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
  

Restricted Activities

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

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.

• NBFC-Factor
  

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:

• Meaning
  

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

Pre Requisites for NBFC Registration

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 NOF of Rs. 2 Cr. Tax must be paid on it.

• Qualify Capital Test
  

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

• Credit History
  

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.

• 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.

Documents Required for NBFC Registration

• 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
  

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 years’ 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
  

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 Certificate of Registration
  

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 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 to3 years

AND

Fine of twice the amount received