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Financial Services Organisation

Non-Banking Financial Companies

What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013/1956 engaged in the business of

  • loans and advances,
  • acquisition of shares/stocks/bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature,
  • leasing, hire-purchase, insurance business, chit business

but does not include any institution whose principal business is that of

  • agriculture activity,
  • industrial activity,
  • purchase or sale of any goods (other than securities) or
  • providing any services and
  • sale/purchase/construction of immovable property.

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

What does conducting financial activity as “principal business” mean?
Financial activity as principal business is when a company’s

  • financial assets constitute more than 50% of the total assets and
  • income from financial assets constitute more than 50 % of the gross income.

A company which fulfils both these criteria will be registered as NBFC by RBI. This test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

  1. NBFC cannot accept demand deposits;
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Is it necessary that every NBFC should be registered with RBI?
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without obtaining a certificate of registration from the Bank.

But, in terms of the powers given to the RBI, to remove 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 registered with SEBI,
  • Insurance Company holding a valid Certificate of Registration issued by IRDA,
  • Nidhi companies as notified under Companies Act, 1956/2013,
  • Chit companies as defined in the Chit Funds Act, 1982,
  • Housing Finance Companies regulated by National Housing Bank,
  • Stock Exchange or a Mutual Benefit company.

Diagram

What are the different types/categories of NBFCs registered with RBI?

  1. Asset Finance Company (AFC)
    • An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines.
    • Principal business for this purpose is defined as
      • aggregate of financing real/physical assets supporting economic activity is not less than 60% of its total assets and
      • income arising therefrom is not less than 60% of its total income.
  2. Investment Company (IC)
    IC means any company which is a financial institution carrying on as its principal business the acquisition of securities
  3. Loan Company (LC)
    LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
  4. Infrastructure Finance Company (IFC)
    IFC is a non-banking finance company
    • which deploys at least 75% of its total assets in infrastructure loans,
    • which has a minimum Net Owned Funds of ₹ 300 crore,
    • which has a minimum credit rating of ‘A ‘or equivalent and
    • which has Capital to Risky Asset Ratio [CRAR] of 15%.
  5. Systemically Important Core Investment Company (CIC-ND-SI)
    CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-
    • it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;
    • its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;
    • it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
    • it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.
    • Its asset size is ₹ 100 crore or above and
    • It accepts public funds
  6. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)
    IDFs are investment vehicles which can be sponsored by commercial banks and NBFCs in India in which domestic/offshore institutional investors, specially insurance and pension funds can invest through units and bonds issued by the IDFs. IDFs would essentially act as vehicles for refinancing existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure projects.
  7. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
    Microfinance institutions or MFIs are a non-deposit taking NBFC (other than a company formed and registered under section 25 of the Companies Act, 1956 or Section 8 of the Companies Act, 2013) that fulfils the following conditions. Usually, their area of operations of extending small loans are rural areas and among low-income people in urban areas.

    “Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)” means a non-deposit taking NBFC that fulfils the following conditions:

    • Minimum Net Owned Funds of ₹ 5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at ₹ 2 crore).
    • Not less than 85% of its net assets are in the nature of “qualifying assets.”

    “Qualifying assets” are loans that meet below specifications:

    • loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,25,000 or urban and semi-urban household income not exceeding ₹ 2,00,000;
    • loan amount does not exceed ₹ 75,000 in the first cycle and ₹ 1,25,000 in subsequent cycles;
    • total indebtedness of the borrower does not exceed ₹ 1,25,000;
    • for a loan of Rs. 30,000 or more, the duration of the loan should not be less than 24 months, with prepayment without penalty
    • loan to be extended without collateral/securities;
    • aggregate amount of loans, given for income generation, is not less than 50% of the total loans given by the MFIs; the remaining part of the aggregate amount of loans may be extended for other purposes such as housing repairs, personal expenses, education, medical, or other emergencies.

    NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50% of its total assets and its income derived from factoring business should not be less than 50% of its gross income.

