Overview of Non-Banking Financial Company - NBFC Registration
Non-banking financial company (NBFC) is a kind of financial institution which provides financial services to individuals as well as to business entities. Such financial services similar to that of the banks but it doesn’t necessitate banking license but such company owns NBFC License. NBFCs act as an alternative to the banks as they provide financial solutions to the unorganized part of the society.
Regulated Authority of NBFC
The Reserve Bank of India (RBI) formulates rules & regulations for NBFCs therefore license from RBI is required for starting NBFC in India as per Section 45-IA of the RBI Act, 1934. The RBI is authorized to regulate NBFCs by ensuring that they are complying with the prescribed rules & regulations.
Principal Business Requirement for NBFC
The principal business of NBFCs is to provide financial services which involves lending, investments in shares, stocks, bonds, debentures, leasing, hire-purchase, P2P Market Place lending business, financial information service provider (NBFC-AA) insurance business, chit business or involved in the receiving of deposits under any scheme or arrangement.
Besides this, following below mentioned conditions must be fulfilled in order to continue NBFC License:
- Total Assets comprises more than 50% financial assets
- More than 50% of the gross income should be generated from financial assets
To regulate & supervise functions of NBFC, RBI has two departments which are as follows:
- Agricultural Activity
- Industrial Activity
- Sale / Purchase of Goods and Services
- Sale / Purchase of construction of immovable property
Another way of starting finance business is to takeover an existing NBFC however it is always advisable to go for fresh NBFC registration.
Now, you must be wondering why?
Types of NBFCs
NBFCs are classified into two types:
On the basis of liabilities
All NBFCs – ND whose asset size is Rs. 500 Crore and more as per the last audited balance sheet is considered as Systemically Important NBFC (NBFC-ND-SI).
Asset size of the group companies to be clubbed
NBFC-ND-SI has to follow the policies prescribed by RBI mandatorily and exempt from Credit Concentration Norms.
NBFC-ND-Non SI is exempt from observing Prudential Norms, 2015 (except Annual Certificate)
On the basis of Activities
- NBFC-Investment and Credit Company (NBFC-ICC)
It is a kind of NBFC which deals with the lending and investment activities. Previously there were three categories which were later merged into one to provide greater operational flexibility.
[Asset Finance Company + Loan Company + Investment Company = Investment and Credit Company]
- NBFC-Infrastructure Finance Company (NBFC-IFC)
This type of financial institutions is primarily engaged in providing infrastructure loans.
- NBFC-Systemically Important Core Investment Company (CIC-ND-SI)
Its activities are mainly involved in investment in equity shares, preference shares, debt or loans of group companies.
- Infrastructure Debt Fund-NBFC (IDF-NBFC)
Activities of NBFC-IDF are mainly concerned with facilitation of flow of long-term debt into infrastructure projects.
- NBFC-Micro Finance Institution (NBFC-MFI)
NBFC-MFI is mainly formed to provide credit to economically disadvantaged groups.
Their main activity is concerned with acquisition of receivables of an assignor or extending loans against the security interest of the receivables at a discount.
- NBFC-Non-Operative Financial Holding Company (NOFHC)
Facilitation of promoters/ promoter groups in setting up new banks
- Mortgage Guarantee Company (MGC)
Undertaking of mortgage guarantee business
- NBFC-Account Aggregator (NBFC-AA)
Collecting and providing information about a customer’s financial assets in a consolidated, organized and retrievable manner to the customer or others as specified by the customer.
- NBFC–Peer to Peer Lending Platform (NBFC-P2P)
It provides an online platform to bring lenders and borrowers together to help mobilize funds
How NBFCs are different from Banks?
We can differentiate NBFCs from banks on the basis of following points:
NBFCs provide banking services to people without holding Bank license.
Bank is a government authorized financial intermediary which aims at providing banking services to the public.
- Regulated Authority
In case of NBFCs - Companies Act 2013 & RBI Act, 1934
In case of Banks - Banking Regulation Act 1949
- Demand Deposit
NBFCs cannot accept demand deposits.
Banks can accept demand deposits.
- Foreign Investment
In case of NBFCs, foreign investment is 100% allowed.
Foreign investment is allowed up to 74% for private sector banks.
