Zomato announced offering loans to registered restaurant and delivery partners.
Thoughtful, isn’t it?
With this initiative, restaurant owners can easily avail credit and set their operational costs in order, in this current pandemic crisis.
But. How’s that a food delivery app can offer lending services to the gen population?
Zomato’s partnership with InCred has made this feat possible. InCred is a Non-Banking Financial Company or NBFC in India, focussing on consumer loans, home loans, education loans, and SME Lending.
What is an NBFC?
NBFC or Non-Banking Financial Companies are financial institutions that offer some banking services such as loan & disbursals but do not possess a banking license. An NBFC must be registered under the Companies Act, 1956 and is primarily involved in the following:
- Loans & advances
- Acquisition of shares, bonds, stocks, debentures, or securities issued by the Govt, or local authority, or other similar marketable securities
- Insurance business
- Chit business
Some examples of an NBFC include insurance agencies, mortgage lenders, peer-to-peer payment lenders, money market funds, hedge funds, private equity funds, etc.
What are the Criteria to Become an NBFC?
NBFCs come under the regulation of RBI or Reserve Bank of India who has set clear guidelines on how an NBFC should function. RBI states that any company whose principal business is financial activity can be deemed a Non-Banking Financial Company.
When a company’s primary business is financial activity, then:
- Its financial assets comprises more than 50% of total assets
- Income from these assets contributes to more than 50% of the gross income/revenue
Once both these criteria are fulfilled, the RBI registers the company as an NBFC. In addition, an NBFC cannot indulge in a principal business whose primary activity is:
- Purchase or sale of goods excluding securities
- Construction, sale, or acquisition of immovable assets
What are the Guidelines an NBFC Must Follow?
In addition to the criteria above, here are some of the guidelines NBFC must meet.
- Must be a company that’s registered under Section 3 of the companies Act, 1956
- Must possess a net owned fund not less than ₹200 lakh.
- Any NBFC has to perform core management tasks internally. Ergo, these institutions cannot outsource activities such as conducting internal audits, managing the investment portfolio, performing comprehensive KYC checks.
- The board of NBFCs must approve the code of conduct for agents who execute direct sales & recovery.
- The agents must engage in cordial interactions with customers and cannot resort to harassment or intimidation of any kind while collecting debts.
And, a few more.
How is an NBFC Different from a Bank?
Although there are many overlapping areas between NBFCs and traditional banks, the key differences distinguishing the two are.
|License||Operates without a banking license and offers some of the banking services to public||No bank can operate without getting a license from RBI|
|Registration||Companies Act, 1956||Section 22 of the Banking Regulation Act, 1949|
|Services||NBFC cannot accept demand deposits or issue cheque drawn to itself||Collects deposits from the public and loans it, managing cash flow|
|Payment System||An NBFC is not authorized to take part in the payment & settlement system||Banks, under the supervision of RBI, are authorized for enabling payments via NEFT, IMPS, UPI, etc.|
|Foreign Investment Allowance||Up to 100%||Up to 74% for private sector|
|Legal reserve Ratios||Not required||Up to 10% of the deposit base|
|Deposit insurance facility||Not available||Available|
What are the Types of NBFCs?
RBI has categorized NBFCs based on a couple of factors.
- Type of liabilities as accepting deposit & non-deposit.
- Type of activity they perform
- Size of non-deposit taking NBFCs
In this regard, the different types of NBFCs are:
- Asset Finance Company (AFC)
- Investment Company (IC)
- Loan Company (LC)
- Infrastructure Finance Company (IFC)
- Systemically Important Core Investment Company (CIC-ND-SI)
- Infrastructure Debt Fund
- Micro Finance Institution
- Mortgage Guarantee Companies (MGC)
- NBFC- Non-Operative Financial Holding Company (NOFHC)
- Non-Banking Financial Company – Factors (NBFC-Factors)
Asset Finance Company (AFC)
An AFC is one whose principal business, i.e., more than 60% of assets, is financing physical assets involved in activities such as automobiles, material handling equipment, lathe machinery, generators, general-purpose industrial machines, etc.
Investment Company (IC)
An IC has principal business involving the acquisition of securities and manages, sells, and trades funds with the general public.
Loan Company (LC)
A Loan Company deals with providing loans or advances to the general public and derives its principal business from the same.
Infrastructure Finance Company (IFC)
An IFC has a minimum of 75% of its assets invested in infrastructure loans and owns at least ₹300 crores as Net Owned Funds or NOF. Also, it must possess a minimum credit rating of ‘A’ or the likes, and has a CRAR(Capital to Risk-Weighted Assets Ratio) of 15%.
