Notification: RBI/2018-19/130 DNBR (PD) CC.No.097/03.10.001/2018-19 dated 22nd February, 2019
Over a period of time, evolution of the NBFC sector has resulted in several categories of NBFCs intended to focus on specific sector/ asset classes. Different sets of regulatory prescriptions were accordingly put in place.
Out of around 10,190 NBFCs operating in India, more than 95 per cent (10,082) are non-deposit taking NBFCs. Too many categories only increase compliance cost for the entire non-banking sector and monitoring cost for the regulator. On a review, it has been decided that in order to provide NBFCs with greater operational flexibility, harmonisation of different categories of NBFCs into fewer ones shall be carried out based on the principle of regulation by activity rather than regulation by entity. Accordingly, it has been decided to merge the three categories of NBFCs viz. Asset Finance Companies (AFC), Loan Companies (LCs) and Investment Companies (ICs) into a new category called NBFC – Investment and Credit Company (NBFC-ICC).
Differential regulations relating to bank’s exposure to the three categories of NBFCs viz., AFCs, LCs and ICs stand harmonised vide Bank’s circular DBR.BP.BC.No.25/21.06.001/2018-19 dated, February 22, 2019. Further, a deposit taking NBFC-ICC shall invest in unquoted shares of another company which is not a subsidiary company or a company in the same group of the NBFC, an amount not exceeding twenty per cent of its owned fund.
The following three categories have been merged into one:
- Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment, moving on own power and general purpose industrial machines.
- Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.
- Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
The merged category has been defined as follows:
“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 the Bank in any of its Master Directions.
The classification of an NBFC as an AFC or LC or IC was done by the RBI at the time of issuance of the certificate of registration. Apart from satisfying the principality test, which has now been harmonised for all the three categories, there does not seem any other implementation issue in this regard.
Further, the term non-banking financial company has also been defined in the Master Directions for deposit taking NBFCs as follows:
“non-banking financial company” means only the non-banking institution which is an investment and credit company or a mutual benefit financial company or a factor registered with the Bank under section 3 of Factoring Regulation Act (2011);
According, the broad head of NBFC now consists of only three categories:
- NBFC-ICC
- Mutual Benefit Financial Company (MBFC)
- NBFC-Factor
Here, MBFC means any company which is a financial institution notified by the Central Government under section 620A of the Companies Act, 1956 (Act 1 of 1956) and NBFC Factor means a nonbanking financial company as defined in clause (f) of section 45-I of the RBI Act, 1934 which has its principal business as defined in paragraph 40 of these directions and has been granted a certificate of registration under sub-section (1) of section 3 of the Factoring Regulation Act, 2011.
This definition is however restricted to only deposit taking NBFCs and does not extend to non-deposit taking NBFCs. Also, the said definition of NBFC does not include micro finance institutions, Infrastructure Finance Company and Infrastructure Debt Fund as an NBFC.
All related Master Directions for non-systemically important non-deposit taking, systemically important non-deposit taking company, deposit taking company, standalone primary dealers and residuary non-banking companies have been updated accordingly.