  8. Non-Banking Financial Company – Factors (NBFC-Factors)
    NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50% of its total assets and its income derived from factoring business should not be less than 50% of its gross income.Mortgage Guarantee Companies (MGC)

  9. MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.

  10. NBFC- Non-Operative Financial Holding Company (NOFHC)
    It is financial institution through which promoter / promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

  11. Systemically important non-deposit taking non-banking financial company
    It means a non-banking financial company not accepting / holding public deposits and having total assets of ₹ 500 crore and above as shown in the last audited balance sheet;

     

Advantages of NBFCs

  1. Competitive Interest Rates – Easy and affordable loans and other financial services, lower EMIs
  2. Quick Processing – Loan approval easier, smoother and quicker.
  3. Less Rules and Regulations – Less complicated loan processing requirements which makes borrowers are highly satisfied.
  4. Loan available for Individuals with Poor Credit Rating
  5. Simple loans such are vehicle financing loans, gold loans, home loans and durable loans are offered by NBFCs and customer satisfaction ratio is high here.

Incorporation of NBFCs

Non- Banking Financial Companies (NBFCs) are companies incorporated under Companies Act, 2013 or Companies Act, 1956.

Further, principal business, to be stated in the MOA of NBFCs, while registering under the Companies Act shall be lending credit, making investments in various types of shares and stocks, leasing, hire-purchase, insurance business, chit business, and receiving deposits under any scheme or arrangement.

Registration Process with Reserve Bank of India
After incorporation of the company, the NBFC must obtain certificate of registration. Before applying for registration, the company should ensure the following:

  • It should have minimum one director from NBFC background or senior Bankers as full-time director in the company
  • Clean CIBIL records
  • Understanding of NBFC/Finance business

Section 45-IA of the RBI Act, 1934
No non-banking financial company shall commence or carry on the business of a non-banking financial institution without—

  • obtaining a certificate of registration issued by the Bank; and
  • having the net owned fund of 25 lakh rupees or such other amount, not exceeding 100 crore rupees, as the Bank may, by notification in the Official Gazette, specify:

Provided that the Bank may notify different amounts of net owned fund for different categories of non-banking financial companies.

Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify.

Factors to be considered by RBI while accepting application
RBI, for the purpose of considering the application for registration, may require to be satisfied by an inspection of the books of the non-banking financial company or otherwise that the following conditions are fulfilled:—

  • that the non-banking financial company is or shall be in a position to pay its present or future depositors in full as and when their claims accrue;
  • that the affairs of the non-banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;
  • that the general character of the management or the proposed management of the non-banking financial company shall not be prejudicial to the public interest or the interests of its depositors;
  • that the non-banking financial company has adequate capital structure and earning prospects;
  • that the public interest shall be served by the grant of certificate of registration to the nonbanking financial company to commence or to carry on the business of India;
  • that the grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary stability, and economic growth considering such other relevant factors which the Bank may, by notification in the Official Gazette, specify; and
  • any other condition, fulfilment of which in the opinion of the Bank, shall be necessary to ensure that the commencement of or carrying on of the business in India by a non-banking financial company shall not be prejudicial to the public interest or in the interests of the depositors.

The Bank may, after being satisfied that the above specified conditions are fulfilled, grant a certificate of registration subject to such conditions which it may consider fit to impose.

Cancellation a certificate of registration
RBI cancel a certificate of registration granted to a non-banking financial company under this section if such company—

  1. ceases to carry on the business of a non-banking financial institution in India; or
  2. has failed to comply with any condition subject to which the certificate of registration had been issued to it; or
  3. at any time fails to fulfil any of the conditions referred to in clauses (d) to (g) above; or
  4. fails—
    • to comply with any direction issued by the Bank under the provisions of this Chapter; or
    • to maintain accounts in accordance with the requirements of any law or any direction or order issued by the Bank under the provisions of this Chapter; or
    • to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the Bank; or
  5. has been prohibited from accepting deposit by an order made by the Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months:

Provided that before cancelling a certificate of registration on the ground that the NBFC

  • has failed to company with the provisions of clause (ii) or
  • has failed to fulfil any of the conditions referred to in clause (iii),

RBI,

  • unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company,

shall give an opportunity to such company on such term as RBI may specify for taking necessary steps to comply with such provision or fulfilment of such condition:

Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.

Appeal against the order of RBI to Central Government within 30 days
A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an Appeal,

  • within a period of 30 days from the date on which such order of rejection or cancellation is communicated to it,

to the Central Government

The decision of the Central Government where an appeal has been preferred to it, or of the RBI where no appeal has been preferred, shall be final:

Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard.

