The Reserve Bank of India (RBI) in its bid to harmonize Non-Banking and Financial Companies (NBFCs) released a notification on 22nd February 2019 that merged three categories of NBFCs into one called “NBFC-Investment and Credit Company”. The new financial entity also termed as NBFC-ICC was created by merging Asset Financing NBFC, Investment companies and loan companies.
As per RBI, the above step was taken to ease the operational flexibility of the NBFCs by following the principle of “Activity-Based Regulation” in place of the traditionally followed “Entity Based Regulation” policies. The NBFC-ICC so formed resulted in the merger of similar activities conducted by three different institutions which led to an increase in robustness and flexibility of operations under a single window.
If you are looking for information on how the new NBFC-ICC is beneficial or what is the reason behind the merger of three different categories of non-banking financial institutions, then read on to find out the answers. Here we will understand,
- What is NBFC-ICC and How It Came into being?
- Why creating an NBFC-Investment and Credit Company by Merging three NBFCs was necessary?
- What is the current scope of opening an NBFC-ICC in Indian Market?
- How to start an NBFC-ICC in India and what is its registration process?
If you are a new investor and looking to set up your own NBFC to lend and finance then you must continue reading as it will clear all your doubts and also inform you how we at MUDS can help you grow as a new NBFC-Investment and Credit Company in India.
How NBFC-Investment and Credit Company Category Created?
The new category of NBFCs names as NBFC-Investment and Credit Company came into being by a notification from RBI last year. The story behind the creation of the new category is as follows,
To harmonize regulation of different categories of NBFC by activity (which were earlier regulated entity wise), the RBI formed a committee on Comprehensive Financial Services for Small Businesses and Low-Income Households which was chaired by Dr Nachiket Mor. RBI also created an internal committee chaired by Shri G, Padmanabhan. These committees submitted their reports in January 2014 and April 2014 respectively suggesting that harmonization of various categories of NBFCs based on activity was needed.
So, last year RBI decided to merge three categories of NBFCs which cover 99% of the no. of NBFCs in India. These categories were Asset Finance Company, Investment Company and Loan Company. We will study about these categories in the following section. To make the newly formed NBFC category clear to investors and borrowers, RBI came out with the following definition,
“Investment and Credit Company – (NBFC-ICC)” means any company which is a financial institution carrying on as its principal business – asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities; and is not any other category of NBFC as defined by RBI in any of its Master Directions.
The idea behind the creation of this new category was to give NBFC-ICC more freedom to allocate its assets. This has led to flexibility in the operation of NBFCs in this category and made the operation of lending and finance efficient. Lets study in more detail about the need for this merger and formation of the new category and what are its benefits.
Need for a New NBFC Category and Related Reforms
Many of you might be wondering why RBI changed its regulation approach from entity-based to activity-based and why the new category of NBFCs was created? To understand the answer to these questions we must understand the no. of NBFCs in India, how they operate and how RBI conceptualised that operations of these NBFCs could be made flexible.
Nearly 10000 NBFC are operating in India as of now. Out of these, almost 90% NBFCs are non-deposit NBFCs and rest are deposit taking NBFC. The RBI deduced that having too many NBFC categories is creating a high compliance cost for the NBFC sector and a reform was needed to reduce the no. of categories or create broader categories to accommodate more NBFCs and ensure freedom of operation for the companies. This thought led to the introduction of the merger of three categories of NBFC into one by RBI last year. To understand how this merger helped NBFCs from these categories, let us understand in brief about the operation the NBFCs from the three categories.
Asset Financing Companies (AFC): An asset financing company can be defined as an institution that finances the manufacturing companies to invest in buying physical assets to create products. These assets support the productivity of the manufacturing units and are responsible for the main economic activity of any manufacturing facility. Some examples of such assets include tractors, automobiles, lathe machines, earthmoving machines, generators, material handling equipment, supply chain equipment, and other industrial machines. These companies are essential to support the business of small and medium enterprises in case of emergency or to upgrade their manufacturing plants.
Loan Company (LC): The principal business of a loan company is defined as providing finance to borrowers in the form of loans and advances. These loans are assets of these companies and could include personal loans to borrowers in need of emergency loans. This category doesn’t include asset financing and therefore, these companies cannot finance businesses for buying manufacturing equipment or industrial machinery. This obviously created lack of freedom among these companies as they needed the borrower to specify the reason to avail the loan. Also, granting large loans wasn’t possible for these companies as people generally took to them for small emergency loans.
Investment Companies (IC): The principal business of these types of companies was to acquire securities by investment. The securities thus acquired were assets for these companies which helped in bringing revenue for their operations.
