In the ongoing series on Digital Lending, under this write up, we are dealing with Non Banking Financial Company and P2P modalities in Digital Lending in India.
NON-BANKING FINANCIAL COMPANY
Now, usually NBFCs can be classified into two different categories: Deposit Taking NBFCs (NBFC-D) and Non Deposit taking NBFCs (NBFC-ND). However, due to rapid growth and development of NBFC’s in India, it has led to several classification of NBFC’s based on activities and its nature –
1. Investment and Credit Company (NBFC-ICC)
Investment and Credit Company is an NBFC, which is indulged in its principal business of providing finance, whether by providing loan or advances or otherwise for any activity other than its own. Earlier, NBFC’s has three distinct categories based on their activity classified as –
a. Asset Finance Company – It was an NBFC, which was indulged in providing finance for physical assets.
b. Investment Company – it was an NBFC, which was indulged in providing finance by acquisition of securities.
c. Loan Company – it was an NBFC, which was indulged in providing finance by providing loan or advances or otherwise for any activity other than its own.
However, The Reserve Bank of India observed that, over a period of time NBFC’s had seen a rapid growth, which has led to formation of various categories of NBFC’s and formation of these different categories are hampering the smooth functioning of NBFCs. Therefore, Reserve Bank of India (RBI) in order to provide greater operational flexibility, harmonized the aforesaid three distinct categories into one category named Investment and Credit Company (NBFC-ICC) vide notification RBI/2018-19/130 DNBR (PD) CC.No.097/03.10.001/2018-19 dated 22 February 2019.
2. Infrastructure Finance Company (NBFC-IFC)
Infrastructure Finance Company is a non-banking finance company, which invests at least 75% of its total assets in infrastructure loans, has a minimum Net Owned Funds of INR 300 crore, has a minimum credit rating of ‘A ‘or equivalent and a Capital-to-Risk (Weighted) Average Assets Ratio (CRAR) of 15%.
3. Infrastructure Debt Fund (NBFC-IDF)
The Infrastructure Debt Fund usually acts as an investment vehicle, which allows refinancing of existing debt of infrastructure projects from banks, in order to create fresh room for investment in these infrastructure projects. Further, NBFC-IDF facilitates the flow of long-term debt into infrastructure projects and raises resources through issue of INR or Dollar denominated bonds for a period of minimum 5 years. Provided, only Infrastructure Finance Companies (IFC) can sponsor Infrastructure Debt Fund NBFCs in India.
4. Mortgage Guarantee Company (NBFC-MGC)
Mortgage Guarantee Company is an NBFC, which provides guarantee to a creditor institution for repayment of an outstanding housing loan or interest upto the limit of guaranteed amount, in exchange for a mortgage given by the creditor. Provided, in order to establish NBFC-MCG, a company should have at least 90% of the turnover from mortgage guarantee business or at least 90% of the gross income from mortgage guarantee business and net owned fund of INR 100 crore.
5. NBFC Factors
NBFC Factor is a non-deposit taking NBFC, which is engaged in the principal business of factoring. Now, Factoring is a transaction under which a company sells its invoices or bill receivables to a third party at discount. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.
6. Micro Finance Institution (NBFC-MFI)
Micro Finance Institution is an entity that performs functions similar to that of Banks but for lower income groups. It is an institution, which provides financial assistance to small businesses, or low-income population, who do not have access to the official banking channels and are not qualified for availing loans. However, there are few requirement, which needs to be fulfilled in order to establish NBFC, such as –
a. It should not have less than 85% of the assets as qualifying assets.
b. It will not provide loan in the rural area exceeding INR one lakh twenty five thousand or in urban and semi-urban areas exceeding INR two lakh.
c. It will not provide loans of more than INR seventy five thousand in the first cycle and INR one lakh twenty five thousand in subsequent periods. However, the tenure of the loan should not be less than 24 months.
d. It will not have a total obligation of the borrower of more than INR one lakh twenty five thousand.
e. It will provide credit without any collateral.
f. The repayment of the loan should be at the discretion of the borrower. g. Eighty five per cent of the qualifying possessions are to be maintained all the time.
h. The investment paid by the Micro Finance Company to a borrower having annual income
7. Non-Operative Financial Holding Company (NBFC-NOFHC)
Non-Operative Financial Holding Company is a financial institution, which allows promoter or promoter groups to hold shares of a bank or set up a new bank. Further, it acts as a wholly owned company of NBFC, which will hold banks and all other financial service companies regulated by RBI or other regulators. However, there are few requirements which needs to be fulfilled in order to establish NBFC-NOFHC, such as –
a. It should have in principle approval from RBI to act as NBFC-NOFHC.
b. It will not invest in equity instruments of other NBFC-NOFHC.
c. It will not invest in any equity or debt capital instrument of any financial entity under NOFHC.
d. It should not have exposure regarding credit and investments including investments in the equity or debt capital instruments towards the promoter, promoter group or individuals associated with the promoter group or NOFHC.
8. Systemically Important Core Investment Company (NBFC-SICIC)
Systemically Important Core Investment Company is a kind of NBFC, which is engaged in the business of acquisition of shares (Equity and Preference) and securities takeover. Core Investment Company usually acts as a safeguard mechanism for NBFC, which are engaged in the above-mentioned business. However, they are subjected to certain conditions that –
a. It should have asset size of INR 100 crore or above and It should accept public funds.
b. It should hold at least 90% of its assets in investments in shares and securities such as Bonds, debenture or debts. With an additional condition that, out of 90%, at least 60% of its net assets shall be invested in equity shares which includes instruments compulsorily converted in equity shares.
c. It should not trade in its investments in shares, debt or loans in-group companies except through block sale for the purpose of dilution or disinvestment.
d. It should not carry any financial activity referred to in Section 45-I(c) and Section 45-I(f) of the Reserve Bank of India 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.
9. Peer to Peer Lending Platform (NBFC P2P)
Peer to Peer Lending Platform is a digital platform, which connects lenders with the borrower and acts as an intermediary to facilitate the transaction of disbursement and collection of loans and advances, undertaken between these participants. On this platform, any individual investor or financial institution can become a lender and earn interest paid by the person who has borrowed money.
The Reserve Bank of India, keeping in mind the expanding growth of Peer to Peer lending model in India released a set of guidelines vide NBFC–Peer to Peer Lending Platform (Reserve Bank) Directions, 2017. Therefore, if any company wants to establish a NBFC-P2P, they are required to file an application to NBFC department in Mumbai, within 3 months from the issue of these directions.
In part-V, we shall be dealing with Compliances under NBFC (P2P) Direction, 2017 in Digital lending in India.
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