Procedure for filing application with Reserve Bank of India

  • The applicant company is required to apply online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India.
  • The application can be submitted online by accessing RBI’s secured website-https://cosmos.rbi.org.in. At this stage, the applicant company will not need to log on to the COSMOS application and hence user ids are not required.
  • The company can click on “CLICK” for Company Registration on the login page of the COSMOS Application. A window showing the Excel application form available for download would be displayed. The company can then download suitable application form from the above website, key in the data and upload the application form.
  • Thereafter, the company has to submit the hard copy of the application form (indicating the online Company Application Reference Number) along with the supporting documents, to the concerned Regional Office.

Documents required for registration as Type I – NBFC-ND (having no customer interface)

  1. Certified copies of Certificate of Incorporation.
  2. Certified copies of extract of only the main object clause in the MOA relating to the financial business.
  3. Board resolution stating that:
    • the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI
    • the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of RBI
    • the Unincorporated Bodies in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future
    • the company has formulated “Fair Practices Code” as per RBI Guidelines
    • the company does not have any customer interface as on date and will not have any customer interface in the future without the approval of Reserve Bank of India
  1. Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Fund (NOF)
  2. For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years, whichever is less, should be submitted
  3. Copy of the certificate of highest educational and professional qualification in respect of all the directors
  4. Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors
  5. Banker’s report in respect of applicant company, its group/subsidiary/associate/holding company/related parties, directors of the applicant company having substantial interest in other companies. The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Housing Finance Company (HFC)

Housing Finance Company (HFC)

Type of Organisation

A Company incorporated under Companies Act, 2103

Category

Non-Banking Financial Company (NBFC)

Principal Objects

Providing finance for housing, whether directly or indirectly

Regulated/Regulated by

National Housing Bank (NHB)

HFC is an institution which is primarily engaged in the business of providing home loans and other related products against Collateral Securities.

Revised regulatory framework for HFCs
On 22 October 2020, the RBI issued the revised regulatory framework for HFCs. Set out below are the key aspects of the Revised Framework:

“Housing finance company” shall mean a company incorporated under the Companies Act, 2013 that fulfils the following conditions:

  1. It is an NBFC whose financial assets, in the business of providing finance for housing, constitute at least 60% of its total assets (netted off by intangible assets).
  2. Out of the total assets (netted off by intangible assets), not less than 50% should be by way of housing financing for individuals.

“Housing Finance” shall mean financing, for purchase/ construction/ reconstruction/ renovation/ repairs of residential dwelling units (a house, flat, or other place of residence), which includes:

  1. Loans to individuals or group of individuals including co-operative societies for construction/ purchase of new dwelling units.
  2. Loans to individuals or group of individuals for purchase of old dwelling units.
  3. Loans to individuals or group of individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.
  4. Loans to individuals for purchase of plots for construction of residential dwelling units provided a declaration is obtained from the borrower that he intends to construct a house on the plot within a period of 3 years from the date of availing of the loan.
  5. Loans to individuals or group of individuals for renovation/ reconstruction of existing dwelling units.
  6. Lending to public agencies including state housing boards for construction of residential dwelling units.
  7. Loans to corporates/ Government agencies for employee housing.
  8. Loans for construction of educational, health, social, cultural or other institutions/ centres, which are part of housing projects and which are necessary for the development of settlements or townships.
  9. Loans for construction meant for improving the conditions in slum areas, for which credit may be extended directly to the slum-dwellers on the guarantee of the Central Government, or indirectly to them through the State Governments.
  10. Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies.
  11. Lending to builders for construction of residential dwelling units.

All other loans including those given for furnishing dwelling units, loans given against mortgage of property for any purpose other than buying/ construction of a new dwelling unit/s or renovation of the existing dwelling unit/s as mentioned above, will be treated as non-housing loans and will not be falling under the definition of “Housing Finance”.

Net Owned Fund (NOF) Requirement in case of HFC
In exercise of the powers conferred by clause (b) of sub-section (1) of Section 29A of the National Housing Bank Act, 1987, and all powers enabling it in that behalf, the Reserve Bank hereby specifies Rupees 20 crore as the minimum net owned funds required for a company to commence housing finance as its principal business or carry on the business of housing finance as its principal business.

