What are Microfinance Companies?

Microfinance Company or Institution (MFI) operate at a smaller level compared to NBFCs. It serves the similar motive of NBFCs that is, providing lending services to the underprivileged and impoverished sections of the society that do not have an access to traditional banking facilities. MFI lends small funds to the poor people that vary from Rs. 1000 to 20000 for starting a business. There have been complaints of MFIs regarding irregularities in their functioning as they charge relatively higher interest rates than the NBFCs. Besides, it mainly indulges in giving loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation.

How they Differ from NBFCs?

The state governments have taken some steps to convert MFIs into NBFCs to ensure better regulation by RBI. Also, MFIs wants to get NBFC status because they will get access to wide-scale funding from banks. 

Both NBFC and Microfinance Companies play an important role in rural areas. Where there is an absence of banks, the Non-banking financial institution can perform similar functions like a bank. Although, Non-Banking Financial company cannot issue checks drawn on itself it can facilitate term deposits and medium scale lending. On the other hand, MFI stands for Microfinance institutions which are established to operate at a smaller level than NBFC and provide small loans facilities to the underprivileged sections of the society. Unlike NBFCs, the MFIs are not regulated through any financial institution of the government.

Advantages of Opening an NBFC

• Ensures the smoother flow of credit for small debtors and so acts as an important tool of maintaining accuracy in the market. 
• Catering to a variety of clients in online/offline mode with a relatively smaller size of staff..
• Reduces load on other lenders and hence loan processing time is also reduced leading to an overall increase in efficiency of the lending process. 
• Reduces the risk of lending bad loans as the profile of a customer is analysed by NBFCs before considering them eligibility for the loan.

Getting NBFC License in India

The procedure to get the NBFC license is completed according to the master directions given by the Reserve Bank of India. The NBFC of this category should not have any client interface or a public fund. Let us understand the process of registration in the following section.

Eligibility Criteria for NBFC License and Registration

• The first step to be followed is the registration of the company according to the Companies Act, 2013.
• The company must have some fundamental infrastructure that can support the offering of such services. 
• The company must have an adequate capital structure to seamlessly offer account aggregator services. 
• The general image of the company’s administration should be free or unbiased of public intrigue.  
• A prerequisite amount of Rs. 2 crores are required to apply for getting the certificate of registration from RBI. Without getting the registration certificate the company won’t be allowed to operate as an NBFC. 
• The company should provide information related to its data innovation framework that can provide services of account aggregation. 

It is recommended that new entrepreneurs should reach out to firms specializing in the registration process. These firms have experts who can help the customers to get their NBFC license easily. Hiring an expert will help to compile all the necessary documents, filing the Application correctly, and getting all the verification and paperwork done on time. So, do not wait any more, just hire an expert from any reputed firm and get your NBFC license as soon as possible.

The post NBFC Vs Micro Financing Institution: Things to Know before Setting Up Finance Company appeared first on MUDS.

If you want to start a new Asset financing company, then not being familiar with all the legalities involving various legal and regulatory processes could prove to be a roadblock for your success. Many new players are trying to enter the Indian market by registering as Vehicle/Asset financing companies in India to utilize its ample resources and business potential. MUDS Management Consultancy Firm helps new businesses in registering as Asset Financing Companies or AFCs or other such Non-Banking Financial Companies (NBFCs) in India with the complete process. 

Read on to know how to start a new Asset Financing Company in India and how MUDS can help you to make the complete process hassle-free. 

How to Start Asset/Vehicle Finance Company 

The Government of India is focussing on accelerating the development of the manufacturing sector under the “Make in India” initiative. To take advantage of this push by the government many new industrial start-ups are entering the Indian market. All these start-ups need financial assistance to buy industrial machinery and related products to set up their manufacturing units across the country. 

This paves way for new asset finance companies to give loans to these manufacturers. Therefore, many new companies are looking to register themselves as NBFCs to establish their place in the market and take advantage of the current situations where the country is looking to boost the overall manufacturing sector. The market of automobiles production is also going through radical changes especially after the arrival of electric vehicles. Hence, vehicle financing is also picking up as the government is planning to revamp its public transport system. Replacement of conventional rickshaws with E-rickshaws is also part that plan and therefore, the demand for E-Rickshaw finance from NBFCs is increasing. All of this makes the prospect of setting up a new Asset finance company a profitable venture. So, if you are looking to set up a new asset financing company then you can contact MUDS Management Consulting Firm to get complete info and all the help to set up your company. Here is the overview of the steps to get started.  

