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How to Start a Finance Company in India?

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Non-Banking Financial Company

CAPTION 1: MARKET ENTRY STRATEGY

It is company registered under the Companies Act, 2013 having object in the business of loans, advances, acquisition of shares, stocks, bonds, debenture, hire purchase, leasing and so on. The NBFC business is sub set of Indian Banking System with an intent and target to meeting credit demands unmet by the universal bank in India. Despite the pertinent effort from regulator to maintain the financial services inclusion to all people, across country. Somewhere even we have seen tremendous gap on regular credit finance to needy person across the country. There the NBFC segment has helped quite lot to provide the organized systematic finance to needy person, collectively serving the public at large.

Anyone in country or abroad, planning to start finance business, need to be aware of the procedure, complexities, and requirements of regulator, technology and compliance built in with this business model. Therefore the any entry player in this segment, should plan the market entry strategy as far as licensing, category, product development, addressable market, and uniqueness, market research and board composition of company and so on.

Primarily being finance business, the person going to enter into this market should be financially literate with regular academic qualification to substantiate the interest of Board of company to pursue this segment business. Besides that, Board and shareholders need to be clean from any irregularity and conviction from the law of land. 

Read Our Blog: Non-Banking Financial Company (NBFC) Compliance – A Complete Guide


Further, the investment should be from own fund in the proposed finance business. The minimum required Net Owned Fund required to start finance business is Rs. 2 Crore, collected from Shareholders in the form of equity interest in the proposed company. Such investor need to proof themselves financially the amount of investment is their own source of fund. Accordingly understanding and maintaining principal business criteria, is prime requirement of Reserve Bank of India, to be finance company. Principal Business criteria refers to being finance assets and finance income to be at least 50% or more of total assets and total income respectively.

In case of foreign investment in proposed finance company, as such amount of investment should be approved from the Foreign Exchange Department of Reserve Bank of India. Generally foreign investment is under the automatic and approval route subject to source of fund country. When there is automatic route being Greenfield sector, the filing is required to done Foreign Exchange Department of Reserve Bank of India at regional level. However in case of approval route, the corporate is required to obtain the approval from Foreign Investment Promotion Board under Ministry of Finance.

By this on vet of Board, Shareholders, Foreign Investment and corporate proposed to do finance business, can go for Reserve Bank of India for approval of License, to commence the business of finance.

The entire process to start the finance business from scratch to live, is our support service under the Market Entry Strategy from the various regulatory view point, investment strategy and even exit, if needed in due time. 

CAPTION 2: MARKET SCENARIO

Finance business has tremendous opportunity and scope to excel, more precisely in India as the many people are still out of reach of organized regular finance. Technology been involved in finance business as inevitable stake and movement business is connected through technology, the scalability and prospects is unbeatable. And the finance sector are getting it as hot cake in market, and now digitalization with more user friendly enhancing user experience is solo target of every finance business organization.

Sticking to market, the thorough knowledge of variety of finance business verticals and available market peer understanding is most to conquer to make more viable plan and feasibility in market.

Going through the records of Reserve Bank of India, there were around 13k plus NBFCs registered with Bank, of which 178 were NBFCs-D and 220 were NBFCs-ND-SI. The share of NBFCs in terms of assets in total financials sector is beyond 21% or more as on date. And the numbers is increasing day by day due to digital influence and digitalization of NBFC business operations. 

NBFCs are primarily deposit taking and non-deposit taking, as name suggests it’s about acceptance of public deposit. Now with stringent regulation deposit taking NBFC approval is not entertain by Bank and remaining are highly regulated aand closely monitored by Bank. Besides that, even on Non-Deposit taking there is category I and II on basic difference of having customer interface or not. And category I is now just been legacy perspectives, nothing more than that. 

