NBFC Guidelines: Registration, Compliances, Returns & Prudential Norms

Reserve Bank of India is entrusted with the responsibility of regulating and providing Non-Banking Financial Company or NBFC, the guidelines to operate. The powers are listed in Chapter III B of the Reserve Bank of India Act, 1934. The objective is to:

  • ensure healthy growth of the financial institutions.
  • ensure that these companies operate within the policy framework, as a part of the financial system. In such a manner that their existence and functioning do not lead to systemic aberrations.
  • the quality of supervision and surveillance exercised by RBI over the NBFCs is sustained by keeping pace with the developments that take place in this segment of the financial system.

NBFC

An NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/debentures/bonds/securities issued by Government or local authority or other marketable securities of similar nature, insurance business, leasing, hire-purchase, chit business but does not include an institution whose principal business is that of agriculture activity, industrial activity, providing any services and sale/purchase/construction of immovable property or purchase or sale of any goods (other than securities).

A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement by way of contributions or in some other manner is also an NBFC-RNBC (Residuary non-banking company).

The functions of top NBFC in India are similar to banks. However, there are some differences between the two. For example, unlike banks, NBFCs cannot accept demand deposits. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself. The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of an NBFC vs bank.

Conditions, NOF & Principal Business

As per Section 45-IA of the RBI Act, 1934, no company can commence or carry on the business of non-banking financial activities without obtaining a certificate of registration (CoR) from RBI. The pre-conditions for NBFC License are:

  • It should be a company registered u/s 3 of the Companies Act. Either 1956 or 2013.
  • It should have a minimum net owned fund (NOF) of Rs. 2 crore.

Here, NOF is what remains after reducing the amount of investment in shares of subsidiaries, companies in the same group and all other NBFCs, book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, from the owned funds. Owned funds is the total of paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account, and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting accumulated balance of loss, deferred revenue expenditure, and other intangible assets.

The Principal Business of an NBFC is determined with the help of the 50-50 rule. This means that if a company is principally engaged in financial activities with:

A) The financial assets of the company comprising at least 50% of the total assets held by the company,

&

B) At least 50% of income is derived from financial assets.

Company that fulfils the above conditions requires to be registered as NBFC as per RBI Guidelines.

NBFC Registration As Per RBI Guidelines

  • Acquire DSC and DIN for the Directors
  • Apply for approval of Company Name
  • Director’s Affidavit about meeting RBI provisions
  • Draft of MOA & AOA
  • Filing company incorporation forms with necessary documents
  • Obtain a Certificate of Incorporation of Company from the RoC (Registrar of Companies)
  • Deposit NOF in the company’s bank account
  • Apply for NBFC Registration with RBI
  • This application is filed online of RBI website
  • On successful submission, a CARN (reference number) is generated, to be used during all future inquiries
  • Now the hard copies of all the documents and application as submitted online is sent to the regional office of RBI
  • The regional office checks the accuracy of the documents
  • It sends the application to the head office, if ok
  • The central office of RBI grants NBFC License and Certificate of Registration (CoR) if the company is found to be fulfilling the requirements u/s 45-IA
  • The company must commence its NBFC business within 6 months from the date of CoR

Documents For Deposit Accepting NBFC

Following documents are required to be submitted to RBI along with the prescribed application form for NBFC registration of Type I – Deposit Accepting – NBFC for obtaining CoR from RBI as NBFC:

  1. Certified copies of Certificate of Incorporation (COI). And, in case of public limited companies, Certificate of Commencement of Business.
  2. Certified copy of the summary of the main objective clause in the MOA.
  3. A certified true copy of Board resolution affirming that:
    • The company will not commence the NBFC activities before receiving CoR from RBI.
    • The company has not accepted any public funds in the past, does not hold any public funds as on the date and will not accept the same in the future without getting approved from RBI.
    • A claim that the company does not have a customer interface as on date and will not have any in the future either, without the approval of RBI.
    • The Un-Incorporated Bodies (UIBs) in the group, where the Director retains an interest, has not accepted a public deposit in the past. It does not hold any public deposit as on date. And will not accept the same in the future. Till receiving approval from RBI.
    • The company has formulated the “Fair Practices Code” as directed in the NBFC Guidelines by RBI.
  2. Copy of Fixed Deposit receipt of NOF Rs. 2 crore.
  3. Banker Certificate of no claim/liability and confirming balances in support of the NOF.
  4. Audited financial statements along with Director’s & Auditor’s report from the date of establishment of the company, or for the last 3-years, whichever is less.
  5. Banker’s report about Applicant Company, its group, holding company, subsidiary, associate, related parties. Directors of the applicant company having any interest in other companies. The Banker’s report should mention the dealings of these organizations with these bankers as a depositing entity or a borrowing entity. (Report from all the bankers of each one of these entities. The details of deposits and outstanding loan balances as on the date of application and the conduct of the account should be specified.