First, you must have the following set of documents ready for registration of your business:

• 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
• 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 promoters
• Fixed deposit of Rs. 2 Cr for the Purpose of NOF requirement
• Net worth certificate of directors and shareholders

Now, let’s understand the procedure of starting a new Asset Finance Company in a step by step manner. 

1. Register Your Asset Finance Company Under the Companies Act, 2013. MUDS Management’s legal team helps companies in the registration process with Reserve Bank of India by streamlining the process of collecting all necessary documents and ensuring strict adherence to the policy followed for registration. The Asset Finance Company can be registered as a private or public company depending upon the choice of its founders. 
2. Raise Authorized Paid-up Capital of Up to Two Crores: The company has to raise an authorized and paid-up capital of about 2 crores to meet the required standards of registration.
3. 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 this money. After this, they must obtain a Certificate of no lien from the bank to move forward with the process of registration. 
4. Getting All the Certified Copies to Complete the Checklist of RBI Registration: The company should compile the following set of documents along with the documents mentioned above to complete the checklist required for registration. 

• 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

5. Fill Online Application: Once you have all the documents ready for registration, fill the online application form for NBFC registration as an ASSET FINANCE COMPANY (AFC). After filling the form, the company will get an auto generated Company Application Reference Number or CARN. 
6. 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 hard copies of all the necessary and supporting documents must be compiled with the application form. Now, all these documents with the application form should be submitted to the regional RBI Office to complete the process of registration. 

How Muds Management Assist in Registration?

Now, we understand that running a Vehicle/Asset financing firm in India requires registration with the Reserve bank of India. The process for the same is outlined in the above sections.  However, this process proves to be cumbersome and time taking for founders of NBFCs, and therefore, taking assistance from MUDS management can help to save time and the hassle of the registration process. 

Being one of the best management consulting service providers, MUDS management has worked with top NBFCs in India over the years of its operation. 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 info@muds.co.in. 

The post How MUDS Management Helps in Registration of New Asset Financing Firms? appeared first on MUDS.

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 the NBFC 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:

• NBFC-ICC
• Mutual Benefit Financial Company (MBFC)
• NBFC-Factor

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

1. 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 MSMEs 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. 

2. 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. 

3. 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. 

4. 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.  

5. 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. 

Read Also: Pros and Cons of NBFC Business in India

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 info@muds.co.in.

The post Everything You Need to Know about NBFC-Investment and Credit Company appeared first on MUDS.

The health crisis caused by the Covid-19 pandemic has brought the economy of the country to its knees as lockdown has brought all economic activities to a standstill. This has resulted in a fatal blow to most of the sectors but sounds like a death knell for the NBFCs as they were already facing a severe liquidity crunch after the Infrastructure Leasing & Financial Services Limited (IL&FS) crisis in 2019.

What are NBFCs?

In simple terms they are exactly what their name suggests: financial services that function somewhat similar to the banks but are not banks. In the past decade or so the NBFCs have gained huge popularity in India due to its capability of catering to certain sections of the society- primarily the economically weaker sections, the people who found the banks unaffordable and inaccessible.

Then there are the Micro, Small & Medium Enterprises (MSMEs) that rely mostly, if not solely, on NBFCs to meet their credit requirements. The NBFCs are the primary financiers to the MSMEs, on whose growth greatly depends on the progress of the Indian economy.

Definition of NBFC

A NBFC is a company that is registered under the Companies Act, 1956 or 2013 and provides a wide range of financial services like giving loans and advances, insurance, etc. These are governed and regulated by the Reserve Bank of India (RBI) within the framework of the RBI Act, 1934.

Categories of NBFC

In terms of the type of liabilities the NBFCs are categorized as:

(i) NBFCs accepting public deposit (NBFCs-D) and

(ii) NBFCs not accepting/holding public deposit (NBFCs-ND)

Thus, all Non-Banking Financial Companies are divided as either deposit taking or Non-deposit taking.

The non-deposit taking NBFCs have ‘ND’ suffixed to their name (NBFC-ND) and on the other hand, the Systemically Important Non-deposit taking NBFCs have NDSI suffixed to their name and are denoted as NBFC-NDSI. Systemically Important NBFCs are those NBFCs which have an asset size of Rs.100 Crores or more.

Additionally, NBFCs are required to be registered with the RBI and must have taken specific authorization to accept deposits from the public.