In market, being NBFC it’s your choice of application for license under various category, as listed in the regulation of NBFC at the choice of applicants from Reserve Bank of India are:-

  • NBFC-ICC: It is NBFC with prime business of Investment and Credit. It is widely popular and most common segment for entry applicant in this segment. 
  • NBFC-IFC: It is NBFC with business to deploy at least 75% of its total assets in infrastructure loans. Unlike other NBFCs with Net Owned Fund (NOF) of Rs. 2 Crore, it required NOF of at least Rs. 300 Crore. It required to have minimum credit rating of ‘A’ or equivalent and CRAR of 15%.  
  • NBFC-CIC: it is an NBFC with business of acquisition of shares and securities. It holds not less than 90% of its total assets in the form of investment in equity shares, preference shares, debt or loans in group companies. Investment in the equity shares or preference share mandatorily convertible within 10 years period time in group companies constitute not less than 60% of its total assets. It can’t trade in its investment except block sale for the purpose of dilution or disinvestment. Its assets size is Rs. 100 Crore or above. It is not fresh registration, in-fact classification of existing NBFC having assets size Rs. 100 Crore or more and principal business is acquisition of shares and securities.
  • NBFC-IDF: it is an NBFC with object to facilitate the flow of long term debt into infrastructure projects. It raises resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies can sponsor IDF-NBFCs.

Read Our Blog: What Is Infrastructure Finance Company in India

  • NBFC-MFI: it is an NBFC with an NOF of Rs. 5 Crore, however it is Rs. 2 Crore in case of North East State. Its business is based on qualifying assets and to be MFI, such entity should maintain at least 85% of its assets in the nature of qualifying assets. Qualifying assets has following criteria:-
  1. Loan disbursed to borrower with rural household annual income not exceeding Rs. 125k or urban and semi-urban household income not exceeding Rs. 200k.
  2. Loan amount does not exceed Rs. 75k in the first cycle and Rs. 125k in subsequent cycles.
  3. Total indebtedness of the borrower does not exceed Rs. 125k.
  4. Tenure of the loan not be less than 24 months for the amount in excess of Rs. 15k with prepayment without penalty.
  5. Loans to be extended without collateral.
  6. Aggregate amount of loans, given for income generation, is not less than 50% of the total loans by the MFIs
  7. Loans is repayable on weekly, fortnightly or monthly installment as the choice of the borrower.

 

  • NBFC-FACTORS: it is NBFC engaged in principal business of factoring. The financial assets in the factoring business should constitute at least 50% of its total assets and its income derived from factoring business should not be less than 50% of its gross income.
  • NBFC-MGC: Mortgage Guarantee Companies are financial institution for which at least 90% of business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is Rs. 100 Crore.
  • NBFC-NOFHC: Non-operative Financial Holding Company is NBFC through which promoter/promoter group will be permitted to set up a new bank. It’s a wholly owned non operative financial holding company which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

 

Out of all these category, most popular choice of majority of people is NBFC-ICC, as it is combination of AFC, IC and LC. Earlier AFC, IC and LC used to separate category, which is merged into ICC vide notification dated 22nd Feb, 2019 as regulatory reforms to simplify the supervision from Bank. This form of NBFC can be started with least of Rs. 2 Crore as NOF with an business nature of investment in acquisition of share, stock of corporate either listed or unlisted, lending advances to individual and corporate and helping the productive sector on acquisition of their assets for conduct of such business. In a whole, provides one centric solution to person who would like to enter into the finance market. It might be the reason, this category is more popular and even widely registered across the country.

Secondly, MFI is also been preferable category public at large to obtain registration however the complication on catering the Qualifying Assets as per regulation and entry capital requirement, this is on second interest of public. It can be observed the business of MFI been somehow to extent affected by NBFC-ICC license.

Other than this two, rest are been quite big ticket to cater as per the bare minimum requirement of capital and operational complexities, only selected are in those business. Or else can say, person with specific purpose with requisite Net Owned Fund arrangement, only selected individual/corporate go for such license.

Apart from this, NBFC business are been developing day by day more prudent to technology savvy and been successful to address the various new version of NBFC business evolved in market from regulator point of view like:-

  1. Peer to Peer Lending: It is an NBFC with business of platform provider of Investor and Borrower termed as ‘Participant’. This is marketplace creator with no interference on lending business structure. Based on its robust technology and algorithm for credit assessment, onboard the borrower and on the other hand, Investor with intent to invest surplus fund for good returns in comparison to market then platform get investor and borrower to match each other. The operation modality serve the each account to reduce the NPA and serve the investor and borrower, both better user experience.
  2. Account Aggregator: It is an NBFC with business of providing financial information pertaining to its customer and consolidating, organizing and presenting such information to the customer under the contract. It act as common pool for easy and immediate supply of information of customer.
  3. Both product are unique and time demanded, public are slowly and gradually been involved into it and gradually, sooner or later will come to greater visibility and scope as the both the license agency are more technology driven.

