After immense discussion on P2P lending regulations in India, the Reserve Bank of India issued gazette notification dated 18th September 2017 stating that peer to peer companies who provide loan...
The banking and financial sector in India is one of the most essential and pro-development sectors of the country. The entry of Non-Banking Financial Companies (NBFCs) has led to an increase in credit disbursement and financial inclusion of individuals and businesses, which were unserved by the banking institutions. NBFCs have created a more approachable financial system in the country, where people from even the lower-income groups and those residing in remote rural and semi-urban regions are able to access quality financial assistance for their personal and professional requirements. NBFC is a profitable and sustainable business option, and more local and foreign entities eye the sector to penetrate the financially underserved market in India. However, the process to start an NBFC in India is highly complicated and involves numerous steps and requirements, involving a minimum capital requirement for NBFC operations. The blog aims to simplify the process of NBFC registration in India and lay down the details relating to minimum capital requirements to start an NBFC in the country.
Meaning of Non-Banking Financial Company – NBFC in India
Non-Banking Financial Companies or NBFCs are defined as companies which are registered under the Companies Act, 2013 and governed by the Reserve Bank of India. NBFCs are engaged in activities similar to the banking institutions in India, except for some key differences. NBFCs simply extend financial services to businesses and individuals in the country, similar to its banking organisations.
A key goal fulfilled by Non-Banking Financial Companies in India is to extend a wide variety of credit products and services to individuals and businesses across the country. This includes loan products like personal loans, business loan, gold loan, vehicle loans, home loans, secured loans, shared investments, stocks and debentures, health insurance, life insurance, general insurance, leasing, and housing finance, to name a few. Some NBFCs are also engaged in offering marketplace lending platform (P2P), prepaid payment instruments (PPI), etc. to businesses.
The NBFC sector has been trying to bridge the gap left behind by the banking sector in India which has failed to provide financial assistance to low-income individuals and businesses and limited their reach to urban and metro regions. While banks have turned their focus to lend credit to the organised sector and those with a detailed credit history, NBFCs are focussing towards a more inclusive financial domain in the country.
Need for Non-Banking Financial Companies – NBFCs
By targeting the assorted requirements of the underserved section of the society, the NBFCs are fulfilling the following needs:
- Growthin industries like infrastructure, education, and transport.
- Increase in employment opportunities.
- Increase in the flow of credit and wealth creation.
- Holistic economic development of the country.
- Supplement to the banking sector by targeting the rural and semi-urban regions.
- Supply to the latent credit demand.
- Elevation of the living standards of marginalised sections.
- Contribution to the State Exchequer.
Categories of NBFCs in India
Non-Banking Financial Companies or NBFCs in India are classified into two categories:
- Deposit-accepting NBFCs
- Non-Deposit accepting NBFCs
Additionally, the classification of the various kinds of NBFCs in India regulated by the RBI has been done in the following manner, based on their activities:
- Asset Finance Company (AFC)
- Investment Company (IC)
- Loan Company (LC)
- Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)
- Infrastructure Finance Company (IFC)
- Systemically Important Core Investment Company (CIC-ND-SI)
- Non-Banking Financial Company – Factors (NBFC-Factors)
- Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)
- Mortgage Guarantee Companies (MGC)
- NBFC- Non-Operative Financial Holding Company (NOFHC).
The different types of NBFCs are widely diverse from each other in terms of their size, incorporation methods, activities, liabilities, regulation and post-incorporation compliance requirements.
However, regardless of their varying natures, the various kinds of NBFCs have one thing in common – streamlining niche financial assistance for the masses and contribute to the economic development of the country. All NBFCs are, therefore, able to provide customised financial assistance to their clients as per their unique needs and create a more welcoming financial landscape for the public.
Difference Between NBFC and Banks
NBFCs are different from banks in terms of the nature of their liability and the structure of their assets. Banks generally have the liability in the nature of demand and time deposits; however, the liability of NBFCs is not in the nature of demand deposits, with the only exception being Nidhi Companies.
The difference between NBFC and Banks can be summarised in the following ways:
- NBFCs are authorised to accept only Public Deposits. NBFCs cannot accept Demand Deposits like banks.
