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NBFC Registration in India

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Overview: Non-banking Financial Company

We all come across various fund lending institutions such as Muthoot Finance, Shriram Transport Finance Company, Bajaj Finance, Mahindra & Mahindra Financial Services, Cholamandalam, Tata Capital Financial Services, and many more, are some popular Non-banking Financial institutions in India who have established their unique identity and customer loyalty over time due to their lower eligibility criteria and flexible approach towards financial services as compared to other traditional banking institutions.

But, what is an NBFC? As the name suggests, a Non-banking Financial Company (NBFC) is a financial institution, which has financial activity as its principal activity, and is incorporated as a company under the provisions of Companies Act 2013 (or previous one registered under Act 1956), and needs to compulsorily obtain a certificate of registration from the Reserve bank of India under section 45-1A of the RBI Act 1934, to commence its business operations.

Primarily, NBFCs Are Engaged In The Business Of-

  • Offering Loans & advances such as personal loans, gold loans. Home loans, business loans, etc;
  • Acquiring securities such as shares/stocks/bonds/debentures/securities issued by any Government or local authority or other marketable securities of a like nature, or
  • Activities such as leasing or hire-purchase, or
  • Insurance, or 
  • Chit-fund business or
  • Receiving deposits in pursuance of any scheme or arrangement as a lump-sum amount or in installments through contributions or in any other manner;  

But Are Not Involved In the Business-Related To- 

  • Any agriculture activity, 
  • Industrial activity,
  • Sale/purchase of any goods/raw materials (except securities from the capital market) or 
  • Any services related to the sale/purchase/construction of the immovable property.

Although NBFCs are not subject to strict regulations as in the case of banks, the Reserve Bank has been conferred under the provisions of the RBI Act 1934, to register, frame policies and guidelines for their functioning, issue directions, undertake inspections, regulate, monitor, and supervise over NBFCs, including the powers to suspend or cancellation of registration over financial companies who satisfy 50-50 criteria of principal business. 

Learn Our Blog: NBFC Registration Cancellation

In recent years, NBFCs have played a significant role in the development of the economy by catering needs to a large variety of populations, to whom banks generally find it difficult to lend funds due to their higher eligibility criteria. Thus, NBFCs have gained recognition in the market due to their flexible procedures, customer-oriented services, and quick & fast-approaching lending to needy customers.

How are NBFCs Different From A Bank?

Generally, banks and NBFCs are considered similar as both undertake somewhat similar financial activities, but there are a lot of fundamental differences between the two, which have been presented below-

Basis of Comparison    Banks    NBFCs

Basis of Comparison

Banks

NBFCs

 

1. Significance

A bank is an authorized financial intermediary which holds a banking license from the Reserve Bank of India with a primary objective to offer banking services to the public.

An NBFC is a financial institution that offers banking services under the control and administration of RBI but doesn't possess a Banking License from RBI.      

2. Applicable Act

Banking Regulation Act 1949           

Companies Act 2013  

3. Licence

Holds Banking License from RBI

Does not hold banking license, but’ Certificate of Registration’ from RBI

4. Demand Deposits

Can accept demand deposits from the public

Cannot accept demand deposits

5. Payment and Settlement system

An integral part of the System

Not a part of the System           

6. FDI Limit

Only 74% allowed

100% FDI allowed

7. Credit Score Requirement from customers

Higher

Moderate to lower credit score applicants also considered

8. Rules & regulations

Strict adherence

Flexible & customer-suited

9. Deposit Insurance

Allowed and Available

Not Available

 

What Are The Pre-Requisites To Start An NBFC?

For commencing business as an NBFC, the following pre-requisites must be fulfilled-

  • The company must be a public or a private company under the provisions of the Companies Act 2013/1956;
  • Minimum net owned funds of at least 2 Crores.
  • Duly prepared detailed business plan for next three years should be with the company
  • 1/3rd of the directors  of the company must come from work experience in finance background;
  • The company must possess clear CIBIL records;
  • Compliance with requirements under capital compliances and FEMA regulations should be met.

