NBFCs play an important role in consumer finance and factoring in India. They provide financial services like loans, acquisition of financial instruments, leasing, hire purchase, and insurance to those underserved by banks. While they perform bank-like functions, NBFCs cannot accept demand deposits and do not have the same deposit insurance and payment system access as banks. To operate legally, NBFCs must register with the RBI and meet requirements on net owned funds, public deposit acceptance, and credit ratings. NBFCs help expand access to credit for consumers and small businesses.

1. NBFC’s
&
Their role in Consumer Finance and
Factoring
Archana
Dinesh
Nikunj
Shikha

2. What is a non-banking financial
company (NBFC)?
• NBFC is a company registered under the Companies
Act, 1956 .
• It 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.
• It does not include any institution whose principal
business is that of agriculture activity, industrial
activity, sale/purchase/construction of immovable
property

3. NBFC
• The RBI (Amendment) Act, 1997 defines NBFC
as an institution or company whose principle
business is to accept deposits under any
scheme or arrangement or in any other
manner, and to lend in any manner

4. Difference between Banks & NBFCs
• NBFCs are doing functions akin to that of banks;
however there are a few differences:
• (i) an NBFC cannot accept demand deposits;
(ii) an NBFC is not a part of the payment and
settlement system and as such an NBFC cannot
issue cheques drawn on itself; and
(iii) deposit insurance facility of Deposit Insurance
and Credit Guarantee Corporation is not available
for NBFC depositors unlike in case of banks.

5. NBFC To Registered With RBI
• In terms of Section 45-IA of the RBI
Act, 1934, it is mandatory that every NBFC
should be registered with RBI to commence or
carry on any business of non-banking financial
institution as defined in clause (a) of Section
45 I of the RBI Act, 1934.

6. Requirement for registration
• A Non Banking Financial Company should
have minimum net owned fund 2 crore.
• The company is required to submit it’s
application for registration in the prescribed
format along with necessary documents for
bank consideration.

7. Exemptions
• To obviate dual regulation, certain categories of
NBFCs which are regulated by other regulators
are exempted from the requirement of
registration with RBI viz.
• Venture Capital Fund/Merchant Banking
companies/Stock broking companies are
registered with SEBI.
• Insurance Company holding a valid Certificate of
Registration are issued by IRDA.

8. Cont--
• Nidhi companies as notified under Section 620A
of the Companies Act, 1956,
• Housing Finance Companies regulated by
National Housing Bank.

9. NBFC registered with RBI
NBFC
Asset
Loan Investment
Finance
Company Company
Company
Equipment Hire-
leasing purchase
company company
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10. • Asset Finance Company means financing of physical assets supporting
productive / economic activity, such as
automobiles, tractors, generator sets, earth moving and material
handling equipments, moving on own power and general purpose
industrial machines
• Hire – purchase credit is loan supplied for the purchases of consumer
goods, services & sometimes producer goods.
• Lease finance enables firms to acquire the economic use of assets for
a stated period without owning them.
• Loan companies give short term unsecured loans to wholesale & retail
traders, small scale industries & self employed persons
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11. Requirements for Accepting Public
Deposits
• All NBFCs are not entitled to accept public deposits.
Only those NBFCs holding a valid Certificate of
Registration with authorization to accept Public
Deposits can accept/hold public deposits.
• NBFCs authorized to accept/hold public deposits
besides having minimum stipulated Net Owned
Fund (NOF) should also comply with the Directions
such as investing part of the funds in liquid
assets, maintain reserves, rating etc. issued by the
Bank.

12. Ceiling on Acceptance of Public
Deposits
Category of NBFC having minimum Ceiling on public
NOF of Rs 200 lakhs deposit
AFC* maintaining CRAR of 15% without 1.5 times of NOF or Rs 10 crore whichever
credit rating is less
AFC with CRAR of 12% and having minimum 4 times of NOF
investment grade credit rating
LC/IC** with CRAR of 15% and having 1.5 times of NOF
minimum investment grade credit rating
**Lease company and investment company

13. Ceiling on Acceptance of Public
Deposits
Category of NBFC having NOF more Revised Ceiling on public deposits on June
than Rs 25 lakh but less than Rs 200 lakh 17 2008
AFC* maintaining CRAR of 15% without Equal to NOF
credit rating
*Asset Finance company (AFC)
AFC with CRAR of 12% and having minimum 1.5 times of NOF
investment grade credit rating
LC/IC** with CRAR of 15% and having Equal to NOF
minimum investment grade credit rating
**LC ( loan company) and IC (investment
company)

