NBFC Registration

Overview

NBFC stands for Non-Banking Financial Company is highly involved in financial activities such as secured & unsecured loans, marketplace lending, investments, or information service providers or any other business purposes as specified under Section 45-IA Of The RBI Act, 1934 & Companies Act, 2013. NBFCs are different from Commercial & Cooperative Banks and they don’t require a banking license but must follow the rules & regulations given by the Reserve Bank of India (RBI) from time to time.

The Reserve Bank of India strictly regulates & ensures that the NBFCs are complying with the provisions & regulations given in Chapter III B Of The RBI Act, 1934. The principle business activity of a Non-Banking Financial Companies is to raise capital from the public depositors & investors & lend these further to the borrowers. Also, remember that the procedure for NBFC Registration is a lengthy one and so as an applicant, you must ensure that you have all the vital documents required at the time of NBFC Registration and also make sure that comply with all the requirements of NBFC Registration.

Non-Banking Financial Companies are the bridges that connects the depositors or investors with the borrowers and they have become a better or good alternative to the financial & banking sector by providing financial solutions to the unorganized segments of society.

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

Restricted Activities

Agricultural Activity
Industrial Activity
Sale / Purchase of Goods and Services
Sale / Purchase of construction of immovable property

Market Size of The NBFC In India

NBFC is considered as rapidly growing business vertical. In India there are a lot of banks, however, due to the cumbersome process, hefty documentation, unrealistic credit score requirements, lengthy background check and multiple rejections, people tend to approach NBFCs for quick resolution for there short term or small credit requirement. This consequently has resulted into the enhanced demand for availing loans from NBFC and ultimately a greater 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 the slow growth rate.

About

NBFC registration is very detailed procedure, which requires keen knowledge, procedure and team of professionals. Each type of NBFC has its tailored requirements be it government or promoter’s. We at YourLegalExpert.in have a full-fledged, dedicated team of professionals. You are required to fill the form and our expert will reach out to you, to know the exact requirement and gather information. Then our experts at YOURLEGALEXPERT.IN will be at your disposal for assisting you with guidance concerning NBFC Licensing and its compliance for the smooth functioning of your financial business in India. Our professionals will assist you in planning seamlessly at the least cost, confirming the successful conclusion of the process. We shall guide you with Do’s and Don’t’s as well.

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Types of NBFCs

NBFCs are categorized:

a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,

b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and

c) by the kind of activity they conduct.

Within this broad categorization the different types of NBFCs are as follows:

I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

II. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

III. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

VI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;

b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;

c. total indebtedness of the borrower does not exceed ₹ 1,00,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

VIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.

X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

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

The advantages of NBFC Registration are of diverse nature, which are as follows: -

Provides Loan Facilities To Needy

NBFC offers various services such as loan and credit facilities, retirement planning, currency exchange, money market, underwriting, and various related activities.

Offer Wealth Management Services

NBFCs can offer services related to wealth management such as managing portfolios of shares and stocks.

Services Related to Underwriting

NBFCs can underwrite stock and shares and related liabilities. Also, NBFC provides a hassle-free option to the customers for availing of the quick loan.

Trading In Money Market

NBFCs serves the benefits of trading in money market instruments.

Quick In Functioning

NBFC performs in such a quick way as it sets the banks apart. It is easier to get a loan from NBFCs as compared to the Banks. As the banks have strict regulations and more paperwork as compared to NBFCs.

Provides Multiple Choices Reaching Audience

Because of the technological advancement, NBFCs are offering multiple choices to reach the larger audience at a quicker step. NBFC covers both the large businessperson and small sectors by providing them multiple choices to avail themselves the credit facilities.

Strong Regulations and Compliance

Due to the strong regulation and compliance system, it serves the best authenticity and trust among the society.

Allowed FDI

Under NBFC, up to 100% Foreign Direct Investment is also an amazing benefit of its registration. NBFCs are the largest propellants of initiating finance into the country. Also, the financing process is faster and easier as compared to Banks.

Low Operation Cost

Having specifically built innovative and low-cost business models that are driven by a technology platform and low operating expenses, it is evident that the room for growth is wide-open.

Protection By Law for Recovery of Loan

NBFCs is allowed to use SARFAESI law for minimum loan size for debt recovery from the existing level.

Loans To People Having a Poor Credit Score

Banks usually check the credit score while offering loan facilities. In case of a poor credit score, the bank rejects the loan application. However, NBFCs offers loan to people having less credit score.

Pre-Requisites for NBFC Registration in India

For NBFC Registration, below mentioned conditions must be fulfilled as per Section 45-IA of the RBI Act, 1934:

Company Registration

An applicant must be a company registered under companies Act 1956 or Companies Act 2013.

Director’s Experience

1/3rd Directors of the applicant company must possess experience in finance field in order to apply for NBFC license.

Five Year Business Plan

An applicant company needs to draft detailed business plan for the next five years.

Minimum NOF (Net Owned Fund) Requirement

The applicant company must possess minimum Net owned funds of Rs. 2 Crore.

Qualify Capital Test

The RBI undertakes quality of capital test to check that invested capital is free of non-compliance with the prescribed laws.

Credit History

The credit score of the company, directors & its shareholders must be fine and they must have not defaulted loan re-payment deliberately to banks or to NBFCs.

Quality Of Capital

An applicant company must have complied with the mandatory compliances.

FEMA 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.