- NBFCs cannot issue cheques drawn on itself, or be a part of a settlement or payment system.
- NBFCs cannot provide a guarantee to the insurance or other credit service they provide.
Conditions Relating to NBFC Registration in India
The Reserve Bank of India is primarily the regulating authority for NBFCs, with certain exceptions. To operate as an NBFC in India, a company is required to fulfil various conditions as provided by the RBI.
As per Section 45-IA of the Reserve Bank of India Act, 1934, the following conditions must be fulfilled by a company before it can proceed with the process of NBFC registration in India:
- The company must be registered under Section 3 of the Companies Act, 2013. No other form of business like a Partnership firm or Sole Proprietorship can file an application for NBFC registration.
- There must be at least one-third of Directors in the company who have a minimum experience of 10 years in the finance sector. Such Directors must also be appointed as full-time Directors of the company.
- The company must have a comprehensive NBFC business plan laying down the operational strategy of the business for the next five years. This includes defining the goals and objectives, targeted market, products and services offered, business model, technology, risk management policies and operational system.
- The company and its Directors must also have a clear credit history and a strong CIBIL score. The Directors, or the company must not have any wilful defaults, write-offs, or legal action relating to the repayment of loans to a bank or NBFC.
- In case the company is receiving Foreign Direct Investment (FDI) or plans to receive FDI in the future, it must comply with the provisions of the FEMA Act, 1999.
- The company must also adhere to the minimum capital requirement for NBFC as laid down by the RBI, and amended. This means the company must have a minimum amount set aside as its Net Owned Funds.
Minimum Capital Requirement for NBFC Registration
As per Section 45-IA of the RBI Act, 1934, there is a minimum capital requirement for NBFC businesses. The RBI has laid down strict requirements for minimum capital for such shadow banks to ensure risk mitigation arising out of capital crunch and liquidity of such company. This has also been done, keeping in mind, the interest of the customers and support market growth.
When it comes to the minimum capital requirement for NBFC entities, the RBI has provided that every NBFC must maintain minimum Net Owned Funds of INR 2 crores.
The Reserve Bank of India Act was amended in 1997, providing the minimum capital requirement as INR 25 lakhs. However, another amendment of 1999 increased this limit, and the new registrations now need to have Net Owned Finds of at least INR 2 crores. The NBFCs that existed before this amendment were allowed to function, with an extension to increase their Net Owned Funds in a systematic manner.
However, this rule also has certain exceptions. When a company wishes to establish a Non-Banking Financial Company – Micro Finance Institution, or NBFC-MFI, it must have a minimum capital of INR 5 crores. The same limit has been reduced to INR 2 crores in case of NBFC-MFIs in North-Eastern states in India.Such MFIs must open a bank account and deposit the capital in the form of a fixed deposit.
Additionally, every company registered under the Companies Act, 2013 seeking NBFC registration in India as an NBFC-Factor company must also have Net Owned Funds of INR 5 crores. The NBFC-Factor that existed before this change had to approach the RBI to get an extension to fulfil this minimum capital requirement for NBFC.
What are Net Owned Funds?
Net Owned Funds are simply the total amount of money invested in a business, calculated after adjusting any losses of the business (if any). Net Owned Funds (NOFs) are calculated on the basis of the last Audited Balance Sheet of the NBFC.
The Net Owned Funds comprise of only equity paid-up share capital. This does not include preference share capital. It also includes any form of premium earned on the shares and reserves. However, it does not include any amount of a borrower fund. The Net Owned Funds of an NBFC may also include any gifts received from the spouse.
Total Owned Funds of an NBFC consist of the Paid-up Equity Capital, Free Reserves, Share Premium Account Balanceand Capital Reserve. The NOF of a company is calculated by deducting the Revaluation Reserves, Balance of Accumulated Loss and Book Value of the Intangible Assets from Total Owned Funds.
|Net Owned Funds = Total Owned Funds – Revaluation Reserves – Balance of Accumulated Loss – Book Value of Intangible Assets|
Also, if the company has any investment in the form of shares of any other NBFC or debentures and shares of a subsidiary and group company more than 10% of the owned funds, the same is deducted from its Net Owned Funds.
