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Introduction to NBFC’s in India

Non-banking financial companies (NBFCs) are a vital part of the Indian financial service system. NBFC’s have multiplied in large numbers and serving the public at large to support the financial inclusion program with affordable credit at home. NBFCs are playing a key role in meeting the credit demands unmet by the traditional banks, specifically focusing on peer to peer lending.

 

It is a Company registered under the Companies Act engaged in the business(es) of providing financial services including loans & advances, leasing, hire purchase etc. They provide loans and advances and other credit facilities to business people or budding entrepreneur where Bank/Financial Institution are not comfortable, or say it is an alternative source of finance to businessman.  Thus, they have widened the spectrum and array of products and services offered by the financial sector. Progressively, NBFC’s are gaining increasing recognition due to their customer-oriented services; flexible products, abridged procedures; flexibility and timeliness in meeting the credit needs of the seekers of credit; etc.

 

NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Chapter IIIB of the Reserve Bank of India Act, 1934 and any rules made thereunder or any directions issued by it under the Act. It is prima facie that the NBFC can be Companies registered under the Companies Act, 1956/2013 with the object clause of financial activity and the same need to take approval from Regulator Reserve Bank of India RBI) before commence the business of finance. Upon approval of RBI, Company can start the financial business and the entity should maintain the Principal Business Criteria (PBC) regularly.

 

FINANCIAL ACTIVITY as “Principal Business” implies that financial assets of the Company shall constitute more than 50% of the total assets of the Company and income from such financial assets shall constitute more than 50% of the gross revenue of the Company, is termed as “PBC”.

 

Types of Non- Banking Financial Company (NBFC) in India

 

1) INVESTMENT AND CREDIT COMPANY (NBFC-ICC): Any company with its principal business- asset finance, providing the finance for any activity other than its own and the acquisition of securities; also not in any other category of NBFC is called Investment and Credit Company.

 

2) INFRASTRUCTURE FINANCE COMPANY (NBFC-IFC): The Infrastructure Finance Company is the kind of financial institution principally engaged in providing infrastructure loans. Such companies can issue the credit facility (term loans, project loans, etc.). A minimum of 75% total assets of the company should be invested in the infrastructure loans.

 

3) INFRASTRUCTURE DEBT FUND (IDF)-NBFC: IDFs NBFC channelize investment into the infrastructure sector, under this domestic/offshore institutional investors, especially insurance and pension funds can invest through units and bonds issued by the IDFs.

 

4) MORTGAGE GUARANTEE COMPANY (MGC)-NBFC: NGC company' has a principle objective of providing mortgage guarantee. Such companies shall comply with at least 90% of the business turnover form mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business

 

5) NBFC-NON OPERATIVE FINANCIAL HOLDING COMPANY [NOFHC]: A NOFHC is financial business entity through which Entities/groups will be allowed to set up a new bank, which will hold the bank and all other financial services companies regulated by RBI or other financial sector regulators,

 

6) Non-Banking Financial Company (NBFC): Micro Finance Institution (NBFC-MFI) are the non-deposit taking the financial company with Minimum Net Owned Funds of Rs.5 crore and above (for North Eastern Region of india, it will be Rs. 2 crore). NBFC-MFI covers a wide range of services like credit, insurance, savings, remittance and also non-financial services like training, counseling etc.

 

7) NBFC – FACTORS (NBFC-FACTORS): NBFC-Factors to financial institution with minimum net worth of the Company Rs 5 Crores, having the principal business of acquisition of receivables on discount or financing against such receivables by way of loans or advances or by the creation of security interest over such receivables but excludes normal lending by a bank.

 

8) Systemically Important Core Investment Company (NBFC - CIC-ND-SI): CIC-ND-SI NBFC are engaged in the business of acquisition of securities and shares which its holds 90% of its total assets in the form of investment in shares and equity. Such NBFC’s shall compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.

