payment of application fees: The RBI may require the payment of
application fees. You’ll need to pay the fees as per the RBI’s guidelines

9. Principal Business/ Types of NBFCs
• Asset Finance Company (AFC) :Primarily finances physical assets
like machinery, equipment, vehicles, etc...
• Loan Company: Provides loans and advances, including personal
loans, business loans, and consumer loans.
• Investment Company: Invests in various financial assets like shares,
stocks, debentures, and bonds.
• Infrastructure Finance Company (IFC):Provides long-term finance
for infrastructure projects.
• Infrastructure Debt Fund: Raises resources to finance infrastructure
projects through issuing bonds.

10. • Housing Finance Company:
Housing finance companies have mention housing finance as the main
clause in its main memorandum of association. NBFC’s have
complemented commercials bank in providing mid-term capital loans to
individual or firms; their flexibility and less stringent regulation provide
them competing for an edge over commercial banks.
• Micro Finance Company:
There are many microfinance companies in India, which play some
crucial role in the development of India. Microfinance companies are
those financial institutions that offer small-scale financial services in the
form of credit and savings, to the poor in rural, semi-urban areas.

11. • Residuary Non-Banking Company(RNBC):
Co., which receives any deposit under any scheme or arrangement, by
whatever name called, in one lumpsum or in instalments by way of
contribution or subscription.
• Nidhis or Mutual Benefit Finance company( MBFC):
It receives deposits from its member and lends only to members against
tangible securities. Loans are given for marriages, redemption of old
debts for the construction, and repairs of houses.

12. Regulatory Structure of NBFCs
• Regulatory structure for NBFCs shall comprise of four layers based on their size,
activity, and perceived riskiness. NBFCs in the lowest layer shall be known as
NBFC - Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be
known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-
UL) respectively. The Top Layer is ideally expected to be empty and will be
known as NBFC - Top Layer (NBFC-TL).
1. Base Layer
The Base Layer shall comprise of
(a) non-deposit taking NBFCs below the asset size of ₹1000 crore.
(b) NBFCs undertaking the following activities- (i) NBFC-Peer to Peer Lending
Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-
Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing
public funds and not having any customer interface.

13. 2. Middle Layer
The Middle Layer shall consist of
a. all deposit taking NBFCs (NBFC-Ds), irrespective of asset size.
b. non-deposit taking NBFCs with asset size of ₹1000 crore and above.
c. NBFCs undertaking the following activities (i) Standalone Primary Dealers
(SPDs), (ii) Infrastructure Debt Fund - Non-Banking Financial Companies (IDF-
NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies
(HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs).
4. Upper Layer
Upper Layer shall comprise of those NBFCs which are specifically identified by the
Reserve Bank as warranting enhanced regulatory requirement based on a set of
parameters and scoring methodology as provided in the Appendix to this circular.
The top ten eligible NBFCs in terms of their asset size shall always reside in the
upper layer, irrespective of any other factor,

14. 5. Top Layer
The Top Layer will ideally remain empty. This layer can get populated if the
Reserve Bank is of the opinion that there is a substantial increase in the potential
systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to
the Top Layer from the Upper Layer.

15. Supervision of NBFCs
• Regulatory Authority: In most countries, NBFCs are regulated and
supervised by a dedicated regulatory authority. For example, in
India, the Reserve Bank of India (RBI) is responsible for regulating
and supervising NBFCs. In the United States, the Federal Reserve,
the Securities and Exchange Commission (SEC), and other agencies
may have oversight depending on the activities of the NBFC.
• Licensing and Registration: NBFCs are required to obtain licenses
or registrations from the regulatory authority before commencing
operations. This ensures that only credible and financially sound
entities are allowed to operate in the financial system.

16. • Reporting and Disclosure Requirements: NBFCs are usually
required to regularly submit financial reports, regulatory filings, and
disclosures to the regulatory authority. This helps the regulator to
monitor their financial health and compliance with regulations
• On-site Inspections and Off-site Surveillance: Regulatory
authorities conduct on-site inspections of NBFCs to assess their
operations, risk management practices, and compliance with
regulations. Off-site surveillance involves continuous monitoring of
NBFCs through data analysis, market intelligence, and risk
assessments.
• Prudential Regulations: Regulatory authorities impose
prudential regulations on NBFCs to ensure their financial
soundness and stability. These regulations may include capital
adequacy requirements, asset quality norms, liquidity
requirements, and restrictions

17. RBI Measures
1. Legal Requirements of NBFCs.
• It is necessary that every NBFC should be registered with RBI:
• No One can requirements for registration with RBI:
• There is ceiling on Acceptance of Public Deposits:
• Rate of Interest and Period of Deposit which NBFCs can Accept is too
low.
• NBFCs Regulations which the Depositors may Note at the Times of
Investment.
• A Depositors should bear some Aspects in mind, While depositing
money with NBFCs
• Rating of NBFCs is necessary before it accepts deposit.

18. 2. Regulatory provisions for NBFCs
• NBFCs have to maintain 10 and 15 percent of their deposits in liquid assets
effective from January 1 and April 1, 1988 respectively.
• They have to create reserve fund and transfer not less than 20 percent of
their net deposits to it every year.
• The Rbi can now direct them on issues of disclosures, prudential norms,
credit, investment etc.,
• Nomination facility is now made available to depositors of these companies
• Application for loans and their processing:
• Loan Appraisal and Terms/Conditions:
• Disbursement of Loans including changes in terms and conditions
• Know your customers’ standards

19. Guidelines on Fair practices Code for NBFCs
• Application for loans and their processing:
• Loan Appraisal and Terms/Conditions:
• Disbursement of Loans including changes in terms and conditions
• Know your customers’ standards
• Customer Acceptance Policy(CAP)
• Customer Identification Procedure(CIP)
• Monitoring of transactions
• Risk Management
• Customer Education

20. RBI’s prudential Norms for NBFCs
• Income Recognition
• Income from Investment
• Accounting standard
• Accounting for Investments
• Asset classification
• Provision Requirement
• Capital Adequacy Requirement

21. Other/SEBI Measures
• Constitution of audit Committee
• Constitution of Nomination Committee
• Constitution of Risk management Committee
• Disclosure and Transparency.
• Connected Lending
• Corporate Governance