What is RBI Regulations for funding in NBFC?
NBFCs (Non-Banking Financial Companies) as the name suggests, are not banking companies. They do not rely on CASA (Current Account Savings Account) deposits for raising funds. As CASA deposits are only meant for banks, wherein the banks are provided with licenses by the RBI in order to accept monies from the public. NBFCs do not have those luxuries, it means, the NBFCs needs to look for alternate sources of the money supply, which are higher than the deposits taken by banks, where the interest rate offered is between 4%-6%.
What are the permitted business activities for NBFC?
A Non-Banking Financial Company (NBFC) is a company which carries on the business of loans and advances, acquisition of shares, bonds, stock, insurance business or hire-purchase, but does not include any institution whose principal business objective is agriculture or agriculture allied activity,, purchase or sale of any goods (other than securities) ordinary business activity or providing any services and sale/purchase/construction of immovable property.
The financial institutions capable of raising money supply at a low rate like banks and end up raising funds at a higher interest rate. This causes NBFCs to seek for alternative strategies for raising funds in order to generate a higher return.
The Key Points to keep in mind while raising funds in NBFC?
- Evaluating the mismatch between assets & liabilities; and
- Minimizing the mismatch in assets and Liabilities.
In case of NBFCs, working as a financing organization, Assetsare the investments made (equity/debt/structured products). while liabilities are the amounts owed to parties that have supplied the monies for the financing activities.
NBFCs can raise funds from various sources. One of the best option to raise fund is from foreign investment.
After the liberalization of the Indian economy in 1991, there has been witnessed a significant interest of foreign investors in the Indian NBFC sectors. A Non-Banking Financial Company (NBFC) is a company engaged in the business of financing but not including any institution whose principal business objective is agriculture or agriculture allied activity, ordinary business activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
Foreign investment in NBFC sector is permitted under the automatic route as per the FDI policy
- The automatic route is one where no approval from Foreign Investment Promotion Board (FIPB) or RBI approval is needed before making the proposed investment. Up to 100%, foreign investment is permitted without the approval of FIPB under the automatic
- All foreign transactions are required to routed only through entities licensed by the RBI as per the regulations framed under FEMA.
- A Foreign investment which is allowed under automatic route only in the non-banking financial service activities are as follows:
- Merchant Banking, Underwriting, Portfolio Management Services, Stock Broking, Asset Management, Venture Capital, Custodian Services, Factoring
- Leasing & Finance, Housing Finance, Credit Card Business, Micro Credit, Rural Credit, Non-fund based activities, Investment Advisory Services, Financial Consultancy, Forex Broking, Credit Rating Agencies, Money Changing Business, etc.
- FDI in such NBFC’s is allowed without any minimum capitalization norms after 2016.
Frequently Asked Questions
Majorly there are two sources from which an NBFC can raise money –
- Borrowing from other financial institutions.
- Accepting non-chequable deposits, mostly the term deposits. However, it is significant to note that not all NBFCs are allowed to accept deposits, as it leads to compliance with the larger number of regulations issued by RBI. This all happened after the Sharda scam. Hence, over the years the amount of deposits accepted by NBFCs has been considerably reduced at lot.
In the modern NBFC business, both funding and fundraising, acts as a major source which supports the growth of a startup. Further, to achieve the goal of having a startup, it is crucial to ensure the right allocation of fund to each business segment. Fundraising agenda needs to be carried by the founder on a regular basis. There is no end of the fundraising process for a startup.
Loan Company is one of the types of NBFC primarily engaged, in the business, of providing finance to the public whether by making advances or loans or otherwise from any activity other than its own. However, it does not include an Asset Finance company, equipment leasing company or a hire-purchase company.
NBFCs (Non-banking financial companies) are those financial institutions that offer several banking services to the general public but do not have a banking license. Normally, these institutions are not allowed to take any traditional demand deposits or readily available funds, such as those in savings accounts from the public.
Further, NBFCs can provide banking services such as loans and credit facilities, retirement planning, money markets, currency exchange, underwriting, and merger activities.
Following listed are the types of NBFCs –
- Asset Finance Company (AFC)
- Investment Company
- Loan Company
- Mortgage Guarantee Company
- Infrastructure Finance Company
- Core Investment Company
- Housing Finance Company
- Micro Finance Company
- Mutual benefit Finance Company
- Chit Fund Company
- Housing Finance Company
- Residuary Non-Banking Company
Nowadays Banks can make use of NBFCs to meet their priority sector targets. Further, NBFCs can also use banks to borrow funds. This will benefit those NBFCs which operate in the segments such as SME (Small Medium Enterprises) lending and housing.” Furthermore, RBI has also allowed banks to classify some kind of advances to the NBFCs as priority-sector loans
- NBFCs are not eligible to accept demand deposits
- An NBFC does not form part of the payment and settlement system and also cannot issue cheques drawn on itself
- The Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for the depositors of NBFCs, unlike in the case of banks.
Insurance companies are not considered as NBFCs for a very basic reason that the main business of an NBFC is to collect money from the investors by way of various instruments and then lend it to a borrower.
Any money received by a private limited NBFC either from its relatives or friends of directors, who are not the shareholders, will be considered as a public deposit. However, in the case of public limited companies, any deposits received from the shareholders also are public deposit.