Documents for Type II – NBFC-ND

Other than the above-listed documents. Further documents are required to be enclosed with the prescribed application form for NBFC License as Type II – NBFC to RBI, as below:

  1. Copy of the certificate of educational qualifications and professional experience of all the Directors.
  2. Copy of experience certificate of the Directors, if any, in the financial services industry.

Returns for NBFC-D as per NBFC Guidelines

Below Returns are required to be submitted by a Deposit Accepting NBFC, as per NBFC Guidelines:

  • NBS-1: Returns on deposit in the first schedule, to be filed quarterly.
  • NBS-2: Returns on prudential norms, to be filed quarterly.
  • NBS-3: Quarterly Returns on liquid assets.
  • NBS-4: Returns on important parameters by a rejected company holding deposits from the public. To be filed annually.
  • NBS-6: Returns on exposure to the capital market by deposit-accepting NBFC having total assets of Rs. 100 crore or more. To be filed monthly.
  • ALM Returns: These are to be filed half-yearly by NBFC holding public deposits over Rs. 20 Crore or asset size over Rs. 100 Crore.
  • Audited Balance Sheet and Auditor’s Report.
  • Branch Info Return.

Returns for NBFC-ND as per NBFC Guidelines

Below Returns are required to be submitted by a Non-Deposit Accepting NBFC:

  • NBS-7: Statement of capital funds, risk-weighted assets, risk assets ratio, etc. To be filed quarterly.
  • NBS-2: Returns on important financial parameters of the company. Filed monthly.
  • ALM Returns: Monthly statement of short-term dynamic liquidity in form NBS-ALM-1. And a 6-monthly statement of structural liquidity in form NBS-ALM-2. And another 6-monthly statement of interest rate sensitivity in form NBS-ALM-3.
  • Branch info return: Returns on important financial parameters of ND-NBFCs with assets over Rs. 50 crores, but less than Rs. 100 crores. Calculated and filed monthly.
  • Basic information like name & address of the company, NOF, profit/loss in last 3-years.

RBI Guidelines for NBFC Returns

The NBFC must submit various returns to RBI about their deposit acceptance, prudential norms guidelines, ALM, etc. The list is as under:

  • NBS-1: Returns on Financial Indicators by NBFC-SI-D, if it has approval from RBI to accept or hold deposits. The financial details would include Assets and Liabilities, Profit and Loss account, Exposure to sensitive sectors, etc. This statement is required to be submitted quarterly, within 15 days.
  • NBS-2: Returns on Prudential Norms by NBFC-SI-D, if it has approval from RBI to accept or hold deposits. The details include Capital Adequacy, Asset Classification, Provisioning, NOF, etc. This statement is required to be submitted quarterly, within 15 days.
  • NBS-3: Returns about Liquid Assets by NBFC-D, if approved from RBI to accept or hold deposits. It includes details of Statutory Investments in Liquid Assets such as Government Securities, Fixed Deposits in Scheduled Commercial Bank, etc. This statement is required to be submitted quarterly, within 15 days.
  • NBS-4: Returns of the status of public deposits by NBFC-D, whose CoR was rejected by RBI. Details to be filed are the repayment statuses of public deposits. To be filed annually.
  • ALM: Asset-Liability Management Returns for NBFC-D, if it has an asset base of Rs. 100 crore or more, or holding public deposits of Rs. 20 crore or more (irrespective of their asset size), in their latest audited balance sheet as of 31st March of last financial year. ALM to be filed on a half-yearly basis, within 30 days. This return enables RBI to assess Asset Liability mismatches and interest rate risk exposures, helpful in effective risk management.
  • NDSI-500cr Return: All NBFCs-ND-SI are required to submit NDSI-500cr return, to enable RBI to know Important Financial Parameters. Details to be filed are components of Assets and Liabilities, Profit and Loss account, Sectoral deployment of credit, Exposure to sensitive sectors, etc. To be filed quarterly, within 15 days.
  • NBS-7: All NBFCs-ND-SI need to submit this to show compliance with various prudential norms, e.g. Capital Adequacy, Asset Classification, Provisioning, NOF, etc. To be filed for every quarter, within 15 days.
  • Multiple ALM Returns:Asset-Liability Management Returns for NBFCs-ND-SI:
    1. NBS-ALM-1:Statement of short term dynamic liquidity – Quarterly, within 15 days.
    2. NBS-ALM-2:Statement of structural liquidity – Half-Yearly, within 30 days.
    3. NBS-ALM-3:Statement of Interest Rate Sensitivity – Half-Yearly, within 30 days.
    4. ALM-YRLY:Statement on Assets Liability Mismatch – Annually, within 15 days.