Provided that a housing finance company holding a Certificate of Registration (CoR) and having net owned fund of less than Rupees 20 crore, may continue to carry on the business of housing finance, if such company achieves net owned fund of Rupees 15 crore by March 31, 2022 and Rupees 20 crore by March 31 2023.

Scope of Net Owned Funds
According to the Explanation to Section 29A Net Owned Funds means:

  • The aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the housing finance institution after deducting therefrom –
    • accumulated balance of loss;
    • deferred revenue expenditure, and
    • other intangible assets; and
  • further reduced by the amounts representing –
    • investments of such institution in shares of-
      • its subsidiaries;
      • companies in the same group;
      • all other housing finance institutions which are companies; and
  • the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,
    • subsidiaries of such company; and
    • Companies in the same group,

to the extent such amount exceeds 10% of (a) above;

Benefits of HFC
From Companies Point of View – At present housing finance business is very favourable due to government’s initiatives in this field. Due to increasing urbanisation and economic growth of cities and towns, the sector is likely to see immense growth.

From Public Point of View – HFCs are making the availability of Housing Loans more easy and affordable. HFCs are providing long term loans at competitive interest rate with low EMI. HFCs disburse loans quickly. Thus, HFC is an alternate to normal banks.

Registration of HFC 

  1. HFC is company registered under Companies Act, 2013 with main objects of providing finance for housing, whether directly or indirectly.
  2. In terms of Section 29A of the National Housing Bank Act, 1987, no Housing Finance Company shall commence or carry on the business of a housing finance institution without –
    • Obtaining a certificate of registration from National Housing Bank issued under Chapter V of the said Act, and
    • Having the net owned fund of Rs. 20 Crore or such other higher amount, as the National Housing Bank may, by notification, specify.

Thus, it is suggested that the Authorised Capital of HFC shall be 20 Crores or higher.

  1. Before granting the registration, National Housing Bank shall satisfy itself that:
    • HFC is or shall be in a position to pay its present or future depositors in full as and when their claims accrue;
    • Affairs of the HFC are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;
    • General character of the management or the proposed management of the HFC shall not be prejudicial to the public interest or to the interests of its depositors;
    • HFC has adequate capital structure and earning prospects;
    • Grant of certificate of registration shall be
      • in Public interest
      • in the interest of operation and growth of the housing finance sector of the country;
  • Any other condition, fulfilment of which in the opinion of the NHB, shall be necessary to ensure that the commencement of or carrying on the business in India by a HFC shall not be prejudicial to the public interest or in the interests of the depositors.

HFCs are categorized in terms of the type of liabilities, by NHB, into Deposit and Non-Deposit accepting HFCs and are issued Certificate of Registration accordingly.

The applicant company is required to submit a physical copy of the application (in duplicate) along with the essentials documents to the Head Office of the National Housing Bank. Further, it is also required to attach a Demand Draft for Rs. 10,000 favouring National Housing Bank payable at New Delhi.

A filled-in physical copy of the application form (in duplicate) along with necessary enclosures to be submitted to the Head Office of NHB.

Asset Reconstruction Company (ARC)

Asset Reconstruction Company (ARC)

Type of Organisation

A Company incorporated under Companies Act, 2103

Category

Non-Banking Financial Company (NBFC)

Principal Objects

Providing Asset Reconstruction facilities by taking over the Non-Performing Loans/Assets from financial institutions (like banks)

Regulated/Regulated by

RBI

 Asset Reconstruction Company (Securitization Company/Reconstruction Company) is a company registered under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002.

It is regulated by Reserve Bank of India as a Non-Banking Financial Company.

ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:-

  • Isolating Non Performing Loans (NPLs) from the Financial System (FS),
  • Freeing the financial system to focus on their core activities and
  • Facilitating development of market for distressed assets.

As per RBI Notification No. DNBS.2/CGM (CSM)-2003, dated April 23, 2003, ARC performs the following functions:-

  •  Acquisition of financial assets (as defined u/s 2(L) of SRFAESI Act, 2002)
  • Change or takeover of Management/Sale or Lease of Business of the Borrower
  • Rescheduling of Debt
  • Enforcement of Security Interest (as per section 13(4) of SRFAESI Act, 2002)
  • Settlement of dues payable by the borrower

Thus, Banks and financial institutions with a large proportion of their bad loans or Non-Performing Assets can sell to Asset Reconstruction Company at discount. Then Asset Reconstruction Companies recover a sum through attachment, liquidation etc. The objective is to help banks in making clean books by reducing Non Performing Assets. Asset Reconstruction Companies are also making profit by buying Non Performing Assets at a lower price.

Benefits of incorporating an Asset Reconstruction Company (ARC)

  • As the cash realisation activity from defaulting borrowers is a lengthy and cumbersome procedure, relieving banks of the burden of NPAs will allow them to focus better on managing the core business including providing new business opportunities for the ARC.
  • The transfer should help restore depositor and investor confidence by ensuring the lender’s financial health. The banks use it as a method to hive off the bad loans from their balance sheet. ARCs can maximise recovery value while minimizing costs.
  • ARCs also helps building industry expertise in loan resolution and restructuring management, besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection.
  • ARCs play an important role in developing capital markets through secondary asset instruments.

Registration of ARC
ARC is company registered under Companies Act, 2013. It has to register itself with the Reserve Bank of India as ARC.

ARC’s are governed by The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 issued by the RBI as amended from time to time.

  • The ARC’s seeking registration from the RBI shall submit their application in the format specified by the Bank, duly filled in with all the relevant annexures / supporting documents to the Chief General Manager-in-Charge, Department of Non-Banking Regulation, Central Office, Reserve Bank of India.
  • An ARC, which has obtained a certificate of registration issued by the Bank under Section 3 of the SRFAESI Act, 2002, can undertake both securitisation and asset reconstruction activities;
  • (a) An ARC shall commence business within 6 months from the date of grant of Certificate of Registration by the Bank; RBI may grant extension for further period not exceeding 12 months.
    (b) Provisions of section 45 –IA (Requirement of registration and net owned fund), 45-IB (Provisions w.r.t Maintenance of percentage of assets) and 45-IC (Provisions w.r.t Reserve fund) of RBI Act,1934 shall not apply to NBFC, which is an ARC registered with the RBI under Section 3 of the SARFAESI Act, 2002
  • As per notification issued by RBI, an ARC shall have a Net Owned Funds (NOF) of Rs. 100 Crore on an ongoing basis.

MICRO FINANCE INSTITUTIONS (MFI)

NABARD has defined microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas provided to customers to meet their financial needs; with only qualification that (1) transactions value is small and (2) customers are poor.”

Characteristics of a Micro Finance Institution

  1. The size of the loan given by the MFI is small.
  2. The repayment period is short.
  3. MFI can mobilise resources both from internal and external sources.
  4. No collateral for loan is required.
  5. the purpose of end use of loan is flexible.
  6. loans given are mostly group loans, trickling down to individuals.
  7. Transaction cost is low, due to group lending.

Importance of Micro Finance in Indian Economy
Concept of Self Help Group (SHGs) is the most exciting discovery in the context of microfinance. The Indian microfinance scene is dominated by SHGs and their linkage with banks. This has helped in empowerment of women and eradication of property among people with low income.

Micro finance provides financial services to those whose income is small and unstable. These people are in need of credit facilities for several reasons. To name a few:

  • their needs are small and arise suddenly.
  • the institutional providers of finance, namely, the banks, demand collateral security which they cannot provide.
  • most of the time, they are in urgent need of funds to meet their consumption demands, for example, to meet expenses related to education, illness, funerals, weddings for which it is difficult to obtain institution finance.
  • for purpose of investment in income generating activities.

Registration of MFI
MFI is company registered under Companies Act, 2013. It has to register itself with the Reserve Bank of India as MFI.