The objective of Harmonization of Categories
The objective of merging these three categories of NBFC was to impart greater operational flexibility to them. After the merger of categories, these institutions were under the same set of regulations as they were now operating under NBFC-ICC category. Although their principal area of business and sources of finances varied, the same set of regulations gave them the liberty to increase their business and reach a wider audience. The principal business criterion set for AFC in this category was calculated as the total of real/physical financing assets that supported their financial activity and its income. It was expected that this should not be lower than 60% of the total assets and income for any AFC. After harmonization, this principal business criterion was lowered to 50% of total assets and income for all the three categories which helped these businesses. Now, after the merger of categories, the broad head of the NBFC under RBI could be classified into three categories:
- Mutual Benefit Financial Company (MBFC)
The RBI also capped the investment limit for deposit-taking NBFC-ICC to 20% of their owned funds which can be invested in unquoted shares of any other company which is not the same group company or subsidiary company. The text of the regulation from RBI said:
“40. Restrictions on investments in land and building and unquoted shares
(1) No NBFC-ICC, which is accepting the public deposit, shall invest in
a. Land or building, except for its own use, an amount exceeding ten per cent of its owned fund;
b. Unquoted shares of another company, which is not a subsidiary company or a company in the same group of the non-banking financial company, an amount exceeding twenty per cent of its owned fund.
Provided that the land or building or unquoted shares acquired in satisfaction of its debts shall be disposed of by the non-banking financial company within a period of three years or within such period as extended by the bank, from the date of such acquisition if the investment in these assets together with such assets already held by the non-banking financial company exceeds the above ceiling;”
To summarize, we can say that this harmonization was needed to bring better administration with uniformity of norms for NBFCs. This new categorisation has also brought a huge number of NBFCs in the category of NBFC-ICC and so the operation of a large section of the NBFC is under the regulation of common norms and regulation. This will, of course, facilitate the business of this sector and make the lending and investment process efficient. Now let us understand the business and advantages of NBFC-ICC before moving to the process of their registration.
Advantages of Registering as a New NBFC-ICC in India
Venturing into Financial Market of MSMEs
Many experts believe that the NBFC-Investment and Credit Company could play a vital role in the development of Indian economy. The NBFC-ICCs are could become a key player for facilitating the development of the small business or MSMSs financing markets. Most of the MSMEs are looking for small loans for their businesses which they may not get from big banks due to the strict norms or other unavoidable reasons. Now, due to ease of regulation brought by RBI, the AFC in the new category of NBFC-ICC can lend loans to these small businesses to restart their economic activities in the tough financial situation created by COVID-19. The Government has also facilitated credit flow to the NBFC-ICC to maintain liquidity which can further help the small business without facing any cash crunch.
Low-Cost Loans for All
Various reports across the country have indicated that despite having branches of regional rural banks spread across the country and other banks trying to reach the far hinterlands of India, the financial inclusion among small towns and rural areas remains low. The credit deficit in such areas could be easily managed by NBFCs as they won’t need high-grade infrastructural support to operate their business-like banks. The cost required for NBFCs to operate in such areas is very low and therefore, they can easily have a physical presence in such areas compared to a large bank. Many NBFC-ICCs are rapidly expanding their business to many small towns in India and offering loans at a reduced interest rate to small businesses. This shows the contribution of NBFCs toward increasing financial inclusion and development of the population in small towns and rural areas. We all know that NBFC-ICC can provide loans at a lower rate to the borrower to get for their businesses or any other personal activity.
More Finance Options
The requirement of small businesses differs from that of large corporates. Hence, the loan requirements for different activities also differ for small enterprises. Mostly these enterprises need small loans to meet a temporary shortfall of cash. These could include paying salaries to the employees, executing a large order suddenly, or in research and development. The larger banks have plans that rarely if ever cater to the needs of these small businesses and are mostly focussed on the requirement of large corporates. Whereas, the AFC or LC under the NBFC-ICC category can have an assortment of plans that can meet the requirement of these small vendors, merchants, and distributors to buy assets for their business. This also leads to increased financial engagement of small business owners in the financial market.
Increased Credit Supply
Gone are the days when credit supply was the sole responsibility of the banks and other bigger financial institutions. These big organisations follow inflexible policies to finance a small business or give small loans that have acted as a roadblock to access the large part of the Indian population with a humble background. The alternative credit supply chain created by many financing companies that are now NBFC-ICC has led to financial inclusion of the lower class of society. These lenders have also reduced the loads from banks to cater to every section of society. Also, these lenders work with relatively smaller infrastructure and so they can reach to the far hinterlands of India easily compared to banks.