The purpose of these statements is to effectively manage interest rate risk and Asset Liability mismatches.

  • SAC: Every NBFC shall submit a Statutory Auditor Certificate, by its Statutory Auditor that it is engaged in the business of non-banking financial services and needs to hold the CoR. To be filed annually, within a month of finalizing the balance sheet, but not later than 31 Dec. It ensures continued compliance with NBFC regulation.
  • Branch Information Return: To be submitted by NBFC-ND-SI and NBFCs accepting/holding public deposits, to capture the reach of NBFCs. To be filed quarterly, within 15 days.
  • FDI Compliance:This certificate is to be signed by its Statutory Auditor, of NBFC having Foreign Direct Investment, certifying compliance with the existing norms of FDI. This declaration is to be submitted on a half-yearly basis, within 30 days, to the Regional Office of RBI in whose jurisdiction the registered office of the company is located. This ensures that the NBFC is following guidelines of the stipulated minimum capitalization and that its activities are confined to the activities commanded under FEMA.
  • Overseas Investment Return: NBFC, whether deposit accepting or not, having overseas investment, submit this with details on overseas investment. To be submitted quarterly, within 15 days, to the Regional Office of RBI in whose jurisdiction the registered office of the company is located. And a copy to the DSIM (Department of Statistics and Information Management), Central Office, Mumbai.
  • Auditor’s Certificate: Statutory auditors of NBFC with the overseas investment are to submit this certificate to the concerned Regional Office of RBI, certifying that it has fully complied with all RBI guidelines. To be filed annually.
  • ARC Return: NBFC-ARC (Asset Reconstruction Companies needs to submit with details about financial parameters such as non-performing assets (NPA) acquired, acquisition cost, their recovery status, etc. To be submitted quarterly, within 15 days.
  • NBS-8: Returns of NBFC-NDs with asset size between Rs. 100 crore and Rs. 500 crore. To be submitted on year-end, within 60 days. This presents profile information and financial details, about Assets and Liabilities, Profit and Loss account, Exposure to sensitive sectors, Branch Information, etc.
  • NBS-9: Returns by NBFC-ND with asset size below Rs.100 crore, with profile information and financial details, i.e. components of Assets and Liabilities, Profit and Loss account, Branch Information, etc. To be submitted on year-end, within 60 days.
  • NBS-1A & NBS-3A: Returns to be filed by RNBCs with financial details, such as components of Assets and Liabilities, Profit and Loss account, Statutory Investments in Liquid Assets, Exposure to sensitive sectors, etc. To be submitted every quarter.
  • CRILC: Returns by all NBFC-ND-SI, NBFC-D, and NBFC-Factors, with information on all the borrowers with them, having aggregate fund-based and non-fund based exposure of Rs. 5 crore or above, and the SMA status of each borrower. On early Recognition of Stress on large accounts. “Nil” returns need not be submitted in this case. To be filed online for every quarter, within 21 days.
  • SMA-2: All NBFC-ND-SI, NBFC-D, and NBFC-Factors, with aggregate fund-based and non-fund based exposure of Rs. 5 crore or above, need to report all the SMA-2 accounts, so RBI can assess Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders. On the Friday of the week when the relevant account first came in SMA-2 category. In case that Friday is a holiday, it has to be reported on the working day falling just before it.
  • Statement on Interest Rate Futures transaction: NBFCs hedging their underlying exposures and participating in IRF exchanges. It helps RBI to know the extent of participation of NBFCs in the IRF market. To submit half-yearly (within one month from the close of the half-year), to the Regional office of the DNBS (Department of Non-Banking Supervision) of RBI in whose jurisdiction their company is registered.

NBFC Prudential Guidelines

  1. Leverage Ratio: The leverage ratio of an applicable NBFC (other than NBFC-MFIs and NBFC-IFCs) shall not be more than 7 at any point in time.
  2. Accounting Standards: Accounting Standards and Guidance Notes issued by ICAI to be followed if they are not inconsistent with any of the Directions by RBI.
  3. Accounting of Investments: The Board of Directors shall frame investment policy for the company and shall implement the same, including criteria to classify the investments into the current and long-term.
  4. Need for Policy on Demand/Call Loans: The Board of Directors granting/intending to grant demand/call loans shall frame a policy for the company and implement the same.
  5. Asset Classification: Assets to be classified as: (i) Standard assets; (ii) Sub-standard assets; (iii) Doubtful assets; and (iv) Loss assets.
  6. Standard Asset provisioning: Every applicable NBFC shall make provision for standard assets at 0.25% of the outstanding liabilities.
  7. Multiple NBFCs: All NBFCs belonging to a group shall be aggregated to check the limit of Rs. 500 crore asset size.
  8. Disclosures: Every applicable NBFC shall separately disclose provisions for bad and doubtful debts and provisions for depreciation in investments, in the balance sheet.
  9. Schedule: Particulars in the schedule as set out by RBI Directions, to be added to its balance sheet, by every applicable NBFC.
  10. Loans against NBFCs own shares prohibited: No applicable NBFC is allowed to lend against its own shares.