Types of NBFCs in India

Primarily, there are two types of NBFCs-

  • Deposit Accepting NBFCs
  • Non-deposit Accepting NBFCs

NBFCs could be further categorized into the following ten forms under which they function with different objectives such as-

  • Investment & Credit Company – An Investment & Credit Company is a combined form of an Asset Finance Company, Loan Company (LC) & an Investment Company, which has the primary objectives of offering and lending funds to businesses for the purchase of business assets such as automobiles, tractors, lathe machines, generator sets, etc., and other purposes and to acquire securities.
  • Infrastructure Finance Company (IFC)- An Infrastructure Finance Company means an NBFC company who
    • Offers up to a minimum of 75% of its total assets on infrastructure loans;
    • Holds at least Rs. 300 crore of Net Owned Funds;
    • Holds a credit rating of at least A or equivalent;
    • Has a Capital Adequacy ratio (CRAR) of 15%.
  • Infrastructure Debt Fund- An Infrastructure Debt Fund is an NBFC that offers and lends primarily for infrastructure projects.
  • Non-Banking Financial Company (IDF-NBFC) – They generally offer and lend funds to business entities functioning in infrastructure sectors.
  • Systemically Important Core Investment Company (CIC-ND-SI)- It is involved in the acquisition of shares and securities mainly equity shares
  • Non-Banking Financial Company-Micro Finance Institution (MFI)- It is a type of non-deposit accepting NBFC, in which above 85% of its assets of the company do exist in the nature of microfinance loans;
  • Non-Banking Financial Company (Factors)- Generally, NBFCs who are involved in the business of factoring i.e. they sell their bills receivables to third parties as a factor on discount.
  • Mortgage Guarantee Companies (MGC)-  Such NBFC companies where-
    • 90% of business turnover comes from mortgage guarantees; or
    • 90% of the total business income comes from mortgage guarantees; and
    • Net-owned funds are Rs. 100 crores or more; 
  • Non-Operative Financial Holding Company (NOFHC) - A NBFC is allowed to set up a bank in pursuance of meeting RBI eligibility criteria on this behalf.

How to Start an NBFC in India?

NBFC Registration Process in India 

Provided below is the step-by-step process of registering an NBFC and commencing business operations.

  • Go to the MCA portal and get the company incorporated under the provisions of Companies Act 2013.
  • Once the company gets incorporated, the company needs to fulfill the basic criteria.
    • Minimum net-owned funds should be at least 2 Crores.
    • 1/3rd of the directors  of the company must come from work experience in finance background;
    • The company must possess clear CIBIL records;
    • Compliance with requirements under capital compliances and FEMA regulations should be met.
  • Log on to the RBI’s official website (https://www.rbi.org.in/) and fill NBFC application for registration under section 45-1A of the RBI act 1934.
  • Fill in all the required details attach all necessary documents and submit the application form; 
  • On successful submission of the application, a reference CARN number will be generated for application tracking purposes.
  • Next, print the application hard copy to the RBI authority and send the hardcopy to the RBI regional branch;
  • On careful examination of the application, the RBI authority will assess the application and grant a "Certificate of Registration" to the application to the company. 

Documents to Be Attached With NBFC Registration Application

  • Copy of Certificate of Incorporation.
  • Details of the Board of Directors of the company along with a brochure providing company details; 
  • PAN number of the organization;
  • Proof of the registered business address of the organization;
  • Copy of the objectives & bye-rules of the company (i.e. MOA & AOA)
  • CIBIL/Credit reports of all the directors of the company and that of the company;
  • Copy of the board resolution containing a declaration that the company has not carried any NBFC activity in past and shall not start NBFC activities until RBI registration is granted;
  • Copy of a board resolution on ‘Fair Practices Code ’to be drafted and a certified copy of the same shall have to be submitted;
  • A certificate issued by the statutory auditor to the effect that the company has not held public deposits in the past and shall not do so in any time in future;
  • A certificate prescribing details about the “Net Owned Funds” as on the date prepared and signed by Statutory Auditor;
  • A list of information regarding bank accounts, balances, loans, credits, etc. 
  • Copy of the audited balance sheet and profit and loss statement for the previous three years along with a directors and auditor's report regarding the same;
  • Self-certified copy of the bank statement and ITR returns of the company;

Benefits of NBFC Registration

A registered NBFC has a more flexible approach as compared to traditional banking institutions and offers multiple benefits such as.