Increased Research and Development in Small Business
Banks had a restraining policy towards small businesses as they were termed as potentially the riskier clients. The small business could not come back from any sudden downfall in business and so, were not eligible for loans from most of the banks. Also, these businesses refrained from investing in Research and Development due to lack of financial support which led to delay in up-gradation of machinery in their factories. The AFCs have flexible norms to lend loans to small business and offer cheaper interest rates that make paying off the loans easy for these businesses. This has led to the financial inclusion of the small business who were traditionally kept out of the purview of the organized credit system.
In the above sections, we saw how India’s financial market has high growth potential and with a high influx of investment by various lenders, the future of NBFC-Investment and Credit Companies looks bright. To the investors we can only say, it is a great opportunity to take advantage of the growth potential of this market, many investors are multiplying their income by reinvesting their returns from their NBFC investments. Due to the current dim situation created by COVID-19, the Indian business sector needs finance. The Indian government is also focussing on maintaining liquidity in the market and therefore the NBFC-ICCs are currently getting ample support to thrive in the Indian financial market. This marks a great opportunity for all the business owners who want to start their new Non-Banking Financial Company in India. The process for registration as a new NBFC-ICC is given in the following section.
MUDS Management Consultancy Firm helps new businesses to start as a new NBFC-Investment and Credit Company in India. We offer complete guidance to new business starters on the procedure to open a new Asset financing NBFC or a finance company specializing in lending loans or investment only. All three types of companies can be registered as NBFC-ICC with the Reserve bank of India.
Read on to understand how to start a new NBFC-ICC in India and how we can help you throughout the process of registration.
Procedure to Start NBFC-ICC in India
Now, let’s understand the procedure of starting a new NBFC in a step by step manner.
- Register Your NBFC Under the Companies Act, 2013: Start by registering your NBFC as a public or private company with the government.
- Raise Authorized Paid-up Capital of Up to Two Crores: The company must raise an authorized and paid-up capital of about 2 crores to meet the required standards of registration.
- Depositing the Sum in Bank and Getting Certificate: After raising this sum the company is required to open a fixed deposit account in a bank and deposit the money. After this, they must obtain a Certificate of no lien from the bank to move forward with the process of registration.
- Getting All the Certified Copies to Complete the Checklist of RBI Registration
- Fill Online Application: Once you have all the documents ready for registration, fill the online application form for NBFC registration. After filling the form, the company will get an autogenerated Company Application Reference Number or CARN which will be used as a reference number in all further communication with RBI.
- Submit the Hard Copy of Application to RBI’s Regional Office: After filling the online application form and getting the CARN for your company, the physical copies of all the necessary and supporting documents must be compiled with the application form and should be submitted to the regional RBI Office to complete the process of registration.
Documents Required for Registration as a New NBFC-Investment and Credit Company:
- ID Proof (Could be Aadhar Card, Voter ID Card, Passport or Driving License)
- Copy of PAN Card
- Passport Size Photos
- Address Proof (Bank Statement, Telephone bill, Mobile Bill, and Electricity Bill)
- Ownership Documents or Rent Agreement for office space
- Electricity bill
- Certified Copy of Certificate of Registration
- A copy of Fixed Deposit receipt and bankers’ certificate of lien indicating balances in support of Net Owned Funds.
- Bankers Report for Applicant Company/ group companies
- Certified copy of an extract of the main object clause in the MOA (Memorandum of Association) relating to the financial business.
- Certified Copy of the Board resolution
- No Objection Certificate from the owner for rented property
- CIBIL records of all shareholder (more than 10% share in Company) and directors
- Education & Experience proof of promotors
- Net worth certificate of directors and shareholders
Some of the documents required may change depending upon the nature of the business of your new company. You can contact us on the details mentioned at the end of the article to understand the process specific to your business.
How Muds Management Assists in Registration of New NBFCs?
Now, it is understood from the above sections that any new company trying to enter the business of financing in India must start by registering itself as an NBFC-ICC with the Reserve bank of India. The process for the same is outlined in the above sections. However, this process could become cumbersome and time taking for founders of the new NBFCs, and therefore, taking assistance from MUDS management helps them in saving time and the hassle of the registration process. This also becomes necessary as registering in different categories of NBFC may require a different approach so consulting a firm specializing in the registration of businesses is a good idea.
Already one of the best management consulting service providers, MUDS Management has worked with top NBFCs in India to streamline the process of their registration and other legal formalities. With the experience of assisting many clients in legal and regulatory services across different domains, you can rely on MUDS Management to get the best services for your business. You can reach out to MUDS Management Consulting for assistance on new NBFCs registration by contacting them on +91 9599653306 or by email on [email protected]