 

HOW NBFCs ARE DIFFERENT FROM A BANK?

 

Activities of an NBFC are similar to that of a bank; however, there are some differences between the two as stated below:

An NBFC cannot accept demand deposits;

  • NBFCs are not a part of the payment and settlement system
  • NBFC cannot issue cheques drawn on itself;
  • Unlike a bank, Deposit insurance facility is not available to the depositors of NBFCs.

 

REQUIREMENTS FOR REGISTRATION OF AN NBFC

An NBFC should:

  • Be a Company registered under the Companies Act;
  • Should have a minimum net owned fund of INR 2 Crores;

 

NBFC REGISTRATION PROCESS

 

  • Every company registered under the Companies Act, with the object clause of financial activity need to obtain a certificate of Registration (CoR) from Reserve Bank of India (RBI) to commence the business as NBFI.

 

  • For the purpose of registration of an NBFC, an application is to be submitted in the prescribed form along with the necessary attachments with the RBI for its perusal. On being satisfied that the provisions of the RBI Act have been complied with then a CERTIFICATE OF REGISTRATION is issued to the institution.

 

  • It is imperative to fulfill the following prerequisites for obtaining a certificate of registration of NBFC from RBI:
  1. The applicant must be a Company registered under the Companies Act for the time being in force
  2. The Company shall have a minimum NOF (Net Owned Funds) of INR 2 Crores who wish to set up an NBFC in India.
  3. At least one of the directors should be an experience in a similar field of business or should be an experienced banker.
  4. The CIBIL records of the Company, Director or Shareholder should be free from any irregularities.
  • On satisfaction of the aforementioned essentials, the Company should go for its registration as NBFC in the form prescribed by the RBI along with all the mandatory documents and attachments. This application (COSMOS) can be filled on the website of RBI.

 

  • On Successful submission of the application, an application reference number (ARN) is issued by the RBI to the applicant for the purpose of tracking the status of its application. Once, the ARN is obtained a physical copy of the application along with all the attachments should also be submitted with RBI.

 

  • Once the application is received by the RBI, on scrutiny of Company Profile, Promoter/Director and Shareholder Profile then upon satisfaction the license of registration of NBFC is granted by the RBI. 

 

DOCUMENTS FOR NBFC REGISTRATION

1) Certified copies of the Certificate of Incorporation of the Company.

2) Certified copies of main object clause of the Memorandum of Association of the Company.

3) Board resolution(s) stating the following:

  • the company undertakes that it is not carrying on any NBFC activity or has not carried on and stopped any NBFC activities in the past activity and will not carry on or commence the same before getting registration from RBI
  • the unincorporated bodies in the group where the director holds substantial interest or otherwise
  1. which has not accepted any public deposits in the past; and
  2. does not hold any public deposit as on the date of application
  3. will not accept any public deposits in the future
  4. the “Fair Practices Code” as per RBI Guidelines has been formulated by the Company

4) the company:

  • has not accepted public funds in the past and/or does not hold any public fund as on the date; and
  • the Company will not accept any deposits in the future without the prior approval of Reserve Bank of India
  • the company shall seek prior approval of RBI before creating any customer interface in the future

5) Copy of Fixed Deposit receipt & bankers certificate indicating Net Operating Fund.

6) The companies which are already in existence the following documents are to be submitted for the last 3 years OR from the period of incorporation of the Company till the closure date of the previous financial year:

  • Audited balance sheet along with annexures
  • Profit & Loss statement
  • Directors Report
  • Auditors report

7) Banker’s report regarding:

  • Directors of the applicant company having substantial interest in any other companies
  • Applicant company along with the directors of its group, subsidiary, associate, holding company and related parties.
  • The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Note: Bankers report is to be obtained from all the bankers of each of these entities. This report should specifically mention the details of deposits and loans balances as on the date of application and the conduct of the account.

