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NBFC-MFI

Microfinance institutions or MFIs are those financial institutions that are in the business of providing loans and other financial services on a smaller scale. They are in the business of extending small loans in rural areas and among lower-income people in urban areas. Some of the large scale MFIs, after qualifying certain criteria and being non-deposit taking entities, register as Non-Banking Financial Company (NBFC) and get governed by RBI (Reserve Bank of India). These NBFC-MFIs are also termed as “Last Mile Financiers”. RBI governs them to keep these NBFC MFIs healthy and accountable. They are to apply for NBFC License with RBI to get registered with it.

According to provisions of RBI only non-deposit taking NBFCs can get registered as NBFC MFI after meeting the following conditions:

  • Minimum Net Owned Funds (NOF) of Rs. 5 crore. (For North Eastern States, Rs. 2 crore is required as minimum NOF).
  • At least 85% of its Total Net Assets must be “Qualifying Assets.”

An NBFC, not qualifying as an NBFC MFI, cannot extend loans in the micro-finance sector, of more than 10% of its total assets, in aggregate.

The only difference between an NBFC MFI and other types of NBFC is that while other NBFCs can operate at a very high level but MFIs can only cater to the lower level of social strata, who need microcredits.

cor process

NBFC MFI Registration Process

After your company has been established and the minimum NOF arranged, the below procedure needs to be followed to get the NBFC MFI License for your company:

  • Apply online with the required documents. A Company Application Reference Number (CARN) will get automatically generated. This reference number shall be used during all future enquiries and communications.
  • The hard copy of the documents and the application form as submitted online above are sent to the Regional Office of the RBI.
  • Upon verifying the submitted documents, the regional office sends them to the central office of the RBI. There, the application and the documents are examined and a thorough background check is conducted.
  • If RBI finds the company meeting all the terms and conditions specified in Section 45-I A of the RBI Act, it shall be granted the license to become an NBFC MFI.

Pre-Registration Conditions

For New Entities to Register as an NBFC + MFI

All new entities are to get incorporated as a company first. Therefore this may take a while longer – at least 2-3 months.

  1. To register as an NBFC, the business, first, needs to be registered as a Company under the Companies Act, 2013.
  2. Arrange for the minimum NOF of Rs.5 crore (other than those registered in the North Eastern Region of the country – they require NOF of Rs.2 crore)

For Existing NBFCs to be Registered as NBFC MFI

Those NBFCs that are already registered with RBI, and want to convert to NBFC MFI, are to seek registration with RBI, subject to the condition that they hold their NOF at Rs. 5 crore. If this condition is not fulfilled, they must ensure that loans extended to the Microfinance sector (individuals, Self Help Groups or Joint Liability Groups, etc.) shall be less than 10% of its Total Assets.

To encourage NBFCs operating in the 8 North Eastern States, the minimum NOF is to be maintained at Rs. 2 crore.

Compliances to be Met After Registration

If the takeover transaction of the Target NBFC is falling under any of the above-mentioned situations, you need to apply to RBI for prior approval. Then your application needs to be accompanied by the following documents:

Tier-I Capital

It is the capital that can absorb the losses without such an impact on the entity to cease trading,

Tier-2 Capital

The capital that can bear losses at the time of winding–up and so the depositor may not be completely protected.

Capital Adequacy Ratio Standards

  • NBFCs to be classified as NBFC MFIs must maintain a minimum CRAR of 15%.
  • The NBFC MFIs in the state of Andhra Pradesh (now Telangana & AP) having more than 25% loan portfolios are to maintain CRAR at 15%.

Asset Classification Norms

  1. Standard assets are those assets that assets which do not pose any problem nor bear risk more than normally attached to a business. And no default in repayment of principal or payment of interest is recognized, attached to it.
  2. Non-performing assets are assets for which, interest and/or principal payment has been overdue for 90 days or more.

