Things You Should Know About NBFC (Non-Banking Finance Companies) - cairodock

This time we're going to deal with another very important financial intermediary and that is the     NBFC (Non-Banking Finance Companies). All of you must have heard of NBFC's at many different points of time in your career and life so far some of the NBFC's were in the wrong use for some time but things have settled down now and NBFCs are much more organized a lot.

What are  NBFC (Non-Banking Finance Companies)?

•  Now we'll first begin with the understanding of what are  NBFC (Non-Banking Finance Companies).
•  basically, NBFC (Non-Banking Finance Companies) is a company registered under the Companies Act of 1956.
• they are engaged in the business of loans and advances.
• they are also engaged in the business of acquisition of shares, stock, bonds, higher purchase, insurance business, or even chit business.
•  they do not include any institution whose principal business includes agriculture. 
• let's make it very clear that agricultural companies are not  NBFC (Non-Banking Finance Companies). to that extent those companies whose principal businesses agriculture is not included under the definition of non-banking finance companies.

What do NBFC (Non-Banking Finance Companies) Do?

•  A non-banking finance company is an institution that does not have a full banking license. 
• it is not supervised by a national or international banking Regulatory agency or supervisory agency because NBFCs do not have a full banking license.
•  NBFC facilitates bank-type financial services however although they do not have a full banking license. they do facilitate bank-type financial the financial services suggest investment risk pooling contractual savings and market broking.
•  NBFCs cannot have any industrial activity or sale or purchase or construction of the immovable property.
• NBFC (Non-Banking Finance Companies) cannot have any industrial activity. any company which is engaged in industrial activity is not considered to be an NBFC and they also cannot have a sale or purchase of immovable or purchase or construction of the immovable property. if they do construction of immovable property they cannot be termed as an NBFC (Non-Banking Finance Companies).
• More About NBFC (Non-Banking Finance Companies)
•  NBFC (Non-Banking Finance Companies)y is an institution which is registered under the Companies Act of 1956 and which has its principal business of receiving deposits under any scheme or arrangement or any other manner or lending in any manner is also a non-banking financial company which is called the residuary. 
• NBFC (Non-Banking Finance Companies) cannot accept demand deposits like current or savings accounts, any of NBFCs cannot open Savings Bank accounts, they cannot open current accounts, they can only accept turn deposits what are known as fixed deposits. 
• the Deposit insurance facility of the Deposit Insurance Guaranty Corporation of India DICGC is not available for NBFC deposits unlike in the case of banks.
• in terms of section 45 I a of the RBI Act of 1934, it is mandatory that every non-banking finance company should be registered with RBI. although they do not have a full banking license, all NBFC's must be registered with RBI under section 45 of the RB Act of 1934.

 

 Different types of NBFC (Non-Banking Finance Companies)

1.Equipment Leasing Company

 first of all, they could be an equipment leasing company, a company that leases out equipment to his client in which case the company actually grants alone and that loan is given in the form of a leasing agreement. which means that the company or the NBFC continues to be the owner of that industrial equipment and the borrower only enjoys the leasing rights, he can use it on a day-to-day basis but the owner continues with the NBFC that is what is known as equipment leasing.

2.Higher Purchase Company

 there can also be a higher purchase company the difference between leasing and hire purchase is that while in leasing the ownership of the asset continues with the lender while in case of hire purchase the ownership is actually with the borrower. the ownership is actually with the borrower but the asset is hypothecated and too in favor of the lender and the borrower repays the loan in equated monthly installments .that is the difference between a higher purchase and release. so NBSP can either be a leasing equipment company or can either be an equipment leasing company or a higher purchase company.

3. Loan Company

 NBFC (Non-Banking Finance Companies) could also be merely loan companies. they could just extend loans, they need not do leasing and hire purchase but they can just extend loans and that is also classified as an activity of the non-banking finance companies.

4. Investment Company

NBFC (Non-Banking Finance Companies) can also be investment companies in which case they actually collect money from the public in the form of deposits and invest in the market and give returns to the investors so they are called the investment companies.