8) Copy of the certificate of highest educational and professional qualification in respect of all the directors

 

The advantage of NBFC’s in Indian Economy

On an average 70% of the Indian population lives in rural areas, NBFC’s due to its low-cost operations can cover those areas by providing loans, chit–funds etc thus NBFC’s are an integral part of the Indian economy. NBFC’s can perform below activities

E Wallet

Loans and credit facilities

Offer financial assistance to company/individual that requires capital. Types of facilities include personal loan, company loan, loan overdraft services, term loans and letters of credit etc.

E Wallet

Infrastructure Loan

Facilitate investments in property the flow of long-term debt into infrastructure projects. Such type of NBFC’s are called Infrastructure Finance Companies (IFC)

Payment Gateway

Trading money market instruments

Such NBFC’s allows short-term capital needs at a low cost. Such institutions involves in Banker’s Acceptance, Treasury Bills, Repurchase Agreements, Certificate of Deposits, Commercial Papers etc

Nidhi Company

Funding private education

There are approximately 200,000 private schools in India., many of these schools need funds to upgrade their infrastructure. Such facility can provide loans to Schools, loans to Institutes, loans to coaching centers, education Eco space ect.

Payment Gateway

Wealth management

Managing portfolios of stocks and shares is an investment service that associates other financial services to address the needs of affluent clients. Such institutions are highly in demand in Indian market

Nidhi Company

Provides retirement planning

Retirement planning NBFC offers the facilitation of setting retirement income goals and of people across India. At its core, it ensures that when your salary stops, an alternative income source to take care of monthly expenses.

 

 

 

faq FAQ`s

It is not necessary to hire any such professional. However, the process is complicated and you may end up losing more than 3.5 Lac paid for net own fund stamp duties ROC fee and other Mislenious expense. In addition, the end-to-end process takes about 4 to 6 months for this you should have some domain experience.

Yes. You can apply for NBFC Registration. However, you are require to surrender the local lending business license as it may occur a conflict of interest.

A Non-deposit taking NBFCs are permitted only to offer loans and not take any public deposits. However, a deposit taking NBFC can accept the deposit from public like every bank does.

There are many activities involved while registering NBFC

-  Company registered under the Companies Act (25 to 35 Business Days)

-  Application Drafting as per RBI Guideline & Business Plan Preparation (10 to 15 Days)

-  RBI Review process (60 to 90)

Overall, it takes 90 to 180 Business days to get NBFC License

It is advisable to go for fresh NBFC instead of NBFC Takeover. However acquiring a fresh NBFC is a little time consuming process, but under fresh NBFC you can structure your business from the scratch.

The sum of share capital paid up equity and free reserves as per the latest balance sheet of the company and deducting of all the Loans, Investments & Advances given, etc.

No.  The main source of funds shall be owned & tax paid. However, the gift from Spouse or relatives comes under own capital, you can take funds from Spouse or relatives in form of gift

Yes you can take foreign direct investment in newly incorporated / existing NBFC, However, FDI shall be in the form of T1 Equity. In case of early stage, NBFC must comply with FEMA Provisions along with the RBI Act.

If total assets of revenue comes from financial services more than 50 percent, such company becomes eligible to Apply for NBFC license to the RBI.

Yes, it is. Incase an establishment wants to carry a lending/investment business, it becomes necessary to get it registered RBI for carryout such activities.

Yes, it is possible to use this initial amount just after the receipt of the RBI approval. However, you will have to maintain minimum of Rs.2 crore end of every financial year, this would exclude the fund stuck with NPA accounts.

Yes it is necessary of have at least one with finance domain. If it is not the case, one must hire professionals who do have some experience in finance domain.

Approval form RBI is required for NBFC takeover. For the takeover of an NBFC, an application needs to be submitted to the regional office of RBI on the company letterhead for getting approval. Once permission granted, a public notice must be published in the newspaper. Post newspaper publication is done; both the parties shall sign the share-purchase agreement and processed with NBFC operation.

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