Documents Required to Become NBFC MFI

Documents Required by New Companies
  • Duly Signed Application Form,
  • PAN & CIN of the Company,
  • Annexure I with the Company Stamp,
  • Board Resolution to be converted as an MFI,
  • Annexure II certified by Auditor,
  • Annexure III with information on the Directors. Their PAN, DIN, CIBIL, etc.
  • MoA & AoA,
  • Any default in repayment of deposits and interest,
  • Any cases pending in consumer court or forums,
  • I (Certificate of Incorporation) under the Companies Act,
  • Details about FDI, if any. And its approval with FIPB,
  • A declaration that no public deposits have been accepted,
  • The company’s plan of fixing internal exposure limits to avoid any undesirable concentration in specific geographical locations,
  • Declaration by the Board of following the Fair Practices.
  • Banker’s Report,
  • Source of funds to arrange the initial capital.
  • Detailed Business Plan for the next 3-years. With the information on the projected thrust of business, market segment & balance sheets, Cash flow statement, asset/income pattern statement without any element of public deposits, etc.

**RBI can ask for more documents before certifying you eligible to become an NBFC-MFI. The above list is not exhaustive.

**If RBI asks for more documents, they must be submitted within 30 days. Otherwise, the application for CoR will be considered Null.

Documents Required by an Existing NBFC
  • Duly Signed Application Form,
  • PAN & CIN of the Company,
  • Annexure I with the Company Stamp,
  • Proof of membership with at least 1 CIC,
  • Board Resolution,
  • Annexure II certified by Auditor,
  • Annexure III with information on the Directors. Their PAN, DIN, CIBIL, etc.
  • CoR,
  • MoA & AoA,
  • Any default in repayment of deposits and interest,
  • Any cases pending in consumer court or forums,
  • Audited Balance Sheet and Profit & Loss Statement for the past 3 years. Including statements about unsecured loans, qualifying assets, loan asset profile,
  • Details about FDI, if any. And its approval with FIPB,
  • Banker’s Report,
  • Declaration by the Board of following the Fair Practices.

**RBI can ask for more documents before certifying you eligible to become an NBFC-MFI. The above list is not exhaustive.

**If RBI asks for more documents, they must be submitted within 30 days. Otherwise, the application to become an NBFC-MFI will be considered Null.

Net & Qualifying Assets of NBFC MFI

Only the assets originated on or after January 1, 2012 will have to comply with the Qualifying Assets criteria. Those existing before this date are reckoned towards meeting both the Qualifying Assets as well as the Total Net Assets criteria. These assets have been allowed to run off on maturity and not be renewed.

Net Assets” are total assets. Excluding cash, bank balances, and money market instruments.

“Qualifying Assets” are loans by an NBFC MFI, meeting below descriptions:

  • Loan disbursed to a borrower with a rural household annual income not more than Rs. 1,25,000 or urban & semi-urban household income not exceeding Rs. 2,00,000.

  • Loan amount shall not be more than Rs. 75,000 in the first cycle and Rs. 1,25,000 in subsequent cycles.

  • In total, not more than Rs.1,25,000 is to be lent to a borrower. Any loans taken to fulfill education and medical expenses shall be excluded while calculating the total indebtedness of a borrower.

  • For a loan of more than Rs. 30,000, the duration of the loan shall not be less than 24 months. With prepayment clause without penalty.

  • Loan offered without any collateral.

  • The repayment schedule to be chosen by the borrower, as either weekly, fortnightly or monthly instalments.

  • The aggregate amount of loans, given for income generation, not to be less than 50 % of the total loans given by the MFIs. And the balance amount of loans may be extended for other purposes such as housing repairs, personal expenses, education, medical, or emergencies,

  • The income earned from the balance of 15% of the Qualifying Assets shall comply with the provisions provided specified for it.

