NBFC & MFI in India


A Non Banking Financial Company is a company registered under the Companies Act, 2013 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose principal business is that of agriculture, industrial activity, purchase or sale of any goods or providing any services and sale/purchase/construction of immovable property.
The working and operations of NBFCs are regulated by the Reserve Bank of India within the framework of the Reserve Bank of India Act, 1934 and the directions issued by it.
On November 9, 2017, Reserve Bank of India issued a notification outlining norms for outsourcing of functions/services by Non-Bank Financial Institution
As per the new norms, NBFCs cannot outsource core management functions like internal audit, management of investment portfolio, strategic and compliance functions for know your customer norms and sanction of loans.
Staff of service providers should have access to customer information only up to an extent which is required to perform the outsourced function.
Boards of NBFCs should approve a code of conduct for direct sales and recovery agents. For debt collection, NBFCs and their outsourced agents should not resort to intimidation or harassment of any kind.
All NBFCs’ have been directed to set up a grievance redressal machinery, which will also deal with the issues relating to services provided by the outsourced agency.

History of NBFCs in India

The Reserve Bank of India Act, 1934 amended on 1 December 1964 by Reserve Bank Amendment Act, 1963. In this new 'Chapter III-B' introduced to Regulate 'Deposit Accepting' NBFCs.
Different types of Committees to Review existing framework of NBFCs

James S. Raj Committee

In early 1970s Government of India asked Banking Commission to Study the Functioning of Chit Funds and Examining activities of Non-Banking Financial Intermediaries. In 1972, Banking Commission recommended Uniform Chit Fund Legislation to whole country.
Reserve Bank of India prepared Model Bill to regulate the conduct of chit funds and referred to study group under the Chairmanship of James S. Raj.
In June 1974, study group recommended ban on Prize Chit and other Schemes. Directed the Parliament to enact a bill which ensures uniformity in the provisions applicable to chit funds throughout the country.
Parliament enacted two acts. Prize Chits and Money Circulation Schemes Act, 1978 and Chit Funds Act, 1982

Chakravarty Committee

During Planning Era, Reserve Bank of India tried best to 'Manage Money's and evolve 'Sound Monetary' system but no much appreciable success in realising social objectives of monetary policy of the country.
In December 1982, Dr Manmohan Singh, Governor of RBI appointed committee under the Chairmanship of 'Prof. Sukhamoy Chakravarty' to review functioning of monetary system in India.
Committee recommended assessment of links among the Banking Sector, the Non-Banking Financial Institutions and the Un-organised sector to evaluate various instruments of Monetary and Credit policy in terms of their impact on the Credit System and the Economy.

Types of NBFCs in India

Different types of NBFCs are as follows:

Investment and Credit Company (ICC)

Merging three categories of NBFCs viz asset finance companies, Loan companies, Investment companies into a new category called NBFC - ICC.
CIRCULAR : RBI/2018-19/130 DNBR CC No. 097/03.10.001/2018-19 dated February 22, 2019
ICC means any company which is a financial institution carrying on as its principal business asset financing, the providing of finance whether by making loan and advances or otherwise forany 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.



Infrastructure Finance Company (IFC)

Infrastructure finance companies deploys a minimum of three-fourths of their total assets in infrastructure loans. The net owned funds are more than 3 billion and a minimum crediting rating of 'A' and the Capital to Risk-Weighted Assets Ratio is 15%.

Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)

IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure Finance Companies can sponsor IDF-NBFCs.

NBFC-Factors

NBFC Factors has principle business of factoring. Factoring is a financial transaction and a type of debtor finance

Gold Loan NBFCs in India

Over the years, gold loan NBFCs witnessed an upsurge in Indian financial market, owing mainly to the recent period of appreciation in gold price and consequent increase in the demand for gold loan by all sections of society, especially the poor and middle class to make ends meet. Though there are many NBFCs offering gold loans in India, about 95 per cent of the gold loan business is handled by three Kerala based companies, viz., Muthoot Finance, Manapuram Finance and Muthoot Fincorp. Growth of gold loan NBFCs eventuating from various factors including Asset Under Management, number of branches, and also the number of customers etc. Growth of gold loan NBFCs occurred both in terms of the size of their balance sheet and their physical presence that compelled to increase their dependence on public funds including bank finance and non-convertible debentures. Aggressive structuring of gold loans resulting from the uncomplicated, undemanding and fast process of documentation along with the higher Loan to Value ratio include some of the major factors that augment the growth of Gold loan NBFCs.

Residuary Non-Banking Companies (RNBCs)

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets.

Account Aggregators (AA)

Account Aggregators are a new class of NBFC instituted by the Reserve Bank of India in 2016. An account aggregator NBFC takes the business of account aggregation for a fee or otherwise. The NBFC once registered with the RBI, should only provide account aggregation and data to financial institutions based on customer consent. The actual mechanism should follow the consent architecture laid down by the RBI.
The account aggregators are expected to make loan application easier for users by providing data access to financial institutions. RBI has given in-principle approvals to five NBFC Account Aggregators.

Difference between NBFCs & Banks

NBFCs perform functions similar to that of banks but there are a few differences-
Institutions, also known as MFIs, a microfinance institution is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services. A great scale of organizations are regarded as microfinance institutes. They are those that offer credits and other financial services to the representatives of poor strata of population.

MFIs go for NBFC licences

An Increasing number of microfinance institutions are seeking non-banking finance company status from RBI to get wide access to funding, including bank finance.

Exemptions granted to NBFCs engaged in microfinance activities

The Task Force on Supportive Policy and Regulatory Framework for Microfinance set up by NABARD in 1999 provided various recommendations. Accordingly, it was decided to exempt NBFCs which are engaged in micro financing activities, licensed under Section 8 of the Companies Act, 2013, and which do not accept public deposits, from the purview of Sections 45-IA, 45-IB and 45-IC of the RBI Act, 1934.
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MFIs & SHG-Bank linkage programme

In a joint fact-finding study on microfinance conducted by the Reserve Bank of India and a few major banks, the following observations were made:
obtaining in the SHG – Bank linkage programme, which takes about six to seven months for group formation and nurturing. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.
named seven microfinance institutes in India in the list of the world's top 50 microfinance institutions.
Bandhan, as well as two other Indian MFIs—Microcredit Foundation of India and Saadhana Microfin Society – have been placed above Bangladesh-based Grameen Bank.
Besides Bandhan, the Microcredit Foundation of India and Saadhana Microfin Society, other Indian entries include Grameen Koota, Sharada's Women's Association for Weaker Section, SKS Microfinance Private Ltd and Asmitha Microfin Ltd.

Criticisms

Recently, microfinance has come under fire in the state of Andhra Pradesh due to allegations of MFIs using coercive recollection practices and charging usurious interest rates. These charges resulted in the state government's passing of the Andhra Pradesh Microfinance Ordinance on October 15, 2010. The Ordinance requires MFIs to register with the state government and gives the state government the power, suo moto, to shut down MFI activity. A number of NBFCs have been affected by the ordinance, including sector heavyweight SKS Microfinance.