Types of NBFC Licenses and their requirements: Details are here

NBFC Licence and their requirements

Non-Banking Financial Companies (NBFCs) play a pivotal role in the Indian financial ecosystem by providing credit and other financial services to the underserved segments of the economy. Unlike traditional banks, NBFCs do not hold a banking license but are regulated by the Reserve Bank of India (RBI). This article delves into the various types of NBFC licenses available in India and the specific requirements for obtaining each type.

1. Asset Finance Company (AFC)

Definition: An AFC is an NBFC that primarily focuses on financing physical assets that support productive/economic activity. This includes machinery, automobiles, industrial equipment, and more.

Requirements:

• Capital: Minimum Net Owned Fund (NOF) of ₹2 crore.
• Ownership: At least 60% of the total assets must be financial assets, and of these financial assets, at least 60% should be in the form of loans for physical assets.
• Compliance: Must comply with RBI regulations on asset classification, provisioning, and exposure norms.

2. Investment Company (IC)

Definition: An IC is an NBFC that primarily deals in securities and other financial instruments as investments.

Requirements:

• Capital: Minimum NOF of ₹2 crore.
• Ownership: The company’s primary business must be acquiring securities.
• Compliance: Subject to RBI guidelines on investment portfolio, risk management, and periodic disclosures.

3. Loan Company (LC)

Definition: An LC is an NBFC that primarily provides loans and advances to various sectors, including individuals, small businesses, and other commercial enterprises.

Requirements:

• Capital: Minimum NOF of ₹2 crore.
• Ownership: Should primarily be involved in loan activities rather than investments.
• Compliance: Must adhere to RBI’s guidelines on asset classification, provisioning, and capital adequacy.

4. Infrastructure Finance Company (IFC)

Definition: An IFC is an NBFC that provides long-term finance for infrastructure projects such as roads, bridges, power plants, and more.

Requirements:

• Capital: Minimum NOF of ₹300 crore.
• Ownership: Minimum 75% of the total assets should be deployed in infrastructure loans.
• Credit Rating: Must have a minimum credit rating of ‘A’ or equivalent.
• Compliance: Must follow RBI’s prudential norms, including asset classification, provisioning, and risk management guidelines.

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

Definition: A CIC-ND-SI is an NBFC that holds at least 90% of its net assets in the form of investments in shares, debt, or loans in group companies, with investments in equity shares constituting at least 60% of its net assets.

Requirements:

• Capital: Minimum NOF of ₹100 crore.
• Ownership: Primarily invests in and lends to group companies.
• Compliance: Must comply with RBI guidelines on leverage, exposure norms, and periodic reporting.

6. Infrastructure Debt Fund (IDF-NBFC)

Definition: An IDF-NBFC is established to facilitate the flow of long-term debt into infrastructure projects.

Requirements:

• Capital: Minimum NOF of ₹300 crore.
• Ownership: Must invest primarily in infrastructure debt.
• Sponsorship: Can be sponsored by a bank or an NBFC with a minimum of 30% equity.
• Compliance: Must adhere to RBI regulations on investment policy, risk management, and capital adequacy.

7. Micro Finance Institution (NBFC-MFI)

Definition: An NBFC-MFI primarily provides microloans to the economically weaker sections of society, typically in rural and semi-urban areas.

Requirements:

• Capital: Minimum NOF of ₹5 crore for MFIs registered in the north-eastern region and ₹2 crore for others.
• Ownership: At least 85% of total assets should be in the form of microloans.
• Loan Limit: Maximum loan amount per borrower is capped as per RBI guidelines.
• Compliance: Must follow RBI regulations on interest rate ceilings, margin caps, and borrower eligibility.

8. Factors (NBFC-Factor)

Definition: An NBFC-Factor primarily deals with the business of factoring, which involves purchasing the receivables of a company at a discount.

Requirements:

• Capital: Minimum NOF of ₹5 crore.
• Ownership: At least 50% of its assets should be in the form of receivables factoring.
• Compliance: Must adhere to RBI guidelines on factoring operations, capital adequacy, and asset classification.

9. Mortgage Guarantee Companies (MGC)

Definition: An MGC provides mortgage guarantee services, which involve guaranteeing the repayment of a loan or a bond in case of default by the borrower.

Requirements:

• Capital: Minimum NOF of ₹100 crore.
• Ownership: Primary business should be providing mortgage guarantees.
• Compliance: Must follow RBI regulations on capital adequacy, risk management, and exposure norms.

10. Non-Operative Financial Holding Company (NOFHC)

Definition: An NOFHC is a type of NBFC that holds a bank and other financial services companies within a group under a single umbrella.

Requirements:

• Capital: Minimum NOF of ₹100 crore.
• Ownership: Must hold the entire equity capital of the bank and other financial services entities.
• Compliance: Subject to RBI guidelines on ownership, governance, and capital structure.

General Licensing Requirements for NBFCs

Regardless of the specific type, all NBFCs in India must adhere to certain general requirements:

1. Registration: Every NBFC must be registered with the RBI as per Section 45-IA of the RBI Act, 1934.
2. Principal Business: The company’s principal business must be financial activity, defined as more than 50% of its total assets and income from financial assets.
3. Corporate Structure: The company must be incorporated under the Companies Act, 2013.
4. Capital Adequacy: NBFCs must maintain a minimum Capital to Risk (Weighted) Assets Ratio (CRAR) as prescribed by the RBI.
5. Board and Management: The board and management should consist of individuals with the necessary expertise and experience in financial services.
6. Regulatory Compliance: NBFCs must comply with various RBI guidelines on asset classification, provisioning, exposure norms, and periodic reporting.

Summary:

The diverse types of NBFC licenses available in India cater to a wide range of financial services, each with specific regulatory requirements. By adhering to these requirements, NBFCs not only ensure compliance with the regulatory framework but also contribute significantly to the financial inclusion and economic development of the country. Understanding these types and their requirements is crucial for any entity looking to enter the NBFC space in India.