What is NBFC?
Non Banking Financial Companies (NBFCs) are fast emerging as an important segment of the rapidly-growing Indian economy. NBFC offers almost every service that banks do including performing financial intermediation, offering loans, accepting deposits, giving cash advances, leasing, hiring purchase, etc.
Due to a lack of banking institutions in many areas and increasing demand for loans NBFC more and more people are able to have a profitable business in India than ever before.
NBFC can raise funds from the public, directly or indirectly, and can freely lend them to ultimate spenders. The minimum tenure to accept deposits is 12 months (1 year), and the maximum period consists of 60 months (5 years). NBFC advance loans to the various small, wholesale, and retail traders as well as self-employed persons. NBFC is very popular due to attractive interest rates on the investors’ deposits.
NBFC Registration in India
The working and operating of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act. Section 45-IA provides that no NBFC shall commence or carry on the business of a Non- Banking Financial Institution without obtaining a Certificate of NBFC Registration which can only be issued by the Reserve Bank of India. This website is about NBFC Registration Procedure in India.
NBFC has advantages in terms of short-term lending, High ROI, and No Cap on Interests. So, if you are interested in getting an NBFC Registration or NBFC License, this post has the information needed.
A Non Banking Financial Company is a company incorporated under the Companies Act, 2013 or The Companies Act 1956 which is engaged in financial activities comparable to that of a bank.
It carries on the business of-
- loans and advances,
- acquisition of shares/ stocks/ securities/ bonds/ debentures issued by the Government or other authorities,
- chit business
- insurance business,
Whereas it does not include the institutions whose principal business is that of
- Agriculture activity,
- Industrial activity,
- Purchase or sale of any goods not being securities
- Providing any services and sale/purchase/construction relating to any immovable property.
Also, a non-banking institution which
- Is a company and
- Has the principal business of receiving deposits under any arrangement or scheme in either one lump sum or installments is also a Non-Banking Financial Company.
Differences Between NBFC and Bank
A Non-Banking Financial Company though carries on functions which are similar to that of a bank, yet it is not classified as Banks and differs in following ways:
- A Non-Banking Financial Company, unlike banks, is not a part of payment and settlement system. It cannot issue cheques to its customers.
- Unlike Banks, not all NBFCs can accept demand deposits. NBFC can only accept demand deposits if it makes a specific application and it is approved by the Reserve bank of India.
- Unlike in case of banks, Deposit Insurance facility of DICGC is unavailable for NBFC depositors.
According to the provisions of Reserve bank of India Act, 1934, no NBFC can carry on or commence the activities of a non-banking financial institution without-
- Having Net Owned Funds of Rs. 2 crores and
- Having a valid Certificate of NBFC License issued by the Reserve Bank of India.
Different Types/Categories of NBFCs Registered With RBI
NBFCs are categorized as below:
- in terms of the type of liabilities:
- Deposit accepting NBFCs and
- Non-Deposit accepting NBFCs,
- Non-deposit taking NBFCs further by their size:
- systemically important (NBFC-NDSI) and
- other non-deposit holding companies and NBFC-ND)
- according to the kind of activity they primarily undertake:
- 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 Non- Banking Financial Company (IDF-NBFC)
- Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)
- Non-Banking Financial Company– Factors (NBFC-Factors)
- Mortgage Guarantee Companies (MGC)
- NBFC- Non-Operative Financial Holding Company (NOFHC)
The Procedure of Application For NBFC Registration to RBI
Section 45-IA states that a Non-Banking Financial Company can carry on and commence operations only upon the obtaining a Certificate of NBFC License and having a net owned fund (NOF) of Rs. 2 crores.
- The applicant must be a company incorporated under the Companies Act, 2013 or the Companies Act, 1956.
- The application form is available on the official RBI website.
- A hard copy of the duly filled up application form with supporting documents as prescribed has to be sent to the Regional Office of the Reserve Bank of India.
- The application and the documents are scrutinized by the RBI officials.
- The application may be rejected due to incomplete or incorrect information or documents. Thus due care has to be taken while making the application for NBFC License.
- The procedure from filling up of the documents till the NBFC license is obtained takes about 90-120 days time.
What are the Documents Required for NBFC License?
- Certified copy of Certificate of Incorporation
- Certified copies of the extract of the MOA which states the main object clause relating to the financial business
- Copy of PAN/CIN alotted to the company.
- Copy of Fixed Deposit receipt & Bankers Certificate indicating balances in support of in the minimum Net Owned Fund of Rs. 2 crores.
- Directors’ profile in details, signed by each director.
- CIBIL Data of the Directors of the company
- Copy of the certificate of highest educational and professional qualification in respect of all the director’s NBFC experience
- Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors
- For companies which are already in existence:
- the Audited balance sheet
- Profit & Loss account,
- Director & auditor’s report; for the entire period the company is in existence, or for last 3 years, whichever is less.
- Board Resolution as stated in the application form guidelines.
In addition to the above mentioned documents required for Type II – NBFC-ND registration, following documents are also required:
- For the NBFC-MFI applicant:
- A board resolution stating that:
- The company will be a member of all the Credit Information Companies and will be a member of at least one Self-Regulatory Organisation.
- The company will strictly follow the regulations regarding Fair Practices in lending, pricing of credit, and non-coercive method of recovery as per the guidelines of RBI.
- The company has taken steps to fix internal exposure limits so as to avoid any undesirable concentration in any geographical locations
- The company does not fall under Section 25 of the Companies Act, 1956 or Section 8 of the Companies Act, 2013.
- A Roadmap towards achieving 85% qualifying assets.
- A board resolution stating that:
- For the NBFC-Factor applicant:
- A board resolution enclosing a roadmap that the company shall have financial assets in the factoring business constituting at least 50% of its total assets. It also must state that its income derived from factoring business will not less than 50% of its gross income for a specific time frame as mentioned.
- For the NBFC-IDF applicant:
- A No Objection Certificate from RBI for sponsoring the NBFC-IDF issued to the NBFC-IFC.
- The details of the change in the management of the sponsor company during last financial year till date, if any, and it’s
- A copy of Tripartite Agreement between the NBFC-IDF, the concessionaire, and the Project Authority.
- The source of startup capital of the company with evidentiary documents.
What is ‘Owned Fund’ and ‘Net Owned Fund’ in Relation to NBFCs?
‘Owned Fund’ is the aggregate of the
- paid-up equity capital,
- preference shares (compulsorily convertible into equity),
- free reserves,
- balance in share premium account, and
- capital reserves which represent surplus out of the sale proceeds of the asset.
It excludes reserves created by revaluation of the asset, after deducting
- the accumulated balance of loss,
- deferred revenue expenditure, and
- other intangible assets.
‘Net Owned Fund’ equals the ‘Owned Funds’ minus
- The amount of investment of the company in
- shares of its subsidiaries,
- companies in the same group, and
- other NBFCs,
- The book value of
- debentures, bonds, outstanding loans, and advances,
- hire purchase and lease finance made to subsidiaries and companies in the same group,
- Deposits with subsidiaries and companies in the same group
To the extent, it exceeds 10% of the owned fund.
What is meant by Principal Business in the Context of a Registered NBFC?
The term ‘Principal Business’ has not defined by the Reserve Bank of India Act, 1934. Financial activity conducted by any entity shall be considered as its principal business if
- the company’s financial assets comprise more than 50% of the total assets, and
- revenue from fiscal assets comprises more than 50% of the gross income.
Only a company that fulfills both of the above conditions shall be eligible to be registered as NBFC by the Reserve Bank of India.