- Payment and Settlement System
NBFCs – not a part of system
Banks – Integral part of the system
- Maintenance of Reserve Ratios
Not required in case of NBFCs.
Banks have to maintain reserve ratios.
- Deposit insurance facility
NBFCs – Not available
Banks – Available
- Credit creation
NBFCs do not create credit.
Banks create credit.
- Transaction Services
NBFCs cannot provide transactions services.
Banks provide transaction services.
Importance & Functions of NBFCs in India
NBFC registration is very important for a person who wants to carry finance business in India. NBFCs cater wide range of customers and provide loans to the deprived sections of the society including both urban & rural areas in this way they contribute towards the growth of the country. Moreover, the interest rate at which a NBFC advances loan can be decided by itself keeping RBI guidelines in mind.
Functions of NBFC are as follows:
- Providing customized loan solutions
- Digital platform to provide loans using advanced technology
- Faster processing of loan
- Employment generation
- Wealth creation
- Infrastructure development
- Financial assistance to financially weaker section of the society thus economic development
Advantages of NBFC registration
- Lowest Business and legal risk
- High confidence of a customer after Grant of NBFC license
- Easy to Raise Investments in NBFC
- Access of CIBIL and Other Credit Bureaus data
- Open Interest Rate
- Free to charge Processing Fees–
- Protection by law for recovery of loan
- Easy Bank Finance
- Up to 100%, allowed by FDI
- Leverage of technology and Low Operation Cost
- A decline in Bad Loans due to credit reporting to Bureaus
- Company Registration
- Director’s Experience
- Five Year Business Plan
- Minimum NOF (Net Owned Fund) requirement
- Qualify Capital test
- Credit History
- Quality of capital
- FEMA Compliances
- Certified copy of COI (Certificate of Incorporation) / MOA / AOA
- Net Worth Certificate of Directors, Shareholders & Company
- Educational qualification documents of the proposed directors
- Highest Experience certificates
- Directors & Shareholders business profile
- Credit report of directors & shareholders
- KYC details, PAN of the company, GST number, address proof of the company
- Bank account details of the company [Rs. 2 Cr must have deposited as NOF]
- Audited balance sheet of last 3 years or from the date of incorporation
- Related Party Disclosures
- Income tax Returns
- Banker’s Report confirming no lien on fixed deposit
- Format of board resolution regarding NBFC registration
- Underwriting model - Detailed action plan of next 5 years including Fair Practice Code and risk assessment policy
- Business Structure & Loan Structure
- IT Policy
Benefits and Opportunities after NBFC registration
The business environment in India is favourable for NBFC for its exponential growth. The Reserve bank of India highly regulates financing business in India. A Registered NBFC helps in gaining the confidence of borrowers, gives the security of capital invested in the business.
Therefore, NBFC registration offers many benefits.
Pre Requisites for NBFC Registration
For NBFC registration, below mentioned conditions must be fulfilled as per Section 45-IA of the RBI Act, 1934:
An applicant must be a company registered under companies Act 1956 or Companies Act 2013.
1/3rd Directors of the applicant company must possess experience in finance field in order to apply for NBFC license.
An applicant company needs to draft detailed business plan for the next five years.
The applicant company must possess minimum NOF of Rs. 2 Cr. Tax must be paid on it.
The RBI undertakes quality of capital test to check that invested capitalis free non-compliance with the prescribed laws.
The credit score of the company, directors & its shareholders must be fineand they must have not defaulted loan re-payment deliberately to banks or to NBFCs.
An applicant company must have complied with the mandatory compliances.
In case of involvement of foreign investment, an applicant company must have complied with the FEMA Act. 100% FDI is allowed from FATF member countries.
Documents Required for NBFC Registration
What is the NBFC Registration Procedure?
Follow the below mentioned steps to establish your NBFC:
- Hire experienced NBFC registration consultant who is having at least 10 year’s experience and having a team of experienced professionals like CA, CS, lawyers and senior bankers.
- The proposed name of the company must include Finance, FinServ, Final, Investment, Capital, Fintech, and Leasing etc.
