NON-BANKING FINANCIAL COMPANIES (NBFCS)

The Reserve Bank of India has introduced significant alterations to NBFC regulations by publishing the Scale Based Regulation (SBR) Framework to further strengthen the regulations and to ensure NBFCs are managed efficiently and protected from risks.??

The Reserve Bank of India (RBI) published the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions 2023 (SBR Master Directions) on 19th October 2023. These new directions stop dividing NBFCs into two categories such as systemically important and non-systemically important NBFCs.?

The SBR Master Directions have been issued in supersession of the:??

1. Non-Banking Financial Company–Non-Systemically Important Non-Deposit taking (Reserve Bank) Directions, 2016, and
2. Non-Banking Financial Company–Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (collectively, the Erstwhile Regulatory Regime).

A. What is NBFC??

?An NBFC (Non-Banking Financial Company) is a company that mainly deals with financial activities.?

?It should satisfy the below criteria:?

Financial Asset Focus: At least 50% of a company’s total assets are financial assets and??

Income Source: At least 50% of a company’s gross income is generated from financial assets.?

Financial assets : include loans, advances, investments in shares/ debentures/ bonds/ hire purchase and leasing activities, etc.,

• Additionally, for an NBFC to be registered with the RBI (Reserve Bank of India) and continue its operations, it needs to have a certain amount of money called “Net Owned Fund.”

Net Owned Fund is the total amount of a company’s capital, including paid-up equity, preference shares, reserves, and surplus from asset sales, minus any accumulated losses and intangible assets. This amount is further reduced by subtracting investments in subsidiaries, companies within the same group, and other NBFCs, along with the book value of debentures, bonds, loans, advances, and deposits exceeding 10% of the owned fund.?

B. What is the difference between Banks and NBFCs??

?Banks and Non-Banking Financial Companies (NBFCs) are both financial institutions, but they differ in certain key aspects:?

Banks?NBFC?Banks can accept demand deposits.?NBFC cannot accept demand deposits.?Deposit insurance facility is available to depositors of Banks.?Deposit insurance facility is not available to depositors of NBFCs.?Banks form a part of the payment and settlement system and can issue cheques drawn on itself.NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.?

C. Is it mandatory that NBFC registers itself with RBI??

Non-banking financial company cannot commence or carry on business of a non-banking financial institution without obtaining a certificate of registration from the Reserve Bank of India.?

D. Scale Based categorisation of NBFCs.?

Under the SBR Framework, the RBI has introduced four scale-based layers for regulating NBFCs (base layer, middle layer, upper layer, and top layer).?

a. Base Layer (NBFCs-BL): This includes smaller non-deposit taking NBFCs with assets below ?1,000 crore NBFC-P2P, NBFC-AA, NOFHCs, NBFCs not availing public funds and not having any customer interface.?

b. Middle Layer (NBFCs-ML): This layer consists of all deposit-taking NBFCs, regardless of their asset size, non-deposit taking NBFCs with assets of ?1,000 crore and above HFCs, IDF NBFCs, CIC, NBFC-IFC, SPD (Abrevations are explained below).?

c. Upper Layer (NBFCs-UL): This includes NBFCs which are specifically identified by the RBI. Top 10 NBFCs based on their asset size will always fall in the upper layer.?

d. Top Layer (NBFCs-TL): This includes NBFCs which the RBI shifts from the upper layer to the top layer if such NBFCs have potential systemic risk.?

Smaller and specialized NBFCs are in the Base Layer, larger and more diverse ones are in the Middle Layer, while those with significant size or risk are placed in the Upper Layer.?

E. Basic reporting requirements for NBFCs:?

1) Form: DNBS-02

Purpose: The return includes financial information such as asset and liability components as well as compliance with different prudential standards.

Applicability: NBFCs in Base Layer [except Peer-to-Peer Lending platform Companies].

Due Date: Within 21 days from the end of last day of each Calendar Quarter (i.e., March 31st, June 30th, September 30th, and December 31st)

2) Form: DNBS-10

Purpose: Statutory Auditor Certificate (SAC) Return

Applicability: All the NBFCs

Due Date: Within 5 days from the date of finalization of Balance Sheet by auditors

3)Form: DNBS-04A

Purpose: Short Term Dynamic Liquidity

Applicability: i. NBFC-UL,ii.NBFC-ML [except Standalone Primary Dealers (SPDs)], andiii.NBFC-BL with asset size of ?100 crore and abovesolely or at Group level, [excluding Type-I NBFCs, and NonOperative Financial Holding Companies (NOFHCs), P2Ps, AAs, and Mortgage Guarantee Companies]

Due Date: Within 21 days from the end of each quarter.

4) Form: DBNS-04B

Purpose: Structural Liquidity & Interest rate sensitivity

Applicability: i. NBFC-UL,ii. NBFC-ML [except Standalone Primary Dealers (SPDs)], andiii. NBFC-BL with asset size of ?100 crore and above solely or at Group level, [excluding Type-I NBFCs, and NonOperative Financial Holding Companies (NOFHCs), P2Ps, AAs, and Mortgage Guarantee Companies]

Due Date: Within 15 days from the end of each month.

5) Form: DNBS-13

Purpose: Details of Overseas Investments

Applicability: NBFCs with overseas investment, if any.

Due Date: Within 21 days from the end of each quarter.

In addition to the above-mentioned compliances, Middle Layer, Top Layer, and Upper Layer NBFCs are subject to additional compliance requirements. RBI has specified the returns that Supervised Entities (including commercial banks, selected AIFIs, NBFCs, and Urban Cooperative Banks) must file via a designated online portal. Access the list by clicking here .?

F. Companies that do not fall within the scope of NBFCs:?

Companies that cannot be considered as NBFCs are those primarily engaged in agricultural or industrial activities, involved in the purchase or sale of goods (excluding securities), providing services, or undertaking activities related to the sale/purchase/construction of immovable property.

G. The Bottom Line:?

Incorporating a Non-Banking Financial Company (NBFC) offers advantages over banks due to lower regulatory requirements. NBFCs enjoy more operational flexibility, allowing specialization in niche financial services. Lower entry barriers make NBFCs more accessible to entrepreneurs and smaller investors. Additionally, NBFCs have diverse funding sources, enabling greater flexibility in capital raising and risk management.?

*Abbreviations explained:?

NBFC-P2P:?NBFC Peer to Peer Lending Platform?

NBFC-AA: NBFC-Account Aggregator

?NOFHC:?Non-Operative Financial Holding Company?

SPDs:?Standalone Primary Dealers

?IDF-NBFCs:?Infrastructure Debt Fund?

CICs:?Core Investment Companies?

HFCs:?Housing Finance Companies

?NBFC-IFCs:?Infrastructure Finance Companies?