Flexible Approach:

Unlike banks, NBFC companies have earned wide recognition and popularity among various sections of the Indian population, as the NBFCs adopt a flexible approach in understanding the needs of every customer and offering loan facilities. While banks do have limited availability, NBFCs have stretched their business possibilities with semi-rural and rural areas for financial support with a service-oriented approach.

Easy Processing of Loans

The requirement of documents is much lesser and more flexible in the case of an NBFC as compared to banks. Thus, it offers a more convenient option for consumers as compared to other financial institutions. 

Moderate/Low Credit Score Requirement

As compared to banks, NBFCs have a much more flexible approach and even consider people with lesser credit scores to provide loans as the rules for NBFC lending by RBI are much lesser;

Serves Funds Requirements of all Businesses

As NBFCs adopt a more flexible customer-oriented approach in lending, they cater to the fund requirements of all small scale industries and start-ups, to whom usually banks do not find lending comfortable;

Flexible Interest Rates

RBI does prescribe a limit between which the NBFC can adopt any rate of interest for lending to customers. Therefore, NBFCs can lend to customers based on their own decisions;

Customer-Oriented

NBFCs are customer-oriented in nature i.e. they offer a variety of services apart from lending such as investment advisory, trading in money market instruments, education financing support and retirement planning decisions, etc. 

Business-Advisory & Investment: 

Apart from lending facilities for customers, NBFCs also offer business advisories such as corporate mergers, acquisitions, preparation of feasibility reports, markets, and industry studies for businesses. 

RBI Compliances for NBFC

The Applicable compliances to an NBFC could be categorized into Annual, monthly, and periodical compliances to be generally followed by an NBFC-

Name of Compliance

Applicability

Due date

Unaudited March Monthly return/NBS7    

Annually

By 30th June

Audited March Monthly return/NBS7    

Annually

Upon completion

Statutory Auditors certificate on Income & Assets   

Annually

By 30th June

Information about Cos having FDI/Foreign Funds           

Annually

By 30th June

Resolution of Non-acceptance of Public Deposit           

Annually

Before the start of the new Financial year

File Audited Annual Balance Sheet and P&L Account           

Annually

One month from the date of signoff

Declaration of Auditors to Act as Auditors of the Company        

Annually

Annually

Monthly Return          

Monthly

It must be done on the 7th of every month

Director’s Appointment           

Periodical

Within 30 days of the appointment

Resignation of Director(DIR-12 + Challan Receipt) 

Periodical

Within 30 days of resignation

Adoption of any notification in the ensuing Board Meeting & filing the certified copy with RBI.

Periodical

 

 

Conclusion

Since, the main objective of an NBFC is to fulfill the credit needs of the needy section of the society, whereas banks are those financial intermediaries by the government authorities to receive deposits and lend funds to the society but are subject to strict regulations regarding its lending criteria and the applicable interest rates. Whereas, NBFCs come with a flexible approach, customer-oriented services, easier lending with faster processing, and other services such as investment planning support and business advisory. Get an NBFC License with the best NBFC Registration Consultants in India and start your journey today!

NBFC Registration

Want to start your Non-banking financial companies (NBFCs) registered under the Companies Act, engaged in the business of providing credit facilities like loans, accepting deposits, leasing, hire purchase, retirement planning, facilitating security.

NBFC Compliance

Have you done with Certificate of Registration (CoR) from Reserve Bank of India (RBI) as Non-Banking Financial Company, then now take a breath and let’s foster for better corporate governance and compliance mandate by RBI.

NBFC Collaboration

NBFC Collaboration is a new business term in which NBFC License holders collaborate with banks or Fintech companies for sourcing of leads and funding.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.

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Author
Bhavana Bhandari
I am working in Corpseed ITES as "Legal Content Writer" and hold two years of experience in writing, proofreading, and reviewing all kinds of legal content including court rulings, IPR laws, business registration and compliances, tax, GST, and similar matters.

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