CAPTION 3: COMPLIANCE

Idea stage to registration certificate in hand, is great and time taking journey with various ups and down. Moment you are with registration certificate from Reserve Bank of India, the next scope is to set up the business infrastructure and inbuilt compliance measure for same.

Being company incorporated under the Companies Act, 2013 the compliance mandated by Companies Act, 2013 is required to complied on or before due date to avoid fine and penalty. However, if there is any clash in applicable provision then, the Reserve Bank of India Act, 1934 and its regulation, direction and circulars to be preferred at above the Companies Act, 2013.

Under Companies Act, 2013 each company is required to conduct at least 4 board meeting with no gap beyond 120 days in between Two Board Meeting, issuance of share certificate, Appointment of Auditor, and filing of special resolution of company, maintenance of statutory register, minutes books and records, Director KYC, MSME Returns, DPT-3, AOC-4 and MGT-7 etc. are compliance under Companies Act, 2013 mandated to each register Company.

Now, it’s under Reserve Bank of India again the company with license required to pass resolution within 30 days of starting of financial year on recurring basis, then being NBFC, such company need to take registration under Financial Intelligence Unit of India (FIU_IND) to submit the suspicious and cash transaction within stipulated time frame. Similarly, it need to take registration with Credit Information Company (CIC) to report the financial data on monthly basis. Further Central KYC registration under CERSAI is mandated to NBFC to supply its customer KYC within 10 days of onboarding them into system. Accordingly vide IBC Code, 2016 even NBFC are been mandated to supply the credit sanction data to IU under NesL. Moreover, NBS8/9 and SAC along with Audited Financial and Auditor Report to be submitted to RBI. These are the bare minimum compliance under the RBI Act, 1934 for NBFC. However NBFC with specific category has other compliance too, in addition to mention above.

The discuss compliance is bare minimum, however as per category of NBFC the compliance list may further extent accordingly.

The complete getting registration with other external agency mandate by RBI to its NBFC and its regular reporting service is again cater by us for our client.

CAPTION 4: TECHNOLOGY

Technology is inevitable at today business, though its financial or anything other segments. From the past experience, the most of business are now on digital presence as well as their business operation are in the process of automation. This has substantially experienced in Finance business. The finance business is now growing at large with better performance due to involvement of technology in operation.

We support our esteemed client to go for better technology platform based on our experience and even core support to development of technology platform in-house required for NBFC business.

It is prudent to note that the NBFC business is prime facia activities of onboarding the client, managing the client and recovery the dues, if any pending remain unsettled in addition to general business operation manual including Human Resource, Administration, Accounts and Finance, Sales and Marketing etc. Every organization wants to have all these function to cater single page solution of various function in one platform. Basically it is perquisite of Enterprise Resource Planning where the all the basic to extended version of activity get managed from single platform.

The Loan Origination System (LOS), Loan Management System (LMS) and Loan Recovery System (LRS) are basic three models in this business, where one client get on boarded, assessed and sanctioned with finance and the recovery model is implemented in variation of products selected by customer.

System implementation required good time involvement and even investment to build in-house, else it can be outsourced/rent software to operate the function of company.

Sales Campaign and marketing been supported by us to our client on agreed terms and client. The main motto of us is too been solution centric instead of service provider. We thought from the eyes of businessman and provides the service oriented to solutions on affordable cost/budget.

CAPTION 5: RESEARCH

Our regular interest is to research on this segment and provides the services, data and information to our end users as well as client for recent innovation in finance industry.

We being consultant support our client to get the trusted information from us to proceed for their business on more authentic way forward.

BOOK A FREE CONSULTATION

Get help from an experienced legal adviser. Schedule your consultation at a time that works for you and it's absolutely FREE.

Author
Vinay Singh
Vinay Thakur is Managing Partner in Corpseed. He focused on payments, digital transformation, and financial technology for over 15 years and holds strong expertise on fintech startups, banking innovation, and investors with a keen understanding of the trends and activities of startups, banks, and investors in the space.