Different Categories of NBFCs Registered with RBI

In India, Non-Banking Financial Companies (NBFCs) are categorized into various segments based on several criteria. These categories help in defining their operational scope, regulatory compliance, and supervision by the Reserve Bank of India (RBI). The three major categorization approaches are:

1. Based on Liabilities: Deposit and Non-Deposit Accepting NBFCs
2. Based on Size: Non-Deposit Taking NBFCs classified into Systemically Important (NBFC-ND-SI) and Other Non-Deposit Holding Companies (NBFC-ND)
3. Based on the Nature of Activities: Activities they perform

Deposit Taking NBFCs

Deposit-taking NBFCs are companies whose principal business involves receiving deposits from the public. These deposits are collected under various schemes or arrangements, either in installments or as lump sums. These companies operate similarly to banks but are not authorized to accept deposits as banks do. Instead, their business model revolves around collecting funds from the public for specific investment or financial purposes.

Non-Deposit Taking NBFCs

On the other hand, Non-Deposit Taking NBFCs (NBFC-NDs) are those that do not accept public deposits. These institutions focus on providing a range of financial services but without the deposit-taking mechanism. Non-Deposit Taking NBFCs are further divided into two types:

1. NBFC-ND-SI (Systemically Important Non-Deposit Taking NBFCs): These are non-deposit-taking NBFCs whose asset size exceeds Rs. 500 crores, as per the last audited balance sheet. These companies are considered significant from a systemic risk perspective due to their size and operations.
2. NBFC-ND: These are smaller non-deposit-taking NBFCs with an asset size of less than Rs. 500 crores, as per the last audited balance sheet.

NBFCs Based on Activities

NBFCs are also categorized based on the primary financial activity they conduct. Here are the key categories:

1. Asset Finance Company (AFC): An AFC is primarily engaged in the financing of physical assets that support productive or economic activities. These include vehicles, machinery, and equipment. To be classified as an AFC, the financing of such physical assets must constitute at least 60% of the company's total assets and income.
2. Investment Company: These companies focus on the acquisition of securities as their primary business activity, investing in shares, bonds, and other financial instruments.
3. Loan Company: This category encompasses financial institutions whose principal business is providing loans or advances to individuals or organizations. They do not engage in asset financing, which is the primary business of AFCs.
4. Infrastructure Finance Company (IFC): IFCs are specialized NBFCs that allocate a significant portion (at least 75%) of their assets in financing infrastructure projects. To qualify as an IFC, the company should have a net owned fund (NOF) of at least Rs. 300 crores, a minimum credit rating of ‘A,’ and a Capital to Risk Weighted Assets Ratio (CRAR) of 15%.
5. Mortgage Guarantee Company (MGC): MGCs primarily engage in providing mortgage guarantee services. They must generate at least 90% of their business turnover or income from mortgage guarantees. These companies also require a minimum NOF of Rs. 100 crores.
6. Micro Finance Institution (NBFC-MFI): These are non-deposit-taking NBFCs that focus on providing microloans to individuals with low incomes. The loans they offer must meet specific criteria, such as loan amounts not exceeding Rs. 50,000 in the first cycle and Rs. 1 lakh in subsequent cycles. The income threshold for rural households is Rs. 1 lakh per year, while urban and semi-urban households should not earn more than Rs. 1.6 lakh annually.
7. Infrastructure Debt Fund (NBFC-IDF): An NBFC-IDF raises long-term capital by issuing bonds (denominated in Rupees or Dollars) for infrastructure projects. These funds are primarily used for infrastructure-related loans. Only IFCs are allowed to sponsor NBFC-IDFs.
8. Core Investment Company (CIC-ND-SI): This category includes companies whose business is primarily focused on acquiring shares or securities of group companies. Such companies should not trade in their investments except through block sales for disinvestment. The asset size must be at least Rs. 100 crores, and they must hold at least 90% of their total assets in equity shares, preference shares, loans, or debts of group companies.
9. Non-Operative Financial Holding Company (NBFC-NOFHC): These are companies used by promoters or promoter groups to set up new banks. A NOFHC is wholly owned and serves as the holding company for a new bank and other financial services companies regulated by the RBI or other financial regulators.
10. NBFC-Factors: An NBFC-Factor is a non-deposit-taking NBFC that engages in factoring business. Factoring refers to the purchasing of receivables or debts. For an NBFC to be classified as an NBFC-Factor, at least 50% of its total assets must be in factoring business, and at least 50% of its income must come from factoring operations.

Major Changes in the Regulatory Framework for NBFCs in India by RBI

In response to evolving financial markets, RBI has recently implemented significant changes to the regulatory framework for NBFCs. These changes, outlined in the Master Direction - RBI (NBFC-Scale Based Regulation) Directions, 2023, introduce a new classification system and several operational and compliance-related reforms.

1. New Classification of NBFCs into Layers

NBFCs are now categorized into four distinct layers based on their asset size and systemic importance:

• Base Layer: Non-Deposit Taking NBFCs with an asset size of less than Rs. 1,000 crores.
• Middle Layer: All Deposit-taking NBFCs (regardless of asset size), along with non-deposit-taking NBFCs with asset sizes greater than Rs. 1,000 crores.
• Upper Layer: This category includes NBFCs that are specifically identified by the RBI due to their systemic importance.
• Top Layer: This layer may consist of NBFCs where there is a significant increase in potential systemic risk, based on the RBI's assessment.

2. Changes in Net Owned Funds (NOF)

The RBI has also raised the Net Owned Funds (NOF) requirement for various types of NBFCs. The NOF limit will increase in phases as follows:

However, for certain categories such as NBFC-AA, NBFC-P2P, and others with no public funds or customer interaction, the NOF requirement will remain at Rs. 2 crores.