 With effect from December 6, 2006, the NBFC (Non-Banking Finance Companies) have been reclassified as the following -

•  Asset Finance Company (AFC) 
•  Investment Company(IC)  
•  Loan company(LC)

Rules Regarding NBFC (Non-Banking Finance Companies)

• All rules concerning the NBFC's are given by the Reserve Bank of India in terms of circulars from time to time and amendments carried out there too from time to time.
• NBFCs that are registered with the Reserve Bank of India should have a minimum net owned funds of rupees 2 Crores. Minimum net owned funds mean that the promoter himself should have brought in his own money of at least two crore rupees however NBFC's are allowed to tap the public issue market also. they can actually go into the market and raise public shares like many finance companies like many NBFC's for example Sundaram finance has issued public issues of shares and their shares are quoted on the Stock Exchange so to that extent NBFC (Non-Banking Finance Companies)should have a minimum net owned funds of at least ₹2,00,00,000.
•  the company is required to submit this application for registration in the prescribed format along with the necessary documents for RBI'S consideration before the NBFC starts this business of either asset financing or equipment leasing or investment companies, they should actually submit an application in the prescribed format along with all the prescribed documents to Reserve Bank of India for consideration, and upon consideration and upon favorable consideration of the application the RBI grants the registration certificate to the NBFC.
•  all NBFC (Non-Banking Finance Companies) are not allowed to access public deposits, rules are governing NBFC (Non-Banking Finance Companies) from accepting public deposits not that of any NBFC (Non-Banking Finance Companies) can go ahead into the market and collect public deposits.
•  only those NBFC's having a valid certificate of registration with the authorization to accept deposits can accept or hold public deposits.  RBI when it gives the registration certificate also clearly states that this NBFC (Non-Banking Finance Companies) can accept public deposits or this NBFC (Non-Banking Finance Companies) cannot accept public deposits so when RBI grants a license and says that it can accept public deposits only such companies are allowed to collect deposits from the members of the public.
• the NNBFC (Non-Banking Finance Companies) accepting public deposits should have a minimum stipulated net owned funds
•  NBFC's cannot accept deposits from NRIs except by debit to the NRO accounts.
• NBFC (Non-Banking Finance Companies) cannot have FCNR accounts they cannot hold accounts in foreign currency they're allowed to accept deposits or from NRIs only by debit to the NRO accounts and these deposits will be held in Indian rupees only.
• nomination facility is available to the deposits of NBFC (Non-Banking Finance Companies), just like the banks and mutual funds and insurance companies n, nomination facility is available also to the deposits ofNBFC (Non-Banking Finance Companies).
• an underrated NBFC  except certain asset finance companies cannot accept public deposits at all.
•  an unregistered or unrated rate rating is a very important aspect of NBFC deposits there are many credit rating agencies in India and the company which is not rated will not be permitted to accept the deposits from the public 
• If NBFC (Non-Banking Finance Companies) defaults in the repayment of a deposit the depositor can approach the company law bold for consumer forum and filed the civil suit to recover the deposits this is as an offshoot of a lot of is failing to repay their deposits to their depositors especially in the early 90s the period between 1995 and 2000 when a lot of NBFC's went bust and there was at that time no protection for the interests of the depositors.
•  now RBI after that period of fiasco has decided that even NBFC has failed to replace has failed to repay its obligation towards his depositors, then the depositors can approach the company law board or the consumer forum and file a civil suit for recovery of the outstanding dues they can file a civil suit.
• the ceiling on the public acceptance deposits as well so NBFC rules of deposits are very very stringent now this has been taken care of proper interests of the depositors into account. there are rules regarding the number of deposits and there are rules regarding the ceiling of deposits which NBFC can accept.
•  NBFC (Non-Banking Finance Companies) should have adequate prescribed net owned funds and capital adequacy ratios. 
• what is capital adequacy?
•  the ratio between the capital promoted the capital brought in by the promoter and the capital and the deposits which the promoters have taken from the public
•  the NBFC should have the minimum network funds and also adhere to the prescribed capital adequacy ratios
• AFC  maintaining a capital adequacy ratio of 15% without credit rating or AFCs with a credit rating of with a capital adequacy ratio of 12% and having a minimum investment grade rating can accept up to 1.5 times the NOF or rupees 10 crores whichever is less as the public deposits or four times the network fund whichever is less.
• the leasing equipment companies or the leasing companies of the investment companies with the capitalize requested ratio of 15% in having us minimum investment grade rating can accept up to 1.5 times that of the NOF as they prescribe deposits the maximum interest that can be paid by an NBFC is 11% currently.
•  no NBFC can pay more than 11% to its depositors .this was again and after the shoot of the fiasco which happened in the early 1990s when NBFC (Non-Banking Finance Companies) is used to offer 36 percent 40% interest and all that to the depositors and obviously they could not pay that much amount of interest and the many of the NBFC (Non-Banking Finance Companies)  is actually failed and went bust because they could not repair their depositors so the RBI has come out strongly on these NBFC's and said that they can pay a maximum of 11% only.
•  and the minimum amount of period For which NBFC (Non-Banking Finance Companies)  can accept the processes is 12 months and the maximum amount for which they can accept is only 60 months. that means between one and five years only,  they cannot accept deposits for less than one year nor for more than five years at a time NBFC's cannot offer interest rates higher than the ceiling prescribed by RBI so that means they cannot offer interest of more than 11% at this point in time. 
• NBFC (Non-Banking Finance Companies) cannot offer gifts or incentives or any other additional benefit to the depositors. this is again and after the shoot of the period in the early 1990s when the NBFC's were offering all kinds of incentives, like gold coins and whatnot there was a flurry of incentives being authorized by the NBFC's. apart from the 36 to 40% interest they also were offering gold coins and other incentives which means that the cost of borrowing was actually exceeding 40% and when somebody accepts deposits at 40%. 
•  the NBFC  also cannot offer any incentives and any other sort of gifts for the depositors who deposit in their company.
• NBFC (Non-Banking Finance Companies) except the asset financing companies must have a minimum investment grade rating. investment-grade rating is a rating the which the investments cannot be taken. for example in CARE which is a credit rating organization, the investment-grade rating is triple B minus .beyond triple B minus they cannot accept deposits at all which means that if some company has double B, that company cannot accept deposits.
•  the highest rating is given in any rating agencies Triple-A and the lowest is triple B minus, so if anybody has less than a triple B minus rating then they will not be allowed to accept deposits.
• they should have a minimum credit rating from an Authorised credit rating. 
• the deposits with NBC (Non-Banking Finance Companies)  are not insured as I told you a little while earlier their insurance is given by the Deposit Insurance and credit guarantee Corporation which is available for deposits with commercial partners are not available for deposits with NBFC.
•  the repayment of deposits by the NBFC's is not guaranteed by RBI either. RBI does not guarantee the repayment of deposits from the NBFC so to that extent the investor when he deposits the money with the NBFCs has to take a very very careful view of the soundness of the NBFC (Non-Banking Finance Companies)  before taking their investment decisions.

