Non-Banking Financial Companies (NBFCs) are financial institutions, other than the Cooperative and Commercial Banks, which provide a variety of financial and non-financial services to individuals, business enterprises, entrepreneurs, etc. They are not required to hold a banking license but must strictly follow the rules and regulations provided by RBI from time to time.
The most common fields of operations for NBFCs are industrial and commercial loans and advances, deposits, leasing, hire-purchasing, investment funds and chit business, insurance business, instruments of the capital and money markets such as stocks, debentures, bonds, and many other similar activities.
NBFCs must be registered under Section 45-IA of the RBI Act of 1934. The business entity desirous to be registered as NBFC must, first, be duly registered as per the Companies Act of 2013, or earlier Companies Act of 1956.
RBI strictly monitors and ensures that the Non-Banking Financial Companies are complying with the provisions and regulations provided in Chapter III B of the RBI Act of 1934.
The main business activity of NBFCs is to raise capital funds from the public depositors and investors and lend these to all categories of borrowers. They act as bridges to link the investors or depositors with the borrowers. NBFC sector has become an equal alternative to the banking and financial sector by providing financial solutions to the unbanked and unorganized segments of the society.
Principal Business of Non-Banking Financial Companies
Principle business has not been defined under the RBI Act but RBI, in an attempt to clear the doubts, has defined financial activity. Accordingly, the principal business will be considered as financial if the company fulfills the following conditions:
- Financial assets constitute more than 50% of its Total Assets.
- Income from financial assets constitutes more than 50% of the gross income.
But below activities are not considered of having financial nature:
- agricultural activity,
- industrial activity,
- purchase/sale of any goods and services (except securities), and
- Sale/purchase/construction of immovable property.
Since the NBFC and Banks activities are both involved in financial activities but some factors make them different from each other. Such as:
- Acceptance of Deposits.
- Cheques were drawn on itself.
- Being a part of the payment and settlement system.
- The facility of insuring Deposits, available with Deposit Insurance and Credit Guarantee Corporation. Applicable only to bank deposits.
Types of Non-Banking Financial Companies
NBFCs are broadly classified according to the following basis:
- The deposit accepting NBFCs and
- Non-Deposit accepting NBFCs,
Non-deposit taking NBFCs are classified further as per their size:
- systemically important (NBFC-NDSI) and
- Mortgage Guarantee Companies
- Investment Credit Company
- Infrastructure Debt Fund
- Micro Finance Institution
- Non-Operative Financial Holding Company
- Systemically Important Core Investment Company
You can apply for an NBFC License in any of the following categories:
- Non-Banking Financial Companies – Factors (NBFC-Factors): These NBFCs have factoring as their principal business activity. Factoring is a financial transaction. A type of debtor finance in which an entity sells its accounts receivable (invoices or bills) to a third party (NBFC-Factor) at a discount. It is also commonly known as bill discounting or bill factoring.
- Non-Banking Financial Companies – Mortgage Guarantee Companies (NBFC-MGC): NBFC-MGC must be registered with RBI as a Mortgage Guarantee Company. Its primary business is that of providing a mortgage guarantee. This guarantee is provided for the repayment of an outstanding housing loan and interest accrued on it, up to the guaranteed amount to a creditor institution, on the occurrence of a trigger event. The requirement of minimum NOF and financial asset criteria is different for this type of NBFC.
- Non-Banking Financial Companies – Investment Credit Companies (NBFC-ICC): Any financial company carrying on as its principal business- asset finance, the providing of finance by making loans/advances or otherwise for any activity other than its own and the acquisition of securities. And its activities must not fall under some other category defined by RBI.
- Non-Banking Financial Companies – Infrastructure Finance Companies (NBFC-IFC): This Company invests in the debt securities of infrastructure companies or public-private partnership projects, with minimum NOF of Rs. 300 crore. The principal business and Rating requirements also differ for this NBFC.