Necessary Compliances

RBI decrees that every NBFC MFI has to become a member of at least one Credit Information Company (CIC) established under the CIC Regulation Act 2005. Present timely and correct data to the CICs and use the data with them to ensure compliance with the conditions concerning membership of JLG/SHG, level of indebtedness and origins of funds. Such membership will ensure compliance with most of these stipulations.

Recovery Methods
  • NBFC MFIs are responsible to make sure that the Fair Practices Code is followed at the time of recruitment, training, and supervision of field staff.
  • Recovery should be non-coercive. It shall be made only at a central designated place. If the borrower fails to arrive at the central designated place on 2 or more occasions consecutively, then only field staff shall be allowed to recover the loan.
Corporate Governance

The Master Circular of July 01, 2015, issued for NBFCs on Corporate Governance, is applicable for NBFC MFIs as well.

Improvement in Efficiency

To strive for improvement in the efficiency of the backend and back-office operations of the NBFC MFI. Keep updating their Information Technology and systems. To simplify procedures, achieve better control and reduce costs.

Other

RBI has issued guidelines in the circular RPCD.CO.Plan BC.66/04.09.01/2010-11 dated May 3, 2011, issued by the Rural Planning and Credit Department (RPCD) of RBI titled “Bank loans to Micro Finance Institutions (MFIs). And it keeps updating the terms from time to time.

Regulations About Loans & Funding

Pricing of Credit

The margin cap for all NBFCs, irrespective of their size, must not be more than 10% for large MFIs (having loan portfolios over Rs.100 crore) and 12% for the others.

The interest rates charged by an NBFC MFI on its loans extended must be the lower of:

  • The cost of funds added with the margin (10% or 12% as mentioned above), or
  • The average base rate of the 5 largest (by assets) commercial banks multiplied by 2.75 per annum. This rate is calculated and advised by RBI on the last working day of the previous quarter. And interest rates for the upcoming quarter are determined.

NBFC MFI will ensure that the average interest rate on loans during any financial year (FY) does not exceed the average borrowing cost during that FY plus the margin, as prescribed.

  • Further, while the rate of interest on individual loans may be more than 26%, the maximum variation allowed between the minimum and maximum interest rate cannot be more than 4%, for individual loans.
  • The average interest paid and charged by the MFI is to be calculated on average monthly balances of unpaid borrowings and loan portfolio respectively. The figures must be certified by Statutory Auditors, annually, and also disclosed in the Balance Sheet.

The interest rates charged by an NBFC MFI on its loans extended must be the lower of:

  • The cost of funds added with the margin (10% or 12% as mentioned above), or
  • The average base rate of the 5 largest (by assets) commercial banks multiplied by 2.75 per annum. This rate is calculated and advised by RBI on the last working day of the previous quarter. And interest rates for the upcoming quarter are determined.

The condition of maximum variation permitted does not apply to loans being provided from the funding received by NSFDC (National Scheduled Castes Finance & Development Corporation). Such loans are to be directly credited to the borrower’s accounts with banks.

Any borrowing from NSFDC must be excluded while calculating the average cost of funds for the company. Estimate the price of the general credit, excluding the beneficiaries targeted by NSFDC. Proper records of funds received or lent out from NSFDC are to be maintained and disclosed in the balance sheet of the NBFC MFI.

NBFC MFI is to inform the concerned Regional Office of RBI of its being appointed as a channel agent by NSFDC within 30 days of getting appointed.

  1. Processing charges not to be more than 1% of the gross loan amount. These charges are not to be included in the margin cap or the interest cap.
  2. NBFC MFI is to recover only the actual cost, but not administrative charges, of insurance for group, or livestock, life, health for borrower & spouse.

Provisioning Rules

Many NBFC MFIs in the earlier state of Andhra Pradesh (now Telangana and AP) have had to keep aside fairly large amounts towards the non-performing assets. To reflect the true and fair picture of the financials of the NBFC MFI in the Balance Sheet, the provisioning made towards the AP portfolio is to be as per the current provisioning norms. Implying that the Prudential Norms laid by RBI are applicable to both SI-NBFC (Non-Deposit Accepting or Holding) and Non-SI-NBFC (Non-Deposit Accepting or Holding)..

