A Guide to Choosing the Right NBFC Factor for Your Business 

Introduction

Non-Banking Financial Companies (NBFCs) are playing a bigger role in the Indian financial scene by acting as a conduit between traditional banking services and the diverse needs of Indian businesses and individuals. These specialist organizations greatly boost financial inclusion and foster innovation by offering services to markets that regular banks usually overlook, which in turn leads to economic growth.

What exactly is NBFC?

Non-bank financial firms (NBFCs) are, at their core, financial institutions that operate without a typical banking license but offer a wide variety of services that are comparable to those offered by banks. They contribute significantly to the economy by providing loans and other financial solutions to individuals, businesses, and sectors of the population that may not meet the rigid criteria or be catered to by conventional banking establishments.

The Development of Non-Bank Financial Companies in India

Non-bank financial firms (NBFCs) gained popularity in the early 1960s as a solution to the problem of the existing banking system not being able to meet the financial needs of the ever-growing population. This void helped give rise to these specialized groups, which in turn responded to the diverse and ever-changing financial requirements of many segments of society.

By adapting to changing market conditions and regulatory frameworks throughout time, NBFCs have grown into significant forces in the industry. They currently play a crucial role in the nation’s initiatives to promote entrepreneurship, financial inclusion, and economic growth.

The objectives of NBFC

NBFCs have a reputation for being flexible and offering a broad variety of financial services that are tailored to each customer’s specific needs. These comprise the subsequent roles:

1. Retail Financial Services

Individuals, families, and businesses that might not be qualified for traditional bank loans are given access to financing facilities through NBFCs. In order to facilitate financial empowerment and advance local economic development, examples of this include small business financing, consumer durable finance, and personal loans.

2. Finance for Infrastructure

Due to their ability to fund essential infrastructure projects like power plants, telecommunications networks, bridges, and roads that are essential for economic growth, NBFCs play a critical role in shaping the nation. Their endeavors enhance progress and sustained growth.

3. Services for Hiring and Purchasing

NBFCs facilitate the acquisition of assets such as machinery, equipment, and automobiles for individuals and corporations by means of hire-purchase arrangements. This facilitates asset ownership without needing substantial upfront investments, which promotes economic activity and productivity.

4. Financing for Trade

By offering trade finance solutions that facilitate both domestic and international trade, these organizations assist businesses in financing trade. Services that support commerce, encourage economic integration, and assist companies in thriving in the global economy include bill discounting, factoring, and credit letters.

5. Services for Asset Management.

Individuals and businesses may diversify their investments across a variety of asset types, including debt instruments, real estate, and equities, due to NBFCs. Their expertise in asset management assists consumers in maximizing profits while minimizing risks.

6. Financing for Venture Capital

NBFCs recognize the value of fostering innovation and entrepreneurship, which is why they provide venture capital funding to potential early-stage and high-growth businesses. This crucial support encourages the generation of original ideas and facilitates the growth of innovative companies.

The Diverse Kinds of NBFCs

The Reserve Bank of India, the country’s main banking regulator, has classified non-bank financial companies (NBFCs) based on their functions, systemic significance, and acceptance of public deposits. This classification approach ensures regulatory oversight while encouraging industry transparency. The following are the key categories of NBFCs:

1. Asset Financing Businesses (AFCs)

AFCs specialize in financing the purchase of physical assets such as vehicles, tractors, and equipment that support commercial or productive enterprises. To be certified an AFC, an NBFC must undertake at least 60% of its business in this loan category.

2. Financial Institutions (FIs)

Investment businesses, often known as non-bank financial companies (NBFCs), generate revenue via the acquisition of securities, including debt instruments, equity shares, and government securities. These companies assist individual and business investors by streamlining their investing methods and boosting profits.

3. Lending Companies (LCs)

Any non-bank financial organization (NBFC) that provides loans is classed as a loan company if it does not meet the criteria for asset finance business classification. These groups facilitate easy access to credit and encourage economic growth by supporting a wide range of lending conditions.

4. Information and Financial Companies (IFCs)

IFCs provide the majority of the funding for India’s infrastructure development, directing funds into essential sectors including electricity, communications, roads, and transportation. These non-bank financial companies are vital to driving economic growth and facilitating national integration.

5. Companies that Make Important Core Investments for the System (CIC-ND-SIs)

The acquisition of shares and securities by CIC-ND-SIs is focused on investing in their own group firms. Of their entire assets, at least 90% must be invested in equity shares of group companies, representing a minimum of 60% of their total assets.

6. Infrastructure Debt Funds (IDFs)

By allocating long-term loans to infrastructure projects, IDFs—specialized NBFCs—are essential to financing the nation’s development goals. These businesses primarily raise capital by issuing bonds with a minimum five-year maturity that are denominated in dollars or rupees.

Acquiring a License from NBFC

The Reserve Bank of India’s (RBI) stringent regulations make it a difficult process to become an NBFC in India. The procedure consists of several phases, including:

1. Assessment of Eligibility

Companies that wish to get an NBFC license must meet the conditions that the RBI has specified. Maintaining a minimum Net Owned Funds (NOF) of Rs. 10 crores is mandatory, and a minimum of one-third of the directors must possess appropriate finance-related work experience. Both governmental and private businesses must comply with these rules.

2. Submission of an Application

Qualified firms can begin the application process by filling out the required documents online. Providing comprehensive information on the company, its investors, and senior management is one aspect of this.

3. “Fit and Proper” Evaluation

The RBI conducts a thorough assessment of the NBFCs promoters and top management to ensure that they are trustworthy, qualified, and fit for the roles that are being provided. The objective of this study is to ensure that the NBFC industry maintains the highest levels of accountability and governance.

4. Investigations into Past Records

The RBI conducts extensive background checks on the applicant company, including examining its Credit Information Bureau (India) Limited (CIBIL) record and assessing whether it conforms with all applicable laws and regulations, such as the Foreign Exchange Management Act (FEMA) and Capital Compliance statutes.

5. Providing the Application Reference Number (ARN)

Upon the successful completion of the initial processes, the RBI issues the applicant firm with an Application Reference Number (ARN). With this ARN, you may keep an eye on the application’s progress during the process’s subsequent phases.

6. Final Clearance and NBFC License Issuance

If the applicant’s credentials and the provided information are deemed sufficient by the RBI, the NBFC license will be approved. The licensed NBFC is therefore obliged to give the RBI monthly financial and regulatory reports for continued control and monitoring.

Obstacles That NBFCs Face

All things considered, NBFCs have a number of challenges, such as:

• Systemic risk: NBFCs have the potential to pose a systemic risk to the financial system because to their connections to other financial institutions and the overall economy. Any turbulence in the NBFC business might have consequences.
• Additional Restrictions: A growing number of rules apply to various NBFC categories. Apart from offering consistency, these regulations might increase costs associated with compliance and decrease flexibility in operations.
• Issues with Liquidity: If NBFCs depend on wholesale financing on occasion, they may experience liquidity issues, especially during recessions or other disruptions in the financial system.
• Credit Risk: NBFCs often manage higher credit risks because to their focus on underserved markets, which can lead to a higher percentage of non-performing assets (NPAs).
• Competition: Since fintech companies and digital lenders have become more prevalent, there is a greater need for established NBFCs to continuously innovate and upgrade their technology.