NBFC License India is a leading online platform for NBFC Registration. You can contact us if you wish to buy NBFC or sell NBFC. We also aid in mergers, take-overs, and collaborations.

For more information on the subject, call us at (+91) 8750008585. 

You may also like:

NBFC Finance or Bank Loan: Comparison in Detail

NBFC MFI: Conditions, Eligibility & Other Guidelines

Frequently Asked Questions

Q. What is NBFC?

NBFC or Non-Banking Financial Company in India is a financial institution that provides banking services without holding a bank license. Though, some of its activities performed are similar to banks. However, they do not require any banking licenses.

NBFC in India is regulated under the Companies Act, with guidelines stipulated by RBI. Activities of NBFCs include investment, giving loans and advances, leasing, hire-purchase, insurance business, chit-fund business, acquisition of shares, bonds, debentures, stocks, and Government or local authority bonds/ securities which are marketable.

Q. How to get NBFC registered?

  1. Below steps need to be taken to register NBFC with RBI:
    • File an application form, available online with the RBI on its official portal. Enclosing it with the necessary documents. The applicant will get a CARN. This reference number is to be used during all further correspondence.
    • The application and the documents are to be physically sent to the regional office of RBI, nearest to the company. Here the accuracy of all rendered documents is checked.
    • If the documents are found to be all right, the regional office will forward the application (and documents) for NBFC License to the central office of the RBI.
    • The central office of RBI grants NBFC License if the applicant company is fulfilling the requirements laid down u/s 45-IA.

Q. What documents are required with NBFC license application?

  • Certificate of Company’s Incorporation
  • Documents related to the administration, financials and management of the company
  • MoA and AoA
  • Address proof of the company
  • Detailed information about Directors or Partners of the Company- PAN & other KYC, qualifications, etc.
  • Accounts of the company well-audited for at least past 3-years
  • Board Resolution favouring the formation of NBFC
  • Bank Account with a minimum paid-up equity share capital of Rs. 2 Crore
  • Net worth certificate
  • Clean banker report
  • Other relevant documents on request

Q. What are Systemically Important NBFCs (NBFC-SI)?

NBFCs whose asset size is of Rs. 500 crore or more as per the last audited balance sheet are considered NBFC-SI. The reason for classifying such NBFCs is because their activities will have a bearing on the financial stability of the overall economy, and therefore, should be closely monitored.

Q. What are guidelines for NBFC-ND with an asset size of less than Rs. 500 crore?

The regulations on NBFC-ND with an asset size of less than Rs. 500 crore are:

(i) They shall not be subjected to any regulation (whether prudential or conduct of business regulations), such as Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.

(ii) Those which have a customer interface will be subjected only to conduct of business regulations if they are not accessing public funds.

(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they don’t have a customer interface.

(iv) Where both public funds are accepted and customer interface exists, such companies are subjected both to limited prudential regulations and conduct of business regulations.

Q. What are the responsibilities of the NBFCs registered with RBI, about submission on compliances and other information?

  1. Returns to be submitted by NBFC-D
    • NBS-1Quarterly Returns on deposits in First Schedule.
    • NBS-2Quarterly Returns on Prudential Norms are required to be submitted by NBFC accepting public deposits.
    • NBS-3Quarterly Returns on Liquid Assets by the deposit accepting NBFC.
    • NBS-4Annual Returns of critical parameters by a company whose CoR was rejected, holding public deposits.
    • NBS-6Monthly Returns on exposure to capital market by NBFC-D with total assets of Rs. 100 crore or over.
    • ALM Half-yearly Returns by NBFC holding public deposits of over Rs. 20 crore or asset size of more than Rs. 100 crore
    • Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
    • Branch Info Return.
  1. Returns to be submitted by NBFCs-ND-SI
  • NBS-7Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.
  • Important Financial Parameters Monthly Returns by NBFCs-ND-SI.
  • ALM Returns:
    • NBS-ALM-1: Monthly Statement of short term dynamic liquidity.
    • NBS-ALM-2: Half-yearly Statement of structural liquidity,
    • NBS-ALM-3: Half-yearly Statement of Interest Rate Sensitivity.
  • Branch Info return.
  1. Returns by NBFC-ND having assets of more than Rs. 50 crore but less than Rs. 100 crore

Basic information like name of the company, address, NOF, profit /loss during the last 3-years to be submitted quarterly.

There are some other generic reports to be submitted by all NBFCs too, mentioned in the blog above.