The aggregate loan provision to be maintained by NBFC-MFI, from the non-AP portfolio, should never fall below:

  • 1% of the outstanding loan portfolio, or
  • 50% of the aggregate loan instalments that have been overdue for more than 90 days but less than 180 days.
  • And 100% of the aggregate loan instalments which have been outstanding for 180 days or more.

All other provisions commanded for SI-NBFC or Non-SI-NBFC (Non-Deposit Accepting or Holding) apply to NBFC MFIs also. Except if specifically excluded.

Channelizing Agents for Schemes operated by different Government Agencies

  • The department of channelizing agents is to be considered a separate business entity. Their loans shall not be included while determining the minimum qualifying assets criteria of 85%.

  • The interest on such loans is also not to be included while calculating the difference between the maximum and minimum interest rates.

  • The cost of these funds is also not to be counted while determining the average cost of funds or the interest rates charged to borrowers.

  • Proper accounts and records for such loans as well as funding from concerned agencies shall be kept by the NBFC MFI. Disclosed separately in the financial statements.

  • All these loans are to be reported to CICs to restrict multiple borrowings of a borrower.

All other provisions commanded for SI-NBFC or Non-SI-NBFC (Non-Deposit Accepting or Holding) apply to NBFC MFIs also. Except if specifically excluded.

FAQ

NBFCs are institutions that offer financial assistance and various banking services but do not have a banking license. They are not the same as both “Cooperative and Commercial” banks, They don’t have to hold a financial permit however they should carefully follow the standards and guidelines given by RBI from time to time. NBFCs, most usually, work in the field of industrial and commercial loans, hire-purchasing, investment funds, deposits, debentures, chit fund business, leasing, insurance business, instruments of the capital & money markets like “bonds, stocks, and various other similar activities.”

Any business willing to commence activities of non-banking financial nature as defined under Section 45-IA of the RBI Act, 1934 should comply with: 1. It should be a company incorporated under section 3 of the Companies Act, 1956 or 2013, 2. It should have a minimum NOF of Rs.2 crores. (The minimum NOF requirement for specialized NBFCs like NBFC-MFIs, NBFC- Factors and CICs differs).

NBFCs provide loans and make investments. These characteristics are the same as that of banks. However, there are some differences: 1. NBFCs cannot accept deposits payable on demand, 2. They are not part of the payment and settlement system and cannot issue cheques drawn on itself, 3. The deposit insurance facility of “Deposit Insurance and Credit Guarantee Corporation” is not available to the investors of NBFCs.

Just call “LegalRaasta” at +91 875 000 8585. We'll complete the advantage of accumulating the documents as required by RBI according to how you wish to start your NBFC. Advise you on the procedures to be met and arrange for them to get completed. File them with the RBI regional office. Provide consultancy on the steps to be taken by you. Answer all the queries on time. And get you registered conveniently.

• Certificate of Incorporation of the Company. • MoA and AoA. • Administrative Documents of the Company. • Address proof of the Company. • Detailed information about Directors or Partners of the Company. • Well-audited accounts of the Company since its formations or for at least the past 3-consecutive years. • Board Resolution approving the creation of NBFC. • Bank Account that holds the paid-up equity share capital of minimum Rs. 2 Crore. • Latest KYC. • Net worth certificate. • Clean banker's report. • Other relevant documents on request.

No, “Merchant Banking Companies, Stock Exchanges, Housing Finance Companies, Venture Capital Fund Companies, Stock-broking/Sub-broking Companies, Nidhi Companies, Insurance Companies, and Chit Fund Companies” are NBFCs and they do not need to be registered with RBI but are subject to certain conditions. They are regulated by other regulators.