Process of NBFC Registration in India
To register an NBFC in India, the following process must be followed:
Company Registration and Minimum Capital Requirement for NBFC
The applicant company must be registered the company under the Companies Act, 2013. The applicant company must then ensure that it has fulfilled the minimum capital requirement for NBFC.
Once the company registration is done, the capital of the company must be deposited in the form of a bank fixed deposit, and a No Lien Certificate must be obtained from the bank.
NBFC Registration Application with the RBI
Once the first two steps are completed, the company must file an application for NBFC registration with the Reserve Bank of India. The application must be filed along with the requisite documents. The process is highly complicated, and it is advised to consult experienced NBFC experts to complete the NBFC registration procedure.
Hard Copy with the RBI
The primary application filing and documentation process is online. However, the applicant company must also prepare a complete set of physical documents and file the documents with the regional office of the RBI at the earliest.
Queries by RBI and Replies
The RBI takes around 6 to 8 months to complete the NBFC registration process. During this period, the RBI may raise different queries multiple times, and the applicant must send the appropriate reply to these queries within the prescribed time period. This is done in order to clear any doubts that the RBI has regarding the applicant and giving the applicant a chance to remove any mistakes or omissions from the application.
Once the RBI is satisfied and received replies to all the queries raised, it issues the license to the company to operate as a Non-Banking Financial Company (NBFC) in India.
Documents Needed for NBFC Registration
To obtain the license for operating as an NBFC, the following documents must be filed along with the NBFC registration application:
- Certificate of Company Incorporation.
- Details about the Board of Directors and a brochure of the company.
- Copy of PAN and Corporate Identity Number (CIN) of the company.
- Documents confirming the registered office address of the company.
- Certified Copies of the Memorandum of Association (MoA) and Articles of Association (AoA).
- Directors’ profile signed by each director.
- Credit reports from the Credit Bureau of each Director.
- Copy of the Board Resolution warranting that the company has not carried out or halted any NBFC activities and will not carry any such activities until the NBFC registration is received.
- Copy of the Board resolution on ‘Fair Practices Code’.
- Certificate by the Statutory Auditor mentioning that the company is not holding or accepting any form of public deposits.
- Certificate of the Statutory Audit or mentioning the owned funds as on the date of the application.
- Details of the bank account, balances, loans, credits, etc.
- Audited Balance Sheet,and Profit and Loss Statement, as well as the Directors’ and Auditors’Report for the previous three years.
- Self-certified copy of the Bank Statement and Income Tax Returns.
- Business Plan of the company about its next 5-year plan-of-action, along with forecasted Balance Sheet, Cash Flow Statement and Profit and Loss Statement.
NBFCs That Do Not Need Registration with the RBI?
There are certain kinds of NBFCs that do not need to obtain any registration from the RBI, but are regulated by a different regulator in India. These NBFCs are:
- Core Investment Companies.
- Merchant Banking Companies.
- Chit Fund Companies defined under the Chit Fund Act, 1982.
- Nidhi Companies notified under the Companies Act, 2013.
- Companies engaged inStock-Broking/
- Housing Finance Companies.
- Venture Capital Companies.
- Insurance companies or Insurance Web Aggregators.
|Kind of NBFC||Regulatory Authority|
|Hire Purchase Finance Companies||RBI|
|Equipment Leasing Companies||RBI|
|Residuary Non-Banking Companies||RBI|
|Chit Fund Company||Registrars of Chits of the concerned States|
|Nidhi Company||Department of Company Affairs|
|Micro financial companies||Department of Company Affairs|
|Housing Finance Companies||National Housing Bank|
|Insurance Companies||Insurance Regulatory and Development Authority (IRDAI)|
|Stock Broking Companies||Securities and Exchange Board of India (SEBI)|
|Merchant Banking Companies||Securities and Exchange Board of India(SEBI)|
Non-Banking Finance Companies (NBFCs) are pro-actively addressing the finance requirements of a vast segment of society. They are serving a previously unserved and ignored section of small businesses and low-income generating individuals who were not accepted by the traditional banking institutions in India.
NBFCs are simplifying the way people access financial assistance by leveraging both physical and digital channels. They are connecting with a large market base, and running a profitable business model in addition to contributing to the economic development of the country. While starting an NBFC is a profitