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Over the years, Non-Banking Financial Companies has gained a significant role in providing affordable financial services and constitute an integral part of the financial system in India. Despite sluggish economic growth NBFCs have been gaining market share.
With the growing demand of NBFCs, it has a separate Department of Non-Banking Supervision which is entrusted with the responsibility of regulation and supervision of NBFC.
According to RBI, an NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures or securities issued by Government or local authority or other marketable securities. The operations of NBFC are regulated by RBI within the framework of the Reserve Bank of India Act, 1934 (Chapter III B).
NBFC is involved in raising funds from the public whether directly or indirectly and lending to ultimate spenders. They provide loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Gradually, they are being recognized as complementary to the banking sector in reaching out credit to the unorganized sector especially MSME due to the following benefits:
· strong risk management capabilities to check and control bad debts;
· customer-oriented services;
· simplified procedures;
· attractive rates of return on deposits;
· timeliness in meeting the credit needs of different sectors and many others
Types of NBFC
1. Liabilities based NBFC
· NBFC having Public deposits (NBFC-D)
· NBFC not having public deposits (NBFC-ND)
2. Asset-based Classification
· Asset finance Company: The main business is to finance assets such as machines, equipment,
· Investment Company: A Company whose principal business is the acquisition of securities
· Loan Company: A Company whose principal business is to make loans and advances (not for assets but for other purposes such as working capital finance etc.)
· Infrastructure Finance Company(IFC): A Company having a min net owned fund of 300 crores which deploys at least 75% of its total assets in infrastructure loans
· NBFC factor: An NBFC-Factoring company having a minimum Net Owned Fund (NOF) of Rs. 5 Crore and its financial assets in the factoring business should constitute at least 75 percent of its total assets and its income should not be less than 75 percent of its gross income
· Micro Finance institution (NBFC-MFI): NBFC accepting non-deposit which has at least 85% of its assets in the form of microfinance which provides a loan to those whose annual income in rural areas doesn’t exceed 60,000 and 1,20,000 in urban areas
· Infrastructure Debt Fund(NBFC-IDF): NBFC accepting non-deposit having min net owned fund of 300 crores and invests only in Public-Private Partnerships (PPP) and post-commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.
3. Size based Classification:
Core Investment Company: A NBFC with asset size of 100 crores and above and carrying on a business of acquisition of shares and securities satisfying the condition that it deploys 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies out of which 60% should be invested in equity shares including instruments compulsorily converted into equity shares .
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In the Non-Banking Financial Sector, The Reserve Bank of India has increased regulatory oversight. In case of acquisition or transfer of control of NBFCs, RBI has mandated the requirement of prior written approval. Directions have been already issued regarding prior written approval in case of NBFC takeover by The RBI.
Under the following conditions, prior written approval of RBI shall be required:
· In case of takeover or acquisition of control of an NBFC, by the acquisition of shares or otherwise;
· In case of merger/amalgamation of NBFC with another entity or vice versa that would give the acquirer/other entity control of the NBFC;
· In case of merger/amalgamation resulting in acquisition or transfer of shareholding in excess of 10% paid-up capital of NBFC;
· For orders of mergers or amalgamations with other companies or NBFCs, approaching the court or tribunal.
The government of India has liberalized its FDI policy. With the liberalization of the overseas investment, the regime government has allowed 100% foreign direct investment (FDI) in ‘other financial services’ carried out by non-banking finance companies (NBFCs).
Foreign exchange provisions are regulated under the Foreign Exchange Management Act, 2000 and NBFCs operations are regulated by the Reserve Bank of India within the framework of the RBI Regulation Act 1934.
In the NBFC sector, 100% FDI is allowed subject to the minimum capitalization norms issued by the Government. Under this, foreign investment can be obtained not only in liquid currency but also by way of exchange of shares, conversion of loans to share, exchange of some skillsets, etc.
As per the FDI Policy, foreign investment is permitted under the automatic route in NBFC. Under the automatic route, before making the proposed investment there is no requirement of the Foreign Investment Promotion Board or RBI approval. Under automatic route up to 100%, foreign investment is allowed without the prior approval of foreign investment promotion board.
According to RBI, foreign investment in an Indian company, engaged in the activity of investing in the capital of other Indian company will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment.
Foreign investment in Non-Banking Finance Companies (NBFCs), carrying on activities approved for FDI, will be subject to the conditions specified in FEMA notification as amended from time to time.
Liberalizing Foreign Investment
In the NBFC sector, directions of the RBI is an important area for harmonization of provisions of the regulations for foreign direct investment (FDI) in an NBFC. Budget speech of the finance minister announced the government’s intention to permit FDI in all financial activities which are regulated by an Indian regulator under the automatic route.
For example, once the Securities and Exchange Board of India (SEBI) approve the commodity broking license, the company will not require any further approval from the Foreign Investment Promotion Board (FIPB) for foreign investment.
It is a concept introduced by the Reserve Bank of India (RBI). Maximum deposits are restricted to amount INR 1 Lakh per customer which shall be increased in the future. Under these payment banks both the current as well as saving bank account can be operated. They can also provide services related to debit cards, online banking, and mobile banking and ATM cards. Payment banks are also allowed to set up their branches and ATMs. Its activities would be restricted to activities permitted to banks under the Banking Regulation Act 1949. The requirement of the minimum capital for the payment bank shall be 100 Crores. Under this NRI deposits are not allowed and accepted. Payment banks are not allowed to do lending activities.
The main objective of the payment bank is to provide a small savings account and another object is to extend the financial services to small businesses, migrant labor force, low-income households and unorganized sector in India.
Who all are eligible to apply for Payments banks license?
· Existing non-bank prepaid payment instruments under the Payment and settlement systems Act, 2007.
· Non-Banking Finance Companies.
· Business correspondents.
· Mobile telephone companies.
· Supermarket chains.
· Public Companies.
· Real sector cooperatives.
· Public Sector Entities.
RBI has given approval to 11 entities to establish a payment bank in India. It is valid for 18 months according to RBI guidelines. In case these entities fail to open a payment bank then they will have to surrender principal approvals. If the entities comply with all the requirements then RBI shall consider granting a license to them for the commencement of banking business. These payment banks cannot operate in full-fledged banking business.
Payment banks are similar to normal banks however they are allowed to do only a few banking services in comparison to normal banks. It is the new entrant in digital India. From very before, bank accounts and credit cards are being used in the online transaction.
Services offered by Payment Banks
Here are the following services provided by the Payments banks in India:
· A payment bank can accept deposits up to Rs. One lakh per individual from its customers.
· One can open a savings/current bank account with payment banks.
· Payment banks can pay interest on deposits.
· Payment banks can transfer payments through branches, ATMs, business correspondence, etc.
· Payment banks can issue debit cards and ATM cards to their customers.
· With these payment banks, mobile banking can also be assessed.
· Payment banks can provide internet banking which includes payment mechanisms approved by RBI.
· With the help of these payment banks, one can make payment of utility bills also.
· Payment banks are also involved in providing financial services like access to mutual funds, insurance products, pension products, and forex related services subject to conditions imposed by RBI.
Services that cannot be provided by Payment Banks
Here are the following services that cannot be provided by the Payment banks:
· Credit cards cannot be issued by payments banks according to RBI guidelines.
· They cannot deal in relation to lending business. They cannot issue loans to their customers.
· They are not allowed to accept deposits from NRIs (Non-Resident Indians).
· They cannot set up subsidiaries for undertaking non-banking financial services.
Difference between Traditional Banks & Payment Banks
Basis Traditional Banks Payment Banks
Acceptance of deposits Allowed Allowed
Interest on deposits Allowed Allowed
Withdrawal services Allowed Allowed
Lending Services Allowed Not allowed
Issuance of credit cards Allowed Not Allowed
Investment products Allowed Not Allowed
Limit of deposits No limit Up to 1 lakh per individual
List of Payments Banks in India
Here is the list of 11 applicants who got “In principal Approval” from the Reserve Bank of India for the opening of a payment bank in India:
· Aditya Birla Nuvo Limited (Idea Cellular )
· Reliance Industries (Joint venture: 70% RIL, 30% SBI)
· Airtel M Commerce Services Limited
· Vijay Shekhar Sharma (PayTM)
· Cholamandalam Distribution Services Limited
· Department of Posts ( India Post )
· Fino PayTech Limited
· National Securities Depository Limited (NSDL)
· Dilip Shantilal Shanghvi ( Sun Pharma )
· Tech Mahindra Limited
· Vodafone M-Pesa Limited
Out of these Airtel is the first payment bank in India to start its operations in India in the year 2016. They are providing 7.25% on deposits in saving account but they charge 0.65% on withdrawal above Rs. 4000. They are providing a good interest rate but charging for withdrawal over a specified limit.
IndiaPost is the second payment bank who started its functioning in the year 2017. They are offering an interest rate of 4.5% to 5.5% on deposits in a savings bank account.
Paytm payment Bank has been already launched in May 2017. Initially, they are inviting limited users to open a bank account but it is likely to expand in the coming months. In this current Paytm wallet shall be moved to a current bank account. With this users can open a current or savings accounts and can access a wide range of financial services.
To launch a payment bank, other license holders are also accelerating. They are helping India to move towards a digital economy. It will turn India into a cashless economy. It is a very good step to redefine the banking system in India. The dream of “Banking at your Doorstep” will turn out in reality even in the remotest area of India. Payment banks are providing digital innovation to the banking sector. It will bring revolution in the banking sector for the betterment of the people of India.