TYPES OF NON-BANKING FINANCIAL COMPANY

Over the years, India has diversified the financial sector to a large extent both in terms of the growth of existing financial firms and the new emerging ones. What constitutes this sector are commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds, and other smaller financial entities.

The Indian Government has initiated several reforms to liberalize, regulate and enhance this industry. The Government and the Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance. A combination of both government and private sectors, India is undoubtedly one of the world’s most vibrant capital markets. All these companies have played a dominant role in the mobilization and disbursal of funds.

A Non-Banking Financial Companies(NBFC) is a company registered under the Companies Act, 2013 engaged in the business of loans and advances, acquisition of shares/bonds/debentures/securities issued by the Government or any local authority or other marketable securities like leasing, hire-purchase, insurance business, chit business but doesn’t include any institution whose principal business is of agriculture activity, industrial activity, purchase or sale of any goods or providing any services and sale/purchase/construction of the immovable property.

When we talk about financial activity as a principal business, it means the company’s financial assets should constitute more than 50% of the total assets and income from those assets constitutes more than 50% of the gross income. Let’s not confuse NBFCs with the banks as NBFCs can neither accept demand deposits nor have settlements and payment systems.

Types of NBFCs

There are various types of NBFCs some of them are as follows:

1. Asset Finance Company(AFC):

An AFC S is a company that is a financial institution caring on as its principal business the financing of physical assets supporting a productive activity, such as automobiles, tractors, generator sets, earthmoving and material handling equipment, etc. Principal business for this purpose is defined as an aggregate of financing physical assets supporting economic activity and raising income from them which is not less than 60% of its total assets and income.

2. Loan Company(LC):

LC means any company which is a financial institution carrying on as its principal business providing finance either by making loans or advances or any activity apart from its own but does not involve an asset finance company.

3. Infrastructure Finance Company(IFC):

IFC is an NBFC that deploys at least 75% of its total assets in infrastructure loans and has a minimum net owned funds of 300 crores.

4. Investment Company(IC):

IC constitutes any company that is a financial institution carrying on as its principal business to acquire securities.

5. Infrastructure Debt Fund- Non-banking finance company (IDF-NBFC):

It is a company registered as NBFC to facilitate the follow of long-term debt into infrastructure projects. It raises resources through the issue of a rupee or dollar-denominated bonds of a minimum of 5 years of maturity. Only infrastructure finance companies can sponsor IDF-NBFC.

6. Systematically Important core investment company(CIC-ND-SI):

It is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

1. It holds more than 90% of its total assets in the form of investment in equity shares, preference shares, debt, or loans in group companies.
2. Its investments in the equity shares in group companies are more than 60% of its total assets.
3. It does not trade in its investment in shares, debt, or loans in group companies except through block sale.
4. Its asset size is more than 100cr or above
5. It accepts public funds.

7.  Mortgage Guarantee Company(MGC):

This forms the financial institution for which not less than 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business net owned fund is at least 100 cr.

8. NBFC-Micro Finance Institution (NBFC-MFI):

It is a non-deposit taking NBFC having more than 85% of its assets like qualifying assets which satisfies the following criteria:

1. Loan disbursed by NBFC-MFI to a borrower with a rural household annual income not exceeding rupees 1,00,000 or urban income not exceeding rupees 1,60,000.
2. The total indebtedness of the borrower should not exceed rupees 1,00,000
3. The loan amount should not exceed rupees 50,000 in the first cycle and rupees 1,00,000 in the subsequent one.
4. Tenure of the loan should not be less than 24 months for loan amount in excess of rupees 15,000
5. Loan to be extended without collateral
6. The loan is repayable on weekly, fortnightly, or monthly instalments at the choice of the borrower.

Benefits of incorporating an NBFC :

• Competitive rate interest is one of the main and basic aspects of all types of loans. When the rate of interest is lowered, borrowers found it more easy and affordable. This has also resulted in lower equated monthly installments (EMI) for borrowers. Based on the income, credit scoring and repayment rate of interest are charged to the borrowers at competitive rates.
• It is an important fact that the applicant should fulfill the eligibility criteria while applying for loans at the banks but incase of NBFC they are much more lenient in this aspect. This liberty makes loan approval much easier, smoother, and quicker. Most of the time, people apply for loans when they are in immediate need of money. NBFC has taken this as an opportunity to meet the demand by quickly processing the loans at a competitive rate of interest.
• As NBFCs are incorporated under the Company’s Act, the rules and regulations for lending are not as stringent as banks. Helping borrowers to exceed the loan easily. Because of less complicated loan processing requirements, borrowers are highly satisfied. Of course, the risk of default is high with them, and thus interest rates and other charges will be accordingly priced.
• Usually, individuals with poor credit ratings do not get approval from the banks for loans on the other hand loans will be offered to individuals with low credit scores by NBFCs but most of the time the interest rates for such borrowers will be higher than the market rates. Due to these aforementioned advantages, most of the NBFCs are growing.

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