Different Types of NBFCs

1)Asset Finance Company (AFC)

2) Investment Company (IC)

3) Loan Companies (LC)

4) Infrastructure Finance Company (IFC)

5) Systemically Important Core Investment Company (CIC-ND-SI)

6) Infrastructure Debt Fund (IDF-NBFC)

7) Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

8) Non-Banking Financial Company – Factors (NBFC-Factors)

Read Also: NBFC Compliance Checklist

Importance of NBFCs in Indian Economy

As NBFCs cater to more diverse businesses and have penetrated the rural and remote areas of the country, they reach more companies and individuals than banks. Being less bound by regulations than the banks, NBFCs have taken lead in non traditional venues too. In the last decade or so the growth of NBFCs has contributed hugely in adding to India’s economic growth. Here are a few ways in which NBFCs has backed the country’s economic development:

1. It has helped in converting savings into investments, thus leading to mobilization of resources.
2. It aids to increase capital stock of a company resulting in capital formation.
3. It provides specialized and long-term credit.
4. NBFCs help in employment generation in a very big way.
5. It helps in fulfilling the dreams of socially deprived people and small business entities.
6. It attracts foreign direct investment.

Present Day Challenges For NBFC Sector

1.) IL&FS and NBFCs

2019 has not been a very good year for the NBFC sector as in late 2018 one of India’s leading infrastructure finance companies- Infrastructure Leasing & Finance Services (IL&FS), which was a core investment company, defaulted on payments to lenders in a big way.

The collapse of a big company like IL&FS, which was once rated AAA and was in the business for more than three decades, triggered a great panic in the market that especially led to a crisis in the NBFC sector.

This brought to light the shortfall of the Indian shadow banking industry’s dependency on short-term funding sources and when the “bubble” burst over in 2018, the entire NBFC sector was in a limbo.

As the IL&FS crisis erupted, it negatively impacted the sentiments of the banks and they became averse to lending to the NBFC sector, putting them in a tight spot. The biggest concern of the sector was that they (NBFCs) may run out of money, due to lack of liquidity and this eventually would lead to defaults.

Amidst the looming fear of imminent default, the credit rating agencies downgraded most of the NBFCs and this aggravated the woes of Non-Banking Financial Companies as raising money became an uphill task for them.

2.) NBFC Liquidity Crunch & The Government

An economic slowdown was already creating hardships for the NBFCs and it was further aggravated by the IL&FS default. The market lost confidence in the NBFC sector and thus, they faced acute liquidity squeeze manifested.

However, the government and the banking regulator were not unaware of the alarming situation and they keenly watched the situation.

Talking about this, Injeti Srinivas, the Corporate Affairs Secretary said in an interview in May 2019, “There is an imminent crisis in the non-banking financial companies (NBFC) sector. There is a credit squeeze, over-leveraging, excessive concentration, and massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster.”

The IL&FS default was just the trigger after which the cracks in the system started showing up. The real issue is the system that the NBFCs follow is flawed as they take short-term loans of between 3-6 months duration, using commercial papers (CPs), but on the other hand, they lend to businesses like home loans, commercial purpose loans, and vehicle loans etc. as long-term loans. This brings about asset-liability mismatch which becomes a major problem in times of economic uncertainties.

Thus, when the economy is on the track this system does not create any glitch to the cycle of payment & repayment, but with any upheaval in the economy, Non-Banking Financial Companies find their sustenance at stake.

This is what happened after the IL&FS crisis came into the open, and as a result, neither the banks nor mutual fund companies or other investors have been keen to bet their money on NBFCs.

The Narendra Modi-led government took cognizance of the liquidity crisis of NBFC sector that may eventually lead to hampering the economy of the country in a major way and thus, asked RBI to figure out a way to ease the liquidity situation.

RBI in response took steps to embattle the situation effectively by:

1. pumping funds to improve the funding situation; these funds can be taken up by the banks to be lent to NBFCs.
2. announcing new guidelines on Liquidity Risk Management (LCR) in 2019.

Read Also: Top 5 NBFC Stocks in India

3.) Decoding LCR- Liquidity Coverage Ratio by RBI

RBI has introduced Liquidity Coverage Requirements (LCR) for the NBFCs vide its notification dated November 04, 2019.

The RBI has divided the NBFCs into 2 categories, for the applicability of LCR:

Category 1: (Deposit taking NBFCs)

Deposit taking NBFCs are those NBFCs which may accept deposits from the public. However, they are not empowered to repay these deposits on demand.

Category 2:(Non-Deposit taking NBFCs)

Non-Deposit taking NBFCs are those which cannot accept deposits from the public at large.

These Non-Deposit taking NBFCs are further divided into 2 categories as:

1. Category 2.1: These are those NBFCs whose asset size is more than 5,000 crores but less than 10,000 crores.
2. Category 2.2: These refer to those NBFCs whose asset size is more than 10,000 crores.

Now NBFCs are mandated by the RBI to maintain Liquidity Coverage Requirements and High Quality Liquid Asset (HQLA). This has been done by the RBI with the intention that:

• It will promote resilience in NBFCs.
• It will come handy at times of potential liquidity disruptions.
• It will help them to survive lasting for 30 days in any acute liquidity stress scenario.

The LCR RBI requirement of 100% High Quality Liquid Asset stock is to roll out in phases; the minimum HQLAs to be held being 50 per cent of the LCR, will be binding on NBFC registration from December 1, 2020. Liquidity Coverage Ratio will gradually have to be increased and reach up to the required level of 100 per cent by December 1, 2024.

The RBI requirement of 100% High Quality Liquid Asset stock is to roll out in phases; the minimum HQLAs to be held being 50 per cent of the LCR, will be binding on NBFCs from December 1, 2020. Liquidity Coverage Ratio will gradually have to be increased and reach up to the required level of 100 per cent by December 1, 2024.

4.) COVID-19 and NBFC Sector

By the end of 2019, the NBFC Sector was able to shrug the negative effects of the IL&FS crisis and was on the path to recovery, and 2020 was predicted to be a better year by all means. But this was not to happen as pandemic COVID-19 struck India in March, 2020 and this unique and unforeseen health crisis triggered an economic slowdown like never seen before.

Declared as an emergency, entire India was put under complete lockdown bringing the country to its knees and this has put the entire economy under distress but for the already beleaguered NBFC sector this was a fatal blow.

With the economic operations and consumption activities coming to a standstill for more than 60 days, the impact of this crisis across various classes of non-banking financial companies can be assessed by the exposure it has towards the various borrower segments. Sectors such as real estate and micro-finance, whose economic activities have been severely impacted, the NBFCs with loan exposures in the said sectors are the ones to be the worst hit in the wake of this global pandemic.

Another problem that aggravated the liquidity crisis in this sector was the announcement of the COVID-19 regulatory relief package by the Reserve Bank of India (RBI) on March 27, 2020.

The RBI Relief Package asked the lending institutions to grant a moratorium of three months on payment of all installments falling due between March 1, 2020 and May 31, 2020. This was further extended by another three months i.e., till August 31, 2020.

This posed a major problem primarily for the NBFCs as they utilize the cash inflows from the payments made by their borrowers to repay the liability owed towards their lenders.

The sector operates on very thin short-term liquidity and therefore, granting a moratorium to its borrowers on payment of loan installments came up as a serious trouble for the NBFCs. All these factors put together have once again led to a stark asset-liability mismatch in NBFCs.

So on the one hand the NBFCs are directed to offer the moratorium to its debtors, on the other they are not getting the same benefit from its lenders. Additionally, the NBFCs with high share of capital market borrowings are expected to make repayments on time as no moratorium has been announced for capital market borrowings (such as bonds and commercial paper).

Government’s COVID-19 Rescue Package

The countrywide lockdown imposed to check the spread of COVID-19 has continued for more than 60 days and has caused an economic turmoil so huge that it is said to be the worst since the 1930s.

The pandemic has had the same impact globally and to combat the economic losses the nations around the world have announced in what is come to be known as ‘Coronavirus Stimulus Packages’.

Prime Minister Narendra Modi leading from the front, on May 12, 2020 in a live telecast addressed to the nation pledged India’s economic rescue package of a total spending of Rs 20 lakh crore. This stimulus package to weather the fallout of the coronavirus pandemic is one of the largest that has been announced by other nations around the world.

Modi termed this package that is about 10 percent of India’s GDP in 2019-20 as ‘Atma-nirbhar Bharat Abhiyan’ or Self-reliant India Mission. The Finance Minister, Nirmala Sitharaman while announcing the details of the mammoth relief package reiterated the same sentiments and said that this economic package would spur growth and help to build a self-reliant India.

Explaining the details of the Rs 20 lakh crore economic package, Union Finance Minister Nirmala Sitharaman on May 14 announced a huge benefit for non-banking financial companies (NBFC), housing finance companies (HFC) and microfinance institutions (MFI).

Divided into 2 distinct schemes, the stimulus package for NBFCs is a whooping Rs 75,000 crores.

#1. Rs 30,000 Crore Special Liquidity Scheme for NBFCs/HFCs/MFIs

The FM said that the government was acutely conscious that NBFCs/HFCs/MFIs were finding it very difficult to raise money in debt markets and to deal with this problem the government has launched Rs 30,000 crore Special Liquidity Scheme.

