Non Banking Financial Company
A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
A non-banking institution which is a company 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 (residuary non-banking company).
Major difference between Banks & NBFCs
NBFCs are doing functions akin to that of banks; however there are a few differences:
- A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand immediately or within a very short period like your current or savings accounts).
- It is not a part of the payment and settlement system and as such cannot issue cheque to its customers.
- Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
There are different types of NBFCs registered with the RBI:
- Equipment leasing company
- Hire-purchase Company
- Loan Company
- Investment Company
The important regulations relating to acceptance of deposits by NBFCs are as follows:
- The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
- NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
- NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
- NBFCs (except certain AFCs) should have minimum investment grade credit rating.
- The deposits with NBFCs are not insured.
- The repayment of deposits by NBFCs is not guaranteed by RBI.
- There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.
Non-banking financial companies (NBFCs) have seen considerable business model shift over last decade because of regulatory environment and market dynamics.
In the early 2000s, the NBFC sector in our country was facing following problems:
- High cost of funds
- Slow industrial growth
- Stiff competition with NBFCs as well as with banking sector
- Small balance sheet size resulting in high cost of fund and low asset profile
- Non performing assets
A majority of NBFCs were not able to face the pressure created on and were wiped out. However, since FY2001-2002, there has been significant improvement in the business model of existing NBFCs with improvement in overall business environment. NBFCs have been able to expand their resource profile by diversifying the funding avenues. Further a strict control on asset quality and overheads, coupled with use of innovative borrowing tools such as securitization has resulted in improved profitability of NBFCs.
NBFC sector reports robust growth – 2008
The RBI increased the increased the capital adequacy requirement of non-deposit taking non-banking finance companies from 10 per cent to 12 per cent by 31 March 2009 and to 15 per cent by 31 March 2010.
For the quarter ended 30 June 2008, the NBFC sector reported a robust top line growth of 45.4 per cent and well converted it into a robust bottom line growth of 43.2 per cent. Net profit margin expanded by 110 basis points to 12.8 per cent.
August 2008, the sector yielded a minimal 0.4 per cent returns during July 2008, but witnessed a surge in volumes from 14.4 million shares in June to 20.1 million shares in July.
NBFC capital adequacy hiked
On 12 December 2006, the RBI had stated that all non–deposit taking NBFCs with an asset size of Rs.100 crores and more as per the last audited balance sheet would be considered as systemically important (NBFC-ND-SI).Thereafter, with effect from 1 April 2007, specific regulatory framework involving prescription of capital adequacy and exposure norms was put in place. NBFCs-ND-SI were advised to maintain a minimum Capital to Risk-Assets Ratio (CRAR) of 10 per cent with effect from 1 April 2007. The RBI increased the minimum capital to risk assets ratio (CRAR) for NBFCs-ND-SI from 10 per cent to 12 per cent to be achieved by 31 March 2009 and further 15 per cent to be achieved by 31 March 2010.