RBI has the authority to register, lay down policy & provisions, issue directions, regulate, supervise, inspect, and exercise surveillance over NBFCs meeting the “50-50” criteria of principle business. It can penalize NBFCs for infringing the provisions of the RBI Act or directions/orders issued under it. The penal action can also be cancelation of the CoR or prohibiting them from accepting deposits and alienating their assets or filing a winding-up petition.

Businesses whose principle activity is “lending, investing, or accepting deposits” must be registered with the RBI as NBFCs .If they are found without an NBFC license, then RBI can impose a penalty or fine on them. They can even be indicted in a court of law. Members from the general public are invited to report such firms to the nearest Regional Office of RBI. Appropriate action will be taken against such entities for violating the provisions of the RBI Act, 1934.

The provisions are as follows: a) They shall not be subjected to any statutes, whether prudential or conduct of business regulations if they have not accessed any public funds and do not have a customer interface. The norms are “Fair Practice Code, KYC, etc.” b) Those with a customer interface are subject to these codes if they are not accessing public funds. c) If public funds are accessed, NBFCs will be subjected to certain prudential regulations but no conduct of business regulations if no customer interface is there. d) When both public funds are accepted and the customer interface also exists, those companies are subject to both the limited prudential regulations and the conduct of business regulations

Public Fund means “public deposits, bank finance, inter-corporate deposits, and all funds received” whether directly or indirectly, from outside sources. It could be funds raised by issuing Commercial Papers etc.

A. Returns to be submitted by NBFC-Deposit Accepting are: 1. NBS-1 - Quarterly returns on deposits in the First Schedule. 2. NBS-2 - Quarterly returns on Prudential Norms. 3. NBS-3 - Quarterly returns on Liquid Assets. 4. NBS-4 - Annual returns of critical parameters by a rejected company holding public deposits. 5. NBS-6 - Monthly returns on exposure to capital market institutions with total assets of Rs. 100 crore and above. 6. Half-yearly ALM returns - with companies having public deposits of over Rs. 20 crore or asset size of over Rs. 100 crore 7. Audited Balance sheet and Auditor’s Report. 8. Branch Info Returns. B. Returns to be submitted by NBFCs-ND-SI: 1. NBS-7 - Quarterly statement of capital funds, risk-weighted assets, their ratio, etc. 2. Monthly Returns on Important Financial Parameters. 3. ALM returns: a. Monthly statement of short term dynamic liquidity in format ALM [NBS-ALM1], b. Half-yearly Statement of structural liquidity in format ALM [NBS-ALM2], c. Half-yearly Statement of Interest Rate Sensitivity in the form ALM -[NBS-ALM3]. 4. Branch Info returns. 5. Quarterly returns on important financial values & basic information like name of the company, its address, NOF, profit & loss statement during the last 3-years of NBFC-NDs with assets between Rs. 50 crore and Rs. 100 crore.

Residuary Non-Banking Company (RNBC) is a type of NBFC whose principle business is of receiving deposits under any “scheme/arrangement/some other manner”. It is not an “Investment Company, Asset Financing Company, or Loan Company.” They are required to maintain investments and liquid assets as required by RBI. Their functioning is quite different from those of NBFCs in terms of how they mobilize deposits and the requirement of deployment of depositors' funds as per RBI Directions. Besides, Prudential Norms Directions apply to them also.

All NBFCs are not permitted to accept public deposits. Only the NBFCs which have taken specific permission from the RBI to do so, are allowed to accept/hold public deposits. To get permitted by RBI, they must have an investment-grade rating to a limit of 1.5 times of it’s NOF.

RBI has capped the annual rate of interest an NBFC to a maximum of 12.5%. The interest may be paid or compounded at a frequency of one month or more.

The deposits with NBFCs can be accepted/renewed for a minimum period of 12 months and a maximum of 60 months. They cannot accept demand deposits.

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