Where do NBFCs Fit in the Indian Landscape?
Banks alone can’t cater to the growing needs of a large population, especially in India. This is where NBFCs come as a helping hand to enhance financial inclusion and provide services to the country’s under-served population.
Some of the critical functions of NBFCs that brings a positive impact to Indian fintech includes:
Growth of MSMEs & SMBs
Help with the growth of Micro Small Medium Enterprise. Very often, it’s not easy for banks to cross-check the credit history of these businesses, especially SMBs, and sanction them a loan. NBFCs could step in to provide credit, loans, and any supportive services to aid in the business growth.
Simplify & Decentralize Lending
Meet the rising needs of loans, credit, insurance, and more. NBFCs remove the middlemen out of the picture and provide services directly to those in need.
Offer wealth management by managing portfolios via investing in stocks, shares, and securities.
Strengthen Various Economic Sectors
According to the Govt data, only 60% of farmers have access to financial services to drive their occupation forward. Further, this number sinks to an abysmal 15% for small farmers.
With the entry of Agri-NBFCs, farmers can use their crop/produce as collateral to receive credit facility and against storage receipts of commodities. In contrast, they fare over traditional banks since the loan sanction is quick and has less hassle due to reduced paperwork.
Similarly, a significant contribution to the infrastructure sector helps nation-building by routing suitable funds to infrastructure projects via IDFs.
Digitized Financial Services
Digitization has enabled NBFCs to incorporate the latest fintech technology, such as open banking and API banking, into their offerings, making financial services easy to avail & enjoy.
For instance, lending has simplified with Peer-to-peer offerings and has brought money to those in need. Consequently, it has paved the way for penetrating financial inclusion better. Moreover, the involvement & guidance to companies & businesses when it comes to investments and mergers help to channelize cashflow & manage money movement effectively.
Which are Some of the Top NBFCs in India?
Although the complete list of NBFCs registered under RBI is available at the latter’s official website (www.rbi.org.in), we thought of mentioning some of the top NBFCs that are/have been game-changers.
- Bajaj Finance Limited
- Shriram Transport Finance Company Limited
- Muthoot Finance Ltd
- Aditya Birla Finance Ltd.
- HDB Finance Services
- Mahindra & Mahindra Financial Services Limited
- L & T Finance Limited
- Sundaram Finance Limited
How is Decentro Helping & Empowering NBFCs?
It gives us immense happiness to do our bit for enabling NBFCs to perform more seamlessly and remove any retardants in the process.
For the very process, we’ve set-up a host of products to cater to the diverse needs of an NBFC.
Authenticate & Onboard Customers Easily via KYC APIs
While engaging in financial services, it’s up to the financial institutions to ensure the entities are not fraudulent nor involved in any money laundering or terrorist-related activities.
RBI has made KYC or know your customer mandatory to curb money laundering and terrorist financing. With Decentro’s APIs, your NBFC can run comprehensive identity checks on customers before onboarding them.
Be it identity checks via Aadhaar or PAN, income data checks via ITR or GSTIN, background checks via negative lists, or behavioral checks via lifestyle choices, know your transacting customers inside-out.
Streamline Disbursals & Automate Payouts
Set-up multiple virtual accounts on top of your NBFC business account to facilitate disbursements easily. Receive payments from your buyers and channel them to dedicated virtual accounts, making it easy to reconcile payments. Add beneficiaries to manage your payouts, without any cooling periods, after verifying their account details & UPI.
You can automate payouts using any method such as IMPS, RTGS, UPI, or cards. Track all the transaction details in real-time on your dashboard.
Make Payment Collections Instant
Collect payments automatically after setting up virtual accounts and UPI IDs. If not a UPI payment link, you can always opt for static or dynamic QR codes to collect payments from customers or partners.
Decentro’s APIs support multichannel payment options- ergo, you can reach out to customers for payments via email, SMS, chatbots, social media, and the likes.
You can white-label the UPI ID as per your institution’s name and brand it.
Above all, while transacting with customers, it becomes all the more important to establish trust, and that’s why we’ve set-up the white-label feature for UPI.
Financial inclusion, especially for the underserved segment of society, is a path our country has already set on. We’d be delighted to do our bit to enable your NBFC to serve customers better and make financial services more accessible.
If you have any interesting use cases that we can pick up, we’re just a chat or call away! Drop us a ‘Hey’ at email@example.com, and let’s catch up!