- Register a Private Limited or Public company
- Plan your Registered office, City and Area of Operations
- Obtain certificate of Incorporation from Registrar of Companies
- Deposit Net Owned Funds in bank account opened for company
- Documentation for obtaining NBFC license
- Drafting of Business Plan for the next 5 years consisting:
• Executive Summary
• Product Plan
• Lending Model
• Risk Model
• Peer Analysis
• SWOT Analysis
• Financial Projections
- Apply for registration with RBI under RBI Act, 1934.
- Applicant Company has to file an online application with the RBI on its official website.
- After this, an applicant will get a reference number (CARN) to facilitate inquiry in the future.
- After this, it is required to submit the duplicate hard copies to the concerned regional office of RBI.
- The regional office shall check the accuracy of all submitted documents.
- The regional office will send the application for NBFC registration to the central office.
- The central office of RBI grants NBFC registration only when applicant company fulfills prescribed requirements under section 45-IA.
- NBFC must commence its business within 6 months from the date of Certificate of Registration
RBI Conditions for Granting NBFC License
- After filing application for NBFC registration, RBI will scrutinize the file and grant license only after satisfying the below mentioned conditions:
- Ability of NBFC to repay its dues to investors and Business Plan of the company must fulfill the larger interest of the society
- NBFC activities shall not be detrimental to the interest of the Public at Large
- Capability to Infuse Sufficient capital
- Earning capability of the Proposed Business
- Activities shall be carried out in such a manner that it shall be in the public interest
- Board shall act in the interest of public or depositors
- Granting license will contribute to the economic growth of the country
- Proposed NBFC shall comply with the RBI regulations
Market Size of the NBFC in India
NBFCis considered as rapidly growing business vertical. In India there are a lot of banks, however, certain areas are still untouched, and no banking facilities are available there, this consequently has resulted into the enhanced demand for availing loans from NBFC and ultimately more number of NBFC registration. NBFC incorporation has taken a boom in past few years and playing very important role in the growth of financial sector. Behind this, the main reason is providing customized loan product, customer friendly loan policy as well as faster processing of loan, advanced technology and digital reach.
Non-Banking Financial Companies (NBFCs) has managed to attract considerable stake of the market in banking and banking-related services. NBFCs are engaged in the business similar to a bank but do not cover everything that a bank is indulged into. NBFC can raise funds from the public, directly or indirectly, and can freely lend them to ultimate spenders.
In our opinion, NBFC sector will continuously grow because of advanced technology used by financial companies regardless of of the slow growth rate.
NBFC License Cancellation Cases
On the following below mentioned grounds RBI may cancel NBFC license:
- NBFC license can be cancelled in case of insufficient financial experience
- Directors & shareholders business profile is not satisfactory
- Business plan not up to the mark
- Capital arranged from the prohibited source
- NBFC consultants are not experienced
- Area of carrying NBFC operations is not encouraging
Mandatory Compliances after obtaining NBFC License from RBI
Formalities prior to the business commencement
After obtaining registration but prior to the commencement of business, there are following types of Compliances which need to be followed strictly for further operations.
NBFC has to apply for the following:
- Registration with 4 Credit Rating Agencies – CIBIL, ICRA, Equifax and Experian
- Central KYC
- CERSAI Registration
- FIU-IND Registration
- Adoption of Fair Practice Code
- National E-Governance Registration
- Adoption of Anti Money Laundering Policy & IT Policy
- Submission of Financial Information to Information Utilities
NBFC Annual Compliances
After complying with above mentioned registrations, NBFCs have to follow below mentioned compliances on an annual basis:
- Filing of annual return with the RBI
- Statutory compliances with the registrar of companies (ROC) – Annual Return Filing, Filing of Financial Statements
- Tax Filing - Income Tax Returns & GST Returns
Penalty Provisions – In case of non compliance with RBI Regulations
- Carrying NBFC Activities without CoR
Imprisonment of 1 to 5 years
Fine of Rs. 1 to 5 lakhs
- Non-Compliance of RBI Directions
Imprisonment up to3 years
- Failure to produce documentation or answer queries
Fine which may extend to Rs. 2000 per offence and in case of continuous non-compliance, additional fine up to Rs. 100 per day from the first offence
- Acceptance of Deposits
Imprisonment up to 3 years
Fine of twice the amount received
FDI in NBFC
100% Foreign Direct Investment is allowed for NBFCs under automatic route, if NBFC is engaged in the following subject to the minimum capitalization requirements:
- Merchant Banking
- Portfolio Management Services
- Investment advisory services
- Financial consultancy
- Stock broking
- Asset Management
- Venture Capital
- Custodian Services
- Credit Rating Agencies
- Leasing and Finance* (financial leases only)
- Housing Finance
- Forex Broking
- Credit Card business**
- Money changing business
- Micro Credit
- Rural Credit
How we can help you? – NBFC Registration
First, you have to fill the query form
You will get a call from our expert
Get confirmation on mail
Submission of documents with us
Executive will process your application
Track progress of your order
After registration, Corpbiz can help you with other NBFC related services:
Fintech based lending model advisory
Designing loan product & documentation
Complete market strategy
Assistance in fund raising
Virtual CFO services
Post incorporation compliances
Expert advisory on adoption of IND-AS and IFRS
Frequently Asked Questions
Yes, RBI registration is mandatory for setting up NBFC in India under section 45-IA of the RBI Act, 1934.
