RBI Update: Reserve Bank of India on 22nd February 2019 issued a notification on Synchronization of the Non-Banking Financial Companies (NBFCs) Categories”.  As per the circular RBI has merged 3 categories of NBFCs into one,  going forward Asset Finance Company (AFC), Investment Company (IC) and Loan Companies(LC) will be merged to  Investment and Credit Company (NBFC-ICC).

Introduction: Non-Banking Financial Company

NBFC stands for Non-Banking Financial Company NBFC’s are institutions generally engaged in offering loans for homes, vehicles, machinery, etc. Generally, it is classified as companies offering loans |  acquisition of shares and advances majorly involved in stocks | debentures | bonds | marketable securities or securities issued by Government or local authority or of a similar nature | hire purchase | leasing | insurance business | chit business, etc.  

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New Categories Based on the recent circular of RBI

Investment And Credit Company (NBFC-ICC):

There are approximately 10,000+ NBFCs running in India, out of which more than 95 percent of NBFC’s are non-deposit-taking NBFCs. The merged three categories have been defined as Investment and Credit Company – (NBFC-ICC)” this means any NBFC carrying on as its core business of asset finance, by offering finance whether by offering loans or advances except other than its own and the achievement of securities. The following three categories of NBFC’s are merged into one Investment And Credit Company (NBFC-ICC).

• Asset Finance Company(NBFC - AFC): According to previous categories defined by RBI, “Asset Finance Company(NBFC - AFC)” can act as an AFC, subject to the condition that the income arising from the aggregate of physical assets supporting its economic activity is not less than 60% of its. Principal Business of an Asset Finance Company (AFC) is comprised of the following 2 activities: 
  • Financing of physical assets that correspond to productive or economic activity such as plant or machinery, automobile, material, equipment, power generators, etc.
  • The act of pledging assets Viz. Bills of exchange, short-term inventories or investments to borrow funds in the form of loans or cash. This type of financing is used when a person is seeking short-term borrowing for working capital needs.
• Investment Company (IC) Or (NBFC-IC): An Investment Company which is a financial institution registered with RBI is a type of NBFC engaged in the activity of acquisition of shares, stock, bonds, debentures, or securities. These kinds of NBFCs cannot deal with the investments they hold. Services of this kind of NBFC are helpful in starting a Venture Capital Fund or a Private Equity Business.
• Loan Companies (LC): A Loan Company is a financial institution registered under the Companies Act whose principal business is providing loans and advances. 50% of the assets of this kind of NBFC must be in lending and 50% of the total income of such income shall arise from the previously mentioned assets.

Infrastructure Finance Company (NBFC-IFC):

The Infrastructure Finance Company is a type of NBFC engaged in the principal business of providing infrastructure loan. The credit facility(ies) (term loans, project loans, etc.) granted by this kind of NBFC’s to the borrowers in the specific infrastructure sectors Viz. Transport, Energy, Water and Sanitation, Communication, and Social and Commercial Infrastructure are referred to as Infrastructure Loans.

As per RBI, any NBFC can be registered as an Infrastructure Finance Company, subject to the condition that it should be a non-deposit accepting - loan company and must fulfill the following conditions:

• Minimum 75% of the total assets of the NBFC should be deployed in the infrastructure loans.
• The minimum net worth of the Company should beRs 300 Crore.
• The CRAR (capital to risk-weighted asset ratio)of the company should be at least 15% with minimum Tier-I capital at 10%.
• The minimum credit rating of the Company should be“A” or equivalent of CRISIL, or equivalent to any other Credit rating agencies

Infrastructure Debt Fund (IDF-NBFC):

A debt fund is a pool in which core assets are investments with fixed returns. This type of fund is vital because of the fact that investment/funding in the infrastructure sector is complex as compared to other types of funding because of the volume of investment(s) required, long maturity period, and period of funds required.

• In India, an IDF can be set up as a trust or a fund. If it is set up as a trust then it shall be mutual fund and shall be governed by the provisions of SEBI. Such funds are called IDF-MF and would issue rupee-denominated bonds of minimum 5-year maturity for the purpose of raising funds infrastructure projects.
• If IDF is set up as a Company, it would be categorized as an NBFC and shall be governed by the relevant provisions of RBI.
• Infrastructure Debt fund is a non-deposit taking NBFC having a net owned fund of Rs 300 Crores of mores. IDF-NBFC provide long-term debt to infrastructure projects. This type of NBFC’s usually raise resources through currency bonds of five years or more and invests majorly in Public-Private Partnerships and in post-commencement operations date (COD) infrastructure projects which have completed at least 1 year of satisfactory commercial operation.

Mortgage Guarantee Company (MGC)-NBFC: 

NGC company' has a principal objective of providing a mortgage guarantee. Such companies shall comply with at least 90% of the business turnover from mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business

NBFC-Non Operative Financial Holding Company [NOFHC]:

A NOFHC is the financial business entity through which Entities/groups will be allowed to set up a new bank, which will hold the bank and all other financial services companies regulated by RBI or other financial sector regulators,

Microfinance Institution (NBFC-MFI):

NBFC-MFI is another type of non-deposit-taking NBFC that provides short-term credit facilities to low-income groups. An NBFC can be categorized as an NBFC-MFI subject to the following conditions.

• A minimum of 85% of the assets of such an institution is in the form of microfinance.
• Such Microfinance shall be provided subject to the following conditions.
• In rural areas, Loans should be given to people with an income of Rs. 60000/-.
• In urban areas, Loans should be given to people with an income of Rs. 120000/-.
• Such loans should not exceed Rs. 50000/-.
• The tenure of such loans should not be less than 24 months.
• Such loans should be given without collaterals.
• The borrower should be given the choice of repayment on a weekly, fortnightly or monthly basis.

Read Also: Microfinance Institution

Non-Banking Financial Company – Factors (NBFC-FACTORS):

NBFC-Factors to finance institution having the principal business of acquisition of receivables on discount or financing against such receivables by way of loans or advances or by the creation of security interest over such receivables but excludes normal lending by a bank.

As per RBI, any NBFC can be registered as an Infrastructure Finance Company, subject to the condition that it should be a non-deposit accepting - loan company and must fulfill the following conditions:

• Minimum 75% of the total assets of the NBFC should be deployed in the factoring business.
• Minimum 75% of the gross income of such NBFC shall be from factoring business.
• The minimum net worth of the Company should beRs 5 Crores.

Core Investment Company (NBFC - CIC-ND-SI)

A CIC-ND-SI is a type of Investment Company that carries on the business of acquisition of shares and securities is recognized as a Systematically important core investment if it fulfills the following conditions:

• At least 90 percent of the NBFC’s total assets should be in the form of investments in equity shares, preference shares, loans,s or debt in its group companies.
• The investment in equity shares, including all securities or instruments convertible into equity within a period of not more than ten years from the date of issue, in the group companies, shouldn't be less than 60% of its total assets.
• The NBFC does not trade in securities or Loans of its group companies. The only exception to this is if such trading is done through a block sale place in the event of dilution or disinvestment.
• The company shall only carry the activities of investment in bank deposits, government securities, money market instruments, loans and investment in debt securities or guarantees on behalf of group companies.
• The minimum Asset Size of such NBFC should be Rs 100 Crore.

NBFC companies are of two types on the basis of deposits,

• NBFCS eligible to accept deposits
• NBFCS is not eligible to accept deposits.