3. Changes in NPA Classification

The RBI has amended the Non-Performing Assets (NPA) classification criteria, which will change gradually as per the following schedule:

• More than 150 days overdue by 31st March 2024.
• More than 120 days overdue by 31st March 2025.
• More than 90 days overdue by 31st March 2026.

4. Consolidation of NBFCs in a Group

When assessing the asset size for classification in the Middle Layer, RBI will now consolidate the assets of all NBFCs that are part of the same group or are owned by the same promoters. This consolidation will determine the asset size threshold for classification.

5. Risk Management Committee (RMC)

NBFCs are now required to establish a Risk Management Committee (RMC) to assess and monitor the risks faced by the organization. The RMC will report directly to the Board of Directors and be responsible for overseeing liquidity and other risks faced by the company.

6. Leverage Ratio (LR)

The Leverage Ratio (LR) for NBFCs, excluding specific categories like NBFC-MFIs, is limited to a maximum of 7 at any given time.

7. Enhanced Disclosure Requirements

RBI has mandated more extensive disclosure requirements. NBFCs will now need to disclose details about the types of exposure, related party transactions, loans granted to senior officers or directors, customer complaints, and other relevant financial data.

8. Provision for Standard Assets

NBFCs are required to make a provision for standard assets, which should be at 0.25% of the outstanding loans. This provision must be reported separately in the financial statements as Contingent Provisions.

9. Board Composition

To enhance governance, at least one director in an NBFC must have professional experience in managing financial services, such as banking or NBFC operations.

10. Loans to Senior Officers and Directors

NBFCs must adopt a Board-approved policy governing loans to senior officers, directors, and their relatives, as well as loans to entities in which directors or their relatives have substantial shareholding.

Benefits of NBFC Registration

Registering as an NBFC offers numerous advantages for businesses looking to engage in financial services:

1. Wider Access to Credit: NBFCs can extend loans, credit facilities, and financial services to both businesses and individuals.
2. Specialized Financial Products: NBFCs can offer specialized services like microfinance, infrastructure financing, and more.
3. No Banking License Needed: While similar to banks in many ways, NBFCs don’t require a banking license, making the regulatory process simpler.
4. Faster Loan Processing: NBFCs tend to offer quicker loan approvals and simpler documentation compared to traditional banks.
5. Flexible Investment Options: NBFCs provide more flexible investment options, including wealth management and asset-backed financing.

Pre-Requirements for NBFC Registration

To be eligible for NBFC Registration, a company must meet certain criteria:

1. Company Incorporation: The company must be incorporated under the Companies Act, 1956 or Companies Act, 2013.
2. Net Owned Fund (NOF): The company should have a minimum NOF of 2 crores (for most NBFCs). This fund must be owned and not borrowed.
3. Business Plan: A detailed business plan outlining the operations for the next 5 years.
4. Experience of Directors: At least one-third of the company's directors must have experience in the financial services sector.
5. CIBIL Score: The directors and the company must have a clean CIBIL record.

Documents Required for NBFC Registration

The following documents are required to complete the NBFC Registration process:

1. Certificate of Incorporation (CoI) of the company.
2. PAN or CIN of the company.
3. Memorandum of Association (MoA) outlining the company’s financial business activities.
4. Details of the company's Directors with signatures.
5. Proof of the minimum NOF of 2 crores, including a fixed deposit receipt and a banker’s certificate.
6. CIBIL Reports of all company directors.
7. Profit and Loss Account and Audit Balance Sheet (if the company is already operational).
8. Board Resolution authorizing the formation of the NBFC.
9. Proof of the company’s location.

Step-by-Step Process for NBFC Registration

To register an NBFC in India, follow these steps:

1. Incorporate the Company: Ensure the company is incorporated under the Companies Act, 1956 or 2013 as a Private Limited or Public Limited company.
2. Ensure Minimum NOF: The company must have a minimum NOF of 2 crores.
3. Directors' Experience: Ensure that at least one-third of the directors have relevant financial experience.
4. Clean CIBIL Record: The company and its directors must have a clean credit history.
5. File Online Application: Submit an online application through the RBI’s website along with the required documents.
6. CARN Number: Once submitted, a CARN (Company Application Reference Number) will be generated.
7. RBI Examination: The application will be reviewed by the RBI, and upon approval, the company will receive its NBFC License.

Compliance Requirements After NBFC Registration

Once your NBFC is registered, there are several compliance requirements to follow:

1. Quarterly Returns: NBFCs must submit periodic returns to the RBI, including financial statements, liquidity ratios, and risk management reports.
2. Liquidity Requirements: NBFCs with public deposits must maintain a minimum of 15% of public deposits in liquid assets.
3. Audit: Annual audits and a half-yearly Asset-Liability Management (ALM) return are required.
4. NPA Reporting: NBFCs must report their NPA status and adhere to the revised NPA classification norms.
5. Board Approvals: Regular approval from the Board of Directors for loans to senior officers and related entities.

Why Choose Compliance Calendar LLP for Your NBFC Registration?

We understand the complexities involved in NBFC Registration and are here to guide you through every step of the process. Our team of experts will:

1. Evaluate Your Business: Conduct a thorough assessment of your business plan and eligibility for registration.
2. Handle Documentation: Ensure all documentation is in order and filed correctly with the RBI.
3. Coordinate with RBI: We will liaise with RBI officials to ensure smooth processing of your application.
4. Track Your Application: Stay updated with the status of your registration application until approval is granted.