On the basis of their nature of activity, different types of NBFCs are regulated by different type of financial bodies such as RBI, SEBI, IRDA, and MCA. Thus, it is clear that it is not important for every NBFC to obtain license from RBI but surely they have to apply for registration with their respective regulatory body.
Yes, existing company can apply for license if it is registered under Companies Act.
There is a requirement of minimum capital of Rs. 2 cr which will be reserved in the form of fixed deposit in the current account of the company.
Well, as per the government rules & regulations there is a basic need of minimum capital of Rs. 2 Cr consequently applicant first have to apply for company registration with minimum capital along with the government fees of filing necessary forms.
Yes, NBFC is eligible to accept deposits but at least for a period of 12 months and maximum for a period of 60 days on the other hand demand deposits cannot be accepted by NBFC.
No, to meet the minimum capital requirement loan cannot be taken.
Yes, it is important to have financial sector exposure to minimum 1/3rd directors to apply for NBFC license.
Interest rate will be mentioned in the business plan submitted by the applicant to the RBI at the time of registration subject to the limit prescribed by the RBI.
NBFC-ND can give unsecured personal loan& business loan, Securedloan against property, loan against securities, loan to MSMEs, Gold loan etc. however it should be mentioned in the business plan.
Non-banking financial companies (NBFC)s, are the financial institution which deals in financial services. NBFC institution offers several financial services without having banking license. They are allowed to involve in all financial activities under section 45-IA of the RBI Act.
If an organization wishes to expand its paid-up capital, it can expand it by offering the Right Issue of shares. The right Issue can be offered to current investors under a plan of workers' investment opportunity, subject to a special resolution passed by the organization.
NBFCs provide loans and also make investments. This is character as same as that of banks. However, there are some differences between them:
- NBFCs cannot accept deposits payable on demand.
- The deposit insurance facility and Credit Guarantee Corporation is NOT available to the investors of NBFCs.
- NBFCs are also not part of the payment and settlement system. They cannot issue cheques drawn on itself.
Residuary Non-Banking Company (RNBC) is one of the class of NBFC. It has the principal business of receiving deposits under any scheme/arrangement/some other manner. It is not an Asset Financing Company, Investment Company, or Loan Company. They are required to maintain investments and liquid assets as specified by RBI.
The companies are required to be registered with the RBI, the RBI can impose penalty and can even prosecute these companies in a court of law when not registered. To conduct a non-banking financial activity, such as investment, lending, or deposit acceptance registration is necessary.
The NBFCs have an option to accept or renew public deposits for the minimum period of 12 months and the maximum period of 60 months. Moreover, they cannot accept deposits on demand.
NBFCs raise funds by borrowing money from the banks, or they can also sell commercial papers to mutual funds for raising money. NBFC can provide this money to small and medium business enterprises, retail customers.
List of the registered NBFC is available on the official website of RBI. We can check the NBFC registration number by visiting www.rbi.org.in.
NBFCs offer various banking and non-banking services to the people. Although they don't have a banking license for the services but require a registration and follow the rules and regulations that adhere to RBI. Reserve Bank of India regulates and supervises the functions of NBFCs in accordance with the provisions mentioned in Chapter III B of the RBI Act 1934. Only the registered NBFC can commence its operation in the market.