Regulatory Environment for NBFCs in India and Its Impact on the Industry

Non-Banking Financial Company is a registered company under Companies Act, 1956. NBFCs offer bank related services without having banking licenses. Its main focus is on the Loans and Advances business activities and acquisition of shares, money transfers, stock, debentures, bonds, securities issued by government and local authorities. It also does marketing on leasing, hire, purchase, insurance and chit businesses but it does not include agriculture and industrial activities and also does not include sale or purchase of any goods. The Reserve Bank of India supervises Non- banking Financial Institutions. In recent times when we need more money as credit NBFCs fulfill that need for us. Some Examples of NBFCs – ICICI Ventures, Kotak Mahindra Finance, SBI Factors Etc.

License criteria of NBFC in India:

To get the license NBFC must meet the following criterias-

The company should be registered as per Company Act.
The corporation must be either a Private Limited Company or a Limited Company.
The company must have at least Rs. 2 Crores of Net worth funds.

Types of NBFCs in India:

Asset finance company (AFC): an NBFC provides credits for the purchase of assets like machinery, vehicles and equipment.

Investment Company: an NBFC deals in investment and portfolio management services.

Loan Company: an NBFC that provides loans and advances to individuals, business or corporate customers.

Infrastructure finance company (IFC): an NBFC provides long-term finance to infrastructure projects like roads, powers and telecommunications.

Microfinance Institution (MFI): an NBFC provides loans to the small scale industries and low income individuals and as well as gives loans to the semi-urban areas.

Deposit taking company: an NBFC taking deposits from the public, but it does not have a bank license.

Systemically Important Non-Deposit taking company (NBFC-ND-SI): an NBFC does not accept deposits but bear a potential risk to the stability of financial institutions.

Housing Finance Company: an NBFC provides loans to Housing or Real estate projects.

Equipment Leasing and Finance Company: an NBFC that provides lease and finance for equipment and machinery.

NBFC Factors: an NBFC provides factoring services, which involves the purchase of trade receivables from companies.

Each type of NBFC is governed by the Reserve Bank of India from different rules and regulations as per their nature.

Recent regulations for Non Banking financial Institutions:

Recently, Reserve Bank of india (RBI) under the Reserve Bank of India act, 1934 proposed new strict regulation for the NBFCs by creating four-tier structure for featuring a step-by-step escalation in the intensity of regulatory measures:

Base Layer– lower layer is known as base layer and here the need of regulatory invention is minimal.

Middle Layer- this layer is known as NBFC-ML or NBFC-MIDDLE LAYER and this layer is strict as compared to base layer.

Upper Layer- this layer is known as NBFC-UL or NBFC-UPPER LAYER and will invite a new regulatory superstructure. In this layer NBFC have great potential for systematic spill over of risk and ability to influence financial stability. There is not any parallel for this layer and this will be a new layer for regulation.

Top Layer- this layer is supposed to be empty. These NBFCs would then form a separate group at the top of the higher-risk category. Ideally, this highest level should be empty unless regulators specifically identify NBFCs that need closer supervision. In simple terms, if regulators believe that some NBFCs in the higher-risk category pose significant risks, they can be subjected to stricter and personalized rules.

RBI has authority to regulate, supervise and control over the NBFCs in India. RBI can make strict rules and regulations for the NBFCs. For the stability and reliability of NBFCs RBI is making these strict regulations so that borrowers and investors will protect from any evil activity.

These strict rules and regulations will impact NBFCs industries because now NBFCs have to obtain a Certificate of Registration (CoR) which is issued by the Reserve Bank of India. This process involves thorough scrutiny of the NBFCs business models, management teams and financials. For the NBFSc sector CoR is just like a stipulation for commencement of their work and CoR certificate is the symbol of trust and credibility for the company.

One of the major impacts of these rules to NBFCs is that they should maintain a minimum net owned fund of INR 2 crore (approximately $270,000), and adhere to prescribed capital adequacy norms. This will help NBFCs to give protection and safeguard to their depositors and investors. It is the symbol of the sufficient capital of NBFCs.

Another impact of these rules for the NBFCs is that they should maintain credit ratings. The objective is to guarantee that NBFCs have the capability to enter capital markets and secure funding at the reasonable expense. Further RBI lays down different rational norms for the NBFCs, like income recognition, asset classification and provisioning norms. These norms are aimed to protect the depositors and creditors interest.

Reserve Bank of India’s strict rules and regulations has included another regulation that NBFCs should submit final statements and returns to the RBI and filing a return with the Registrar of Companies. This will help to maintain credibility and accountability of the NBFCs.

CONCLUSION:

Reserve Bank of India’s new regulatory framework is for more transparency, accountability and reliability. These frameworks ensure that the NBFCs sector is safe for the investors, borrowers and the public. This is good for the industry because it makes investors more confident and ensures that only strong and well maintained companies can be Non Banking Financial Companies (NBFCs) only. These rules and regulations might be tough in recent times but it will be good for long-term growth and stability to the NBFCs.

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