BEST FINANCE COMPANIES IN INDIA

There are some excellent finance companies in India. Sundaram Finance is a classic example of how a finance company should be run.

Sundaram Finance has been around for many decades and they have proven that an NBFC is not always bad .they have got the highest credit rating and t they have been consistently managing their finances very well their NPS is very little and to that extent, the confidence of the investors in a company like Sundaram finance is very high. so they are allowed to continue to take deposits from the public although there have been many times when Sundaram Finance voluntarily has stopped taking deposits from the public because they felt that they are already flush with funds from other sources as well.

Rules Regarding Deposits

•  there are certain mandatory disclosures about the company in the application form issued by the company for soliciting deposits.
• there are certain mandatory disclosures when the company wants to solicit deposits from the investors there are certain mandatory disclosures which it has to disclose in the application form for a fixed deposit.   

 What are the credit rating agencies and what is the minimum investment grade rating offered by these credit rating agencies?

• CRISIL: FA-(FA MINUS)- if the company is rated by CRISIL then it should have a minimum investment grade rating of FA minus.
• ICRA: MA-(MA MINUS)- IF it is from icra then it is ma minus.
• CARE: CARE BBB(FD)-if it is from CARE it is BBB(FD). BBBFD is the minimum investment grade rating below which it cannot go.
•  Fitch Ratings India private limited:  tA(ind)(FD)- they have given the minimum investment rating as tA- (TA MINUS).

 

 

Conclusion  

So this is all about NBFCS and or rather most of it about NBFC's and the way they can accept deposits and the way they cannot accept deposits.

what are the minimum network funds for a company to accept deposits? what are the minimum grade ratings for an NBFC to accept deposits? and of course, one part is off the NBFCs acceptance of deposits the other part is their lending part the lending part can be done as we have seen either by an equipment leasing route or by a higher purchase route. in the case of equipment leasing the ownership of the equipment lies with the NBFC (Non-Banking Finance Companies) itself. there are many companies giving loans for asset financing that they are called the asset financing companies there are many companies giving equipment leasing financing they're called the leasing companies and there are many companies doing investment business they're called the investment business or the investment companies.

this classification has come about since the 6th of December 2006.

 while there are prescribed rules for acceptance of deposits, there are also rules for lending housing loans. so these business companies which give loans have to follow the mandatory appraisal of the borrowers just like a banker. this appraisal has to involve or has to consist of understanding the borrower in the entirety.

 what is his background what is his experience what is his current level of income, whether the current level will be able to sustain the EMI  till the end we should not take into account or the NBFC (Non-Banking Finance Companies) should not take into account the future income. so the NBFC should take a proper project report from the borrower to know and understand that this equipment is needed for his day-to-day operations and this equipment is going to help him to produce better and earn more profits then only they should go in for leasing of this equipment. 

 where a person gets an income of ₹20,000 and his EMI towards the car loan is ₹15,000 then he obviously cannot survive at all and very often he'll start defaulting sorry very soon he'll start defaulting. 

So this was all about the NBFC (Non-Banking Finance Companies).

I hope you liked the article.

THANK YOU☺.