The list of documents to be filed with RBI for registration as Type II NBFC-ND are given below:

  1. Certified copies of Certificate of Incorporation.
  2. Certified copies of extract of only the main object clause in the MOA relating to the financial business.
  3. Board resolution stating that:
    • the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI
    • the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of RBI
    • the Unincorporated Bodies in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future
    • the company has formulated “Fair Practices Code” as per RBI Guidelines
  1. Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Fund (NOF)
  2. For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years, whichever is less, should be submitted
  3. Copy of the certificate of highest educational and professional qualification in respect of all the directors
  4. Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors
  5. Banker’s report in respect of applicant company, its group/subsidiary/associate/holding company/related parties, directors of the applicant company having substantial interest in other companies. The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

In addition to the Documents required for registration as Type II – NBFC-ND, following list of documents/information to be submitted by the NBFC-MFI applicant:

  • Board resolution stating that:
    • the company will be a member of all the Credit Information Companies and will be a member of at least one Self Regulatory Organisation
    • the company will adhere to the regulations regarding pricing of credit, Fair Practices in lending and non-coercive method of recovery as per RBI Guidelines
    • the company has fixed internal exposure limits to avoid any undesirable concentration in specific geographical locations
    • the company is not licensed under Section 25 of the Companies Act, 1956 / Section 8 of the Companies Act, 2013.
  • Roadmap for achieving 85% qualifying assets.

“Qualifying assets” are loans that meet below specifications:

  1. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,25,000 or urban and semi-urban household income not exceeding ₹ 2,00,000;
  2. loan amount does not exceed ₹ 75,000 in the first cycle and ₹ 1,25,000 in subsequent cycles;
  3. total indebtedness of the borrower does not exceed ₹ 1,25,000;
  4. for a loan of Rs. 30,000 or more, the duration of the loan should not be less than 24 months, with prepayment without penalty
  5. loan to be extended without collateral/securities.
  6. aggregate amount of loans, given for income generation, is not less than 50% of the total loans given by the MFIs; the remaining part of the aggregate amount of loans may be extended for other purposes such as housing repairs, personal expenses, education, medical, or other emergencies.

PAYMENT BANKS

Payments banks is a new model of banks conceptualised by the Reserve Bank of India (RBI). These banks can accept a restricted deposit, which is currently limited to Rs. 2 lakh per customer and may be increased further. They can pay interest on these deposits just like savings bank account. Both current account and savings accounts can be operated by such banks. Payments banks can issue services like ATM cards, debit cards, net-banking, third party transfers and mobile-banking and offer remittance services. These banks cannot grant loans or issue credit cards.

The list of active Payments Bank are:

  • Aditya Birla Payments Bank
  • Airtel Payments Bank
  • India Post Payments Bank
  • Fino Payments Bank
  • Jio Payments Bank
  • Paytm Payments Bank

The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.

To open a bank account and the application process of payments bank is made very easy as compared to other banks. These bank accounts can be opened instantly through their respective mobile apps just by providing details like Aadhar number with KYC verification.

Regulations
There are two kinds of banking licences that are granted by the Reserve Bank of India – universal bank licence and differentiated bank licence.

Payments bank comes under a differentiated bank licence since it cannot offer all the services that a commercial bank offers. In particular, a payments bank cannot lend.

Payment Banks are public limited company registered under the Companies Act, 2013. They are regulated by the RBI. It released Guidelines for Licensing of Payment Banks on November 27, 2014 and Operating Guidelines for Payment Banks on October 6, 2016.

An application has to be filed with Reserve Bank of India in Form III under Section 22 of the Banking Regulation Act, 1949 for a licence to commence banking business by a company incorporated in India and desiring to commence banking business. Key issues which requires compliance by an applicant company are summarised below:

  1. The minimum capital requirement is Rs. 100 crore. For the first 5 years, the stake of the promoter should remain at least 40%.
  2. Foreign shareholding will be allowed in these banks as per the rules for FDI in private banks in India.
  3. The voting rights will be regulated by the Banking Regulation Act, 1949. The voting right of any shareholder is capped at 10%, which can be raised to 26% by Reserve Bank of India. Any acquisition of more than 5% will require approval of the RBI.
  4. The majority of the bank’s board of directors should consist of independent directors, appointed according to RBI guidelines.
  5. The bank should be fully networked from the beginning. The bank can accept utility bills. It cannot form subsidiaries to undertake non-banking activities.
  6. Initially, the deposits will be capped at Rs. 100,000 per customer, but it may be raised by the RBI based on the performance of the bank.
  7. The bank cannot undertake lending activities. 25% of its branches must be in the unbanked rural area.
  8. The bank must use the term “payments bank” in its name to differentiate it from other types of bank.
  9. The banks will be licensed as payments banks under Section 22 of the Banking Regulation Act, 1949.
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