Checklist of Documents and Information Required for NBFC Reg

Certified copy of COI / 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 Net owned funds]
Audited balance sheet of last 3 years or from the date of incorporation, in case of company is in existence for more than 3 years.
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

Procedure for NBFC Registration in India

Follow the below mentioned to register your NBFC in India:

Hire experienced NBFC registration consultant who is having good experience and having a team of experienced professionals like CA, CS, lawyers and bankers.

The proposed name of the company must include Finance, FinServ, Final, Investment, Capital, Fintech, and/or Leasing, depicting the nature of business.

Plan your Registered office, City and Area of Operations

Obtain certificate of Incorporation from Registrar of Companies

Open bank account, Deposit Net Owned Funds in bank account, file form INC-20A.

Prepare timeline and gather 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 fulfils prescribed requirements under section 45-IA.

NBFC must commence its business within 6 months from the date of issuance of license

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 fulfil 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

Penalty Provisions – In case of non-compliance

Below mentioned are the Penal Provisions in case of non-compliance with RBI Regulations: -

Carrying NBFC Activities Without Obtaining a Certificate of Registration From RBI

Imprisonment of 1 to 5 years and 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 offense and in case of continuous non-compliance, an additional fine up to Rs. 100 per day from the first offense.

Acceptance Of Deposits

Imprisonment up to 3 years and a 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
Underwriting
Portfolio Management Services
Investment Advisory Services
Financial Consultancy
Stock Broking
Asset Management
Venture Capital
Custodian Services
Factoring
Credit Rating Agencies
Licensing and Finance (Financial Leases only)
Housing Finance
Forex Banking
Credit Card Business
Money Changing Business
Micro Credit
Rural Credit

Mandatory Compliances after obtaining NBFC License from RBI

Formalities Prior To The Business Commencement

After obtaining NBFC 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

Newly Proposed Scale-Based Approach to Regulation by RBI

Apart from the existing nomenclature, NBFCs would be categorized across four different layers (Base, Middle, Upper, and Top) based on various parameters including size, interconnectedness with the system, etc. The scale-based approach can be visualised as a pyramid with the base layer being subjected to the least regulation and the topmost layer facing the most stringent regulations.

NBFCs would be classified into four categories for scale-based supervision – Base Layer (BL), Middle Layer (ML), Upper Layer (UL), and Top Layer (TL).

The Base Layer would constitute 97% of NBFCs and would include NBFCs with an asset size of less than Rs 1000 cr., P2P lenders, account aggregators, NOFHCs, and Type 1 NBFCs.

The Middle Layer would include NBFCs with asset size greater than Rs 1,000 cr., NBFC-D, HFC, IFCs, IDF, SPDs, and CICs.

The Upper layer would comprise the Top 10 NBFCs as per asset size as well as other NBFCs shortlisted on criteria including size, leverage, assets/liabilities within the financial system, and group structure.

The Top Layer as per RBI is supposed to be empty. The layer would be populated if RBI views the systemic risk spill-overs from specific NBFCs in the Upper Layer has witnessed an unsustainable increase. Such NBFCs would be moved to the Top Layer from the Upper Layer. Such NBFCs would be subject to higher capital charge, including Capital Conservation Buffers

FAQs on NBFC Incorporation in India

Please reach us at info@yourlegalexpert.in if you cannot find an answer to your question.

Does RBI registration mandatory for NBFCs?

Yes, RBI registration is mandatory for setting up NBFC in India under section 45-IA of the RBI Act, 1934.

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Is there any type of NBFC which is exempt from RBI registration?

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.

Can existing company apply for NBFC license?

Yes, existing company can apply for license if it is registered under Companies Act.

How much capital is required for NBFC registration?

There is a requirement of minimum capital of Rs. 2 crore (Please check latest requirement) which will be reserved in the form of fixed deposit in the current account of the company.

What will be the total fees for NBFC registration?

Apart from Professional fee. The government fee varies from state to state and capital wise for Company incorporation, to be paid to MCA and separate fee structure for NBFC registration to be paid to RBI.

Is NBFC eligible to accept deposits?

Yes, NBFC is eligible to accept deposits, but it is only for special type of deposit taking NBFCs. Criteria and documentation are over and above for such types of NBFCs. A detailed scrutiny is also done by the department for such types of NBFCs.

Is it mandatory to posses financial experience in order to apply for NBFC license?

Yes, it is important to have financial sector exposure to minimum 1/3rd directors to apply for NBFC license.

Is there any cap on interest rate for NBFCs?

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.

What type of loans can be given by NBFCs?

NBFC-ND can give unsecured personal loan & business loan, Secured loan against property, loan against securities, loan to MSMEs, Gold loan etc. however it should be mentioned in the business plan.

What can happen in case of carrying NBFC activities without obtaining license from RBI?

In this case, RBI can impose heavy fine penalty and can prosecute defaulter in the court of law.

What if NBFC license got cancelled by RBI?

RBI is empowered to cancel NBFC license but in this case a reasonable opportunity of being heard will be given wherein the applicant can file an appeal against the RBI order within the defined time duration i.e. within 30 days from the date of order received regarding cancellation of certificate of registration.

What do you mean by DNBR Or Department of Non-Banking Regulation?

The DNBR is accountable for conducting the fresh NBFC Registration procedure and is accountable for preparing the regulation & policies for the NBFC. The DNBR has clear and innovative assessment process of NBFC Registration.

The DNBR (Department of Non-Banking Regulation) will send you an email and a notice if they require any extra documents at the time of NBFC Registration.

Should I incorporate new NBFC or should I takeover one?

Another way of starting finance business is to takeover an existing NBFC, however it advisable to go for fresh NBFC incorporation. Although, while takeover, the buyer will perform proper due diligence, but sometimes some important things remain un-noticed.