• This scheme allows investment to be made in both primary and secondary market transactions in investment grade debt paper of NBFCs/HFCs/MFIs
• Additionally, this scheme will supplement RBI/Government measures to help ease  liquidity
• The scheme also lays down that the securities will be fully guaranteed by the Government of India

The FM expressed optimism and said that this step would provide the much needed liquidity support for NBFCs/HFC/MFIs and mutual funds and help to create confidence in the market.

#2. Rs 45,000 Crore Partial Credit Guarantee Scheme 2.0 for NBFCs

Union Finance Minister Nirmala Sitharaman stated that NBFCs, HFCs and MFIs which have low credit rating require liquidity to do fresh lending to MSMEs and individuals.

• Existing PCGS scheme to be extended to cover borrowings such as primary issuance of Bonds/ CPs (liability side of balance sheets) of such entities
• First 20% of loss will be borne by the Guarantor that is, the Government of India.
• AA paper and below including unrated paper eligible for investment (esp. relevant for many MFIs)

Thus, this scheme will result in infusing liquidity of Rs 45,000 crores and certainly help those NBFCs which are lower in the ladder of credit rating.

Read Also: Pros and Cons of NBFC Business in India

What Impact is Expected?

The Finance Minister’s announcement of this ₹75,000-crore package has come as a silver lining for the NBFC sector and will certainly help them to tide over the liquidity crunch being faced by the majority of them.

This move may see borrowing costs fall and liquidity increase even for those entities that are at the lower end of the rating curve.

The FM’s proposal of twin funds- a special fund of ₹30,000 crore + partial credit guarantee scheme worth ₹45,000 crore has helped to ease fears that some of these lenders would have to shut shop due to tight liquidity. The two schemes shall not only help these firms raise money, but also go beyond and lend to SMEs.

Giving a very positive response on this mve, Rashesh Shah, chairman of Edelweiss Group said, “Both the moves should help allay apprehensions, as they offer more flexibility to raise money. NBFCs can sell both portfolios and bonds under the latest version of the partial credit guarantee scheme, which also cuts down the lengthy approval process.”

Though the schemes have been lauded as a right step by the government yet there are few apprehensions and concerns on whether smaller firms will be able to benefit from the twin moves.

P Satish, executive director at Sa-Dhan, an industry association of MFIs, expressed his fears thus, “We welcome the announcement of Rs 30,000-crore liquidity support. The credit guarantee scheme will also give fillip to MFIs. But in both the schemes, we hope that smaller MFIs, which are below investment grade, will not be overlooked”.

Conclusion

In continuing with its intent to grant relief to NBFCs the government of India, the RBI has recently come out with the eligibility criteria for the special liquidity scheme and it includes RBI registered NBFCs, micro-finance institutions (MFIs) and HFCs under respective laws.

RBI states that the CRAR/CAR of NBFCs should not be below the regulatory minimum of 15 per cent as on March 31, 2019, and moreover, the net non-performing assets of these NBFCs should not exceed 6 per cent.

Another mandated criteria is that these NBFCs must have made net profit in at least one of the last two preceding financial years, that is, 2017-18 and 2018-19. Along with this they must not have been reported under SMA-1 or SMA-2 category by any bank for their borrowings during the last one year prior to August 01, 2018.

The RBI has shared information that to manage this operation the State Bank of India subsidiary ‘SBICAP’ has set up a special purpose vehicle (SPV) -SLS Trust which will purchase the short-term papers from eligible NBFCs/HFCs. It is specified that these entities shall utilize the proceeds from this scheme solely for the purpose of extinguishing existing liabilities.

However, this facility shall cease to exist and will not be available for any paper issued after September 30, 2020 and the SPV would not make any fresh purchases after this date and would recover all dues by December 31, 2020.

Recognizing this as an advantageous situation for the NBFCs, Sharad Mittal, CEO, Motilal Oswal Real Estate Fund says, “NBFCs have CP repayments of close to Rs. 65,000 crore between July and September of this year. These NBFCs could benefit considerably from this special liquidity window”.

Although these pro measures have somewhat eased the sicompltuation for the NBFC sector at large yet, there are few more demands by the sector to be able to override during this unprecedented time.

The Finance Industry Development Council (FIDC) which is a representative body of assets and loan financing NBFCs, has recently shot a letter to RBI Governor Shaktikanta Das in which it states, “We urge upon RBI to consider, as a one-time measure, to allow NBFCs to draw-down from their Reserves and adjust towards additional Expected Credit Losses (ECL) provision requirement, in excess of provision calculated as per normal Probability of Default (PD) and Loss Given Default (LGD)”.

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