14. Credit Ratings
• Credit ratings are designed for grading debt
instruments according to their investment
quality
• They help investors to manage risk/return trade
off
• They also help companies & other financial
market intermediaries
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15. Some facts about NBFCs
• Only those NBFCs holding a valid certificate of registration with
authorization to accept public deposits can accept/hold public
deposits
• Nomination facility is available to the depositors of NBFCs
• If rating of a NBFC is downgraded to below minimum investment
grade rating, it has to stop accepting public deposit
• If a NBFC defaults in repayment of deposit, the depositor can
approach Company Law Board or Consumer Forum or file a civil
suit to recover the deposits
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16. Why there is a demand for NBFCs?
• NBFCs provide prompt, tailor made service with least hassles. This more
than compensates for the higher lending rates of NBFCs as compared to
Banks & FIs
• All customers get direct and easy access to and individual attention of
the top management
• NBFCs cater to a class of borrowers who :-
- Do not necessarily have a high income
- But have adequate net worth
- Are honest and sincere (gauged by the personal touch
maintained with them).
• Deposit mobilization at the doorstep of the depositors with personalized
approach, interest warrants are delivered in advance
• NBFCs provide financial assistance to their borrowers in case of
emergency needs
• NBFCs provide assistance and guidance to their customers in matters
relating to insurance

17. NBFCs accepting public deposits should furnish to RBI:-
• Audited balance sheet of each financial year and an audited
profit and loss account in respect of that year as passed in the
general meeting together with a copy of the report of the Board
of Directors and a copy of the report and the notes on accounts
furnished by its Auditors
• Statutory annual return on deposits
• Certificate from the auditors that the company is in a position to
repay the deposits as and when the claims arise
• Quarterly return on liquid assets
• Half-yearly return on prudential norms
Cont…17

18. Cont…
• Half-yearly ALM return by companies having public deposits of
Rs 20 crore and above or with assets of Rs 100 crore and above
irrespective of the size of deposits
• Monthly return on exposure to capital market by companies
having public deposits of Rs 50 crore and above
• A copy of the Credit Rating obtained once a year along with one
of the Half-yearly Returns on prudential norms
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19. Non-Banking Financial Companies Acceptance of Public Deposits
• Reserve Bank Directions, 1998 defines a ‘ public
deposit’ as a ‘deposit’ as defined under Section 45
I(bb) of the RBI Act, 1934 and further excludes the
following:
• amount received from the Central/State
Government or any other source where repayment
is guaranteed by Central/State Government or any
amount received from local authority or foreign
government or any foreign
citizen/authority/person;
• any amount received from financial institutions;

20. • any amount received from other company as inter-
corporate deposit;
• amount received by way of subscriptions to
shares, stock, bonds or debentures pending
allotment or by way of calls in advance if such
amount is not repayable to the members under the
articles of association of the company;
• amount received from shareholders by private
company;
• amount received from directors or relative of the
director of an NBFC;

21. • amount raised by issue of bonds or debentures
secured by mortgage of any immovable property or
other asset of the company subject to conditions;
• the amount brought in by the promoters by way of
unsecured loan;
• amount received from a mutual fund;
• any amount received as hybrid debt or
subordinated debt;
• any amount received by issuance of Commercial
Paper.

22. Rating of NBFCs
• An unrated NBFC, except certain Asset Finance
companies (AFC), cannot accept public deposits. An
exception is made in case of unrated
AFC companies with CRAR of 15% which can
accept public deposit without having a credit rating
up to a certain ceiling depending upon its Net
Owned Funds .
• AN NBFC may get itself rated by any of the four
rating agencies namely, Credit Rating Information
Services of India Ltd, CARE, ICRA and FITCH Ratings
India Pvt. Ltd.

23. Minimum Investment Grade Rating of the Credit Rating Agencies
Name of rating agencies Nomenclature of minimum investment
grade credit rating (MIGR)
CRISIL FA- (FA MINUS)
ICRA MA- (MA MINUS)
CARE CARE BBB (FD)
FITCH Ratings India Pvt Ltd tA- (ind)(FD)
It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not
equivalent to AAA.

24. NBFCs and Financing Norms
• NBFCs have been advised that while granting
finance to housing/development projects, they
should specify as a part of the terms and conditions
that: (a) the builder/ developer/owner/company
would disclose in the Pamphlets/Brochures
/advertisements etc., the name(s) of the entity to
which the property is mortgaged and that they
would provide No Objection Certificate
(NOC)/permission of the mortgagee entity for sale
of flats/property, if
• required. (b) Funds should not be released unless
the builder/developer/owner/company fulfill the
above requirements.

25. NBFCs and RBI Guidelines
• NBFCs have been advised that there should be
no discrimination in extending products and
facilities including loan facilities to the
physically/visually challenged applicants on
grounds of disability.

26. NBFCs and Account of Politically Exposed Person
• Detailed guidelines on Customer Due Diligence
(CDD) measures applicable to Politically Exposed
Person (PEP) and their family members or close
relatives have been issued. In the event of an
existing customer or the beneficial owner of an
existing account, subsequently becoming a PEP,
NBFCs should obtain senior management approval
to continue the business relationship and subject
the account to the CDD measures as applicable to
the customers of PEP category including enhanced
monitoring on an ongoing basis.

27. Roles of NBFCs
As recognized by RBI the specific roles of NBFCs' are:
• Development of sectors like Transport & Infrastructure
• Substantial employment generation
• Help & increase wealth creation
• Broad base economic development
• Irreplaceable supplement to bank credit in rural segments
• major thrust on semi-urban, rural areas & first time
buyers / users
• To finance economically weaker sections
• Huge contribution to the State exchequer

28. Thank You