Non Banking Finance Company

An Overview of NBFC Registration

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 unorganised 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

Which entities in India are not NBFCs?

An NBFC in India does not include the following entities as their primary business:

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.

Role of NBFC in Revolutionising the Economy

Inclusive Growth of Financial Sector
Mobilisation of Resources – Maintains liquidity in the Economy
Capital Formation – Aids to increase capital stock of a company
Provision of Long-term Credit and specialised Credit
Help in deelopment of Financial Markets
Helps in Attracting Foreign Direct Investments
Helping in Boosting the Technology introduction of Fintech Models
Helps in Uplifting the Employment sector
Helps in Breaking Vicious Circle of Poverty by serving as government’s instrument and providing loan to weaker sections of society

Market Size of the NBFC in India

NBFC is 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.

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

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:

Hire Purchase Services:- A hire purchase service is a way for a seller to deliver goods to a buyer without transferring ownership of the goods. Instalments are used to pay for the items. When the buyer has paid all of the goods’ instalments, the buyer instantly gains ownership of the goods.

Retail Financing:- Corporations that provide short-term cash for loans against equities, gold, and real estate, primarily for personal consumption.

Infrastructure Financing: This is the essential component that non-banking financial companies dominate. This segment alone accounts for many of the funds lent throughout the various segments. This category includes railways or metros, real estate, ports, flyovers, and airports, among other things.

Asset Management Firms: Asset Management Companies (AMCs) employ fund managers (who invest in equity shares to make a profit) to invest and actively manage funds collected from small investors.

Venture Capital Services: These companies invest in small enterprises and are still in the early stages of development, but their success rate is strong, and they can provide adequate returns in the future.

Leasing Services:- Organizations that engage in leasing properties to small businesses or even larger ones who can’t afford it for whatever reason. The sole distinction between renting and leasing is that leasing agreements are for a specific time period.

Micro Medium Medium Enterprise (MSME) Financing:– MSME is one of the foundations of our economy, and millions of people rely on it for a living, so the government has introduced enticing plans to stimulate its growth.

Difference between NBFCs and Banks

Points	NBFCs	Banks
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	Companies Act 2013 & RBI Act, 1934	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 & Settlement System	Not a part of system	Integral part of the system
Maintenance of Reserve Ratios	Not required in case of NBFCs	Banks have to maintain reserve ratios
Deposit Insurance Facility	Not Available	Available
Credit Creation	NBFCs do not create credit.	Banks create credit
Transaction Services	NBFCs cannot provide transactions services	Banks provide transaction services

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.

Last Resort Of Borrowing-NBFCs offers services where banks are not offering. NBFCs are more profitable because of their lower costs and this as a result helps in providing cheaper loans to the customer.

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 benefits 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 NOF of Rs. 2 Cr & Tax must be paid on it. However, based on increase in prices, real GDP and regulatory judgment, the entry point norms proposed to be revised from ₹2 crore to ₹20 crore. Applicable immediately for new registration however, existing may be given time, say 5 years.

Qualify Capital Test-The RBI undertakes quality of capital test to check that invested capital is free 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.

Documents Required for NBFC Registration

Certified copy of Certificate of Incorporation issued by the registrar of companies.
Extract of the main object clause in the MOA clearly depicting the financial business.
The Audited balance sheet and Profit & Loss account along with directors & auditors report for the entire period of company’s existence, or for last three years, whichever is less.
In case of fresh company Statutory auditor certificate. Copy of the certificate of Director’s highest educational and professional qualification.
Copy of Director’s experience certificate in the Financial Services Sector (including Banking Sector)
Bankers report depicting details of deposits and loans balances as on the date of application and the conduct of the account.

Difference between Owned Fund & Net Owned Fund:

Owned Fund

Net Owned Fund

Paid-up equity capital
+ Preference Shares which are
compulsorily convertible into equity
+ free reserves
+ balance in share premium account
+ capital reserves representing surplus
arising out of sale proceeds of asset
(excluding reserves created by
revaluation of asset)
– accumulated balance of loss
– deferred revenue expenditure
– other intangible assets
Paid-up equity capital
+ Preference Shares which are
compulsorily convertible into equity
+ free reserves
+ balance in share premium account
+ capital reserves representing surplus
arising out of sale proceeds of asset
(excluding reserves created by
revaluation of asset)
– accumulated balance of loss
– deferred revenue expenditure
– other intangible assets

Owned Fund

– [(the amount of investments of such
company in shares of its subsidiaries
companies in the same group and all
other NBFCs and the book value of
debentures, bonds, outstanding loans
and advances including hire purchase
and lease 􀃄nance made to and deposits
with subsidiaries and companies in the
same group) to the extent it exceeds
10% of the owned fund.]

Where NDM can help you?

Seeking Name Availability with the Registrar of Companies (ROC).
Drafting of Memorandum and Articles of Association of the Company.
Preparation of Affidavits and Declarations required for incorporation of the Company.
Filing of Incorporation Forms with Registrar of Companies.
Assisting in issuance of Certificate of Incorporation and Certificate of Commencement of Business from Registrar of Companies.
Helping you in Go to market strategy, Fintech Lending, Legal & risk management of your NBFC, Loan product designing.
Assisting in issuance of Share Certificates and stamping of the same.

During Registration with Reserve Bank of India:

Drafting of Resolutions, Declarations and other documents forming part of application to be submitted to Reserve Bank of India.
Preparation of Application to be submitted to Reserve Bank of India.
Liasoning with Reserve Bank of India from time to time for issue of Certificate of Registration(CoR).
Preparation of high level Business Plan for the next three years, forming part of the application.

On an ongoing Advisory services:

Drafting of Resolutions, Agendas, Minutes, Agreements, etc.
Preparation and filing of Forms required to be filed with the Registrar of Companies.
Monthly, Quarterly, Half Yearly and Annual Compliances with Reserve Bank of India.
Preparation of Statutory Registers of the Company. Loan Product designing, Go to market strategy, Advisory on use of Fintech based lending model & Digital marketing Liaising with Reserve Bank of India and with Registrar of Companies from time to time.

Why is NBFC a good choice for Fintech Startups?

NBFCs can be registered with a Net owned fund ₹ 2 Cr only and even for small bank Net owned fund should be ₹ 100 Cr.

NBFCs are primarily focused in meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.

The processing of loans from NBFCs is much faster as compared to the Banks. Also, there is less paper work and less stringent compliances in the case of availing loans from NBFCs.

Banks accept deposits, however only those NBFCs are entitled to accept

deposits from public who have been granted license from RBI to accept such deposits.

Banks can issue cheques drawn on itself while NBFCs cannot as they do not form part of Payment and Settlement system. NBFC Registration can be

completed in 90 to 120 days where as even for small bank registration it takes 12 to 24 Months.

The costs in establishing NBFC is usually low making it a more lucrative option as compared to banks.

Less compliance in NBFCs in comparison to the bank. Credit growth of NBFCs is noted at 24.3% per year as against 21.4% for banks.

FAQs on NBFC Registration

1. What does conducting financial activity as “principal business” mean?
When a company’s financial assets constitute more 50% of the total assets and income from financial assets constitute more than 50% of the total income. If a company meets the both condition mandatory required as NBFC by RBI.

2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?
NBFC covers almost everything as banks do, performing financial intermediation in a variety of ways, making loans, accepting deposits, and advances, leasing, hire purchase, etc. NBFC can raise funds from the public, directly or indirectly, and can freely lend them to ultimate spenders.

3. Is it necessary that every NBFC should be registered with RBI?
In accordance with section 45-1A of the RBI Act. 1934, for doing lending and accepting deposits from public every such company requires prior approval from the Reserve Bank of India.

4. What are the requirements for registration with RBI?
The Minimum net owned fund of NBFC should be not less than ₹ 10cr and principal objective should be of making loans, accepting deposits, and advances, leasing, hire purchase, etc. NBFC can raise funds from the public, directly or indirectly.

5. What are banking activities banned for NBFC?
NBFC cannot accept demand deposits and cannot issue cheque drawn on itself.

6. What is the maximum limit to accept deposits from public?
From 31-03-2016, NBFC can accept maximum 1.5 times of Net owned fund.

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