- Non-Banking Financial Companies – Microfinance Institution (NBFC-MFI): A non-deposit taking NBFC that lends on a short-term basis to low-income groups in India, with at least 85% of its assets like qualifying assets satisfying a few conditions:
- loan disbursed to a borrower having a Rural Household Annual Income not exceeding Rs. 60,000, or Urban and Semi-Urban Household Income of not over Rs. 1,20,000.
- the amount of loan does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles.
- the total indebtedness of the borrower doesn’t exceed Rs. 50,000.
- if the amount is more than Rs. 15,000, loan duration of at least 24 months, with prepayment without penalty,
- loan to be extended without security/collateral,
- the aggregate amount of loans, provided for income generation, is not less than 75% of the total loans given by the MFI,
- the aggregate amount of loans, given for income generation, is not less than 75% of the total loans given by the MFI,
- the frequency of repayment, weekly, fortnightly or monthly installments, to be selected by the borrower.
- Non-Banking Financial Companies – Non-Operative Financial Holding Company: The financial company through which promoter/promoter groups will be permitted to set up a new bank. It is a wholly-owned NOFHC which will hold the bank as well as all other financial services companies regulated by RBI or other regulators, to the extent permissible under the applicable regulatory prescriptions.
- Non-Banking Financial Companies – Systemically Important Core Investment Company (NBFC-CIC-ND-SI): These NBFCs acquire shares and securities. The transactions must satisfy below conditions:
- it holds at least 90% of its Total Assets in the form of investment in equity or preference shares, and debt or loans in group companies,
- its investments in the equity shares (including instruments that would convert into equity shares within a period not more than 10 years from the date of issue, in group companies form not less than 60% of its Total Assets,
- it does not trade in its investments in stocks, debt, or loans in group companies except by block sale for dilution or disinvestment,
- no financial activity, which is listed under Section 45I(c) and 45I(f) of the RBI Act, 1934, is being carried out by it. Other than for investments in bank deposits, government securities, money market instruments, loans to and investments in debt issuances of group companies or guarantees declared on behalf of group companies,
- its asset size is Rs 100 crore or above, and,
- it accepts public funds.
Pre-Conditions of NBFC Registration
According to Section 45(1A) of RBI, the below conditions must be fulfilled for a company to be registered as an NBFC:
- Registration: A company should be established as per the rules, regulations, and provisions mentioned under Section 3 of the Companies Act 2013 or the previous Companies Act 1956.
- Director’s Qualifications: At least 1/3rd of the Directors must be experienced in Finance. And he/she must be employed as a full-time Director.
- Unique Business Plan: A detailed business plan must be ready for operations for the next 5 years.
- Net Owned Fund (NOF): The company must have at least Rs. 2 Cr as a NOF. Only equity paid-up share capital is to be included in this. The preference share capital shall not be included. The premium on shares, and reserves, if any, shall be included. But it should not be a borrowed fund. Though, a gift from the spouse can be included in the NOF. This requirement for the minimum NOF is different in the case of specialized NBFCs (NBFC-MFIs, NBFC Factors, CICs).
- Clean Credit History: The CIBIL records of the company, its Directors, and its members must be clean. They must not have any write-offs or intentionally defaulted the repayment of loans to NBFC/Bank.
- FDI Compliance: If investment from abroad is expected, the company should be in compliance with the FEMA Act.
Registration Process of Non-Banking Financial Companies
After the company has been established and has the minimum NOF, you need to follow the below process to get the company registered as an NBFC:
- An application to be submitted online along with the required documents. A Company Application Reference Number (CARN) is generated after submission. This reference number is to be used for all future inquiries and communications.
- The physical copies of the documents and the form as uploaded online above, are to be sent to the Regional Office of the RBI.
- Once the submitted application is found to be ok, the regional office sends the application to the central office of the RBI. There the application and the documents are verified thoroughly and a background check is conducted.
- If the company is meeting all the terms and conditions specified in Section 45-I A of the RBI Act, the NBFC License is granted to the applicant.
Please ensure to keep the required minimum capital in a deposit account, free from all liens. Generally, such amount is held in a Fixed Deposit (FD). RBI will verify this amount, on receipt of your application, as the deposit of the company with the concerned bankers.
- Certified Copy of Certificate of Registration (COR): Take a Certified Copy of CoR, MoA (memorandum of association), and AoA (an article of association) from the Regional ROC (Registrar of Companies)
- Updated KYC & Net Worth Certificate: Latest KYC details, income proof, credit report, and Net-worth Certificate of Directors and shareholders. Education & qualification proof of the Directors.
- Company’s Details: Company’s PAN & GST number. Documents supporting the address proof of the company.
- Net Worth Certificate: Collect updated net worth certificate of Directors, member/shareholders, and Company
- Bank Account: Details of the bank account of the company. This must have the minimum NOF Rs. 2 crores. And well audited for the last 3-years.
- Banker’s Report: A Banker report to be obtained with the No Lien remark on the Initial Fixed Deposit of Rs 2 crore.
- Board Resolution: The resolution from the board favoring the formation of NBFC.
- Underwriting model: A detailed action plan, for the next 5-years, about the loan products, fair practice code, credit, and risk assessment policy.
- Organization Structure: Plan of the organization hierarchy and decision-making process. The proposed basis on which a loan application will get approved or rejected.
- IT Policy: Submit the planned system and Information technology policy.
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Frequently Asked Questions
Q. What is an NBFC?
NBFCs or Non-banking financial companies in India are the financial institutions providing banking services without any bank licenses.
Some of their activities are performed similar to banks, however, they do not require any banking licenses.
NBFCs in India are regulated under the Companies Act and the RBI. Services provided by 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 in nature, hire purchase, and chit funds.
Q. What are is required for NBFC registration with RBI?
- An institution willing to start a business of non-banking financial activities as defined under Section 45 I (a) of the RBI Act, 1934 should comply with:
- It should be a company established u/s 3 of the Companies Act, 1956 or 2013,
- It should have a minimum NOF of Rs. 200 lakh. (The minimum NOF required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, and CICs is different).
Q. How to register NBFC?
Below steps need to be taken to register NBFC with RBI:
- File the application form online with the RBI on its official portal, enclosing with the necessary documents. The applicant will get a CARN. This reference number is to be used during all further communications.
- Hard copies of the application and the documents are sent to the regional office of RBI, nearest to the company. Here the accuracy of all tendered documents is checked.
- If the documents are found to be all right, the regional office will send the application for NBFC License to the central office of the RBI.
- The central office of RBI grants NBFC registration if the applicant is fulfilling the requirements laid down u/s 45-IA.
Q. What documents are required for an 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 the past 3-years
- Board Resolution favoring 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 compliances are required by the NBFCs?
Compliances to be met differ according to the type of NBFC.
- Returns to be submitted by NBFC-Deposit Accepting are:
- NBS-1: Quarterly returns on deposits in First Schedule.
- NBS-2: Quarterly returns on Prudential Norms.
- NBS-3: Quarterly returns on Liquid Assets.
- NBS-4: Annual returns of critical parameters by a rejected company holding public deposits.
- NBS-6: Monthly returns on exposure to capital market institutions with total assets of Rs. 100 crore and above.
- ALM: Half-yearly return with companies having public deposits of over Rs. 20 crore or asset size of over Rs. 100 crore
- Audited Balance sheet and Auditor’s Report.
- Branch Info Returns.
- Returns to be submitted by NBFCs-ND-SI
- NBS-7: Quarterly statement of capital funds, risk-weighted assets, risk asset ratio, etc.
- Monthly Returns on Important Financial Parameters.
- Monthly statement of short term dynamic liquidity in format ALM [NBS-ALM1],
- Half-yearly statement of structural liquidity in format ALM [NBS-ALM2],
- Half-yearly Statement of Interest Rate Sensitivity in format ALM – [NBS-ALM3].
- Branch Info returns.
- Quarterly returns on important financial values and basic information such as the name of the company, address, NOF, profit/loss during the last 3-years of NBFC-NDs with assets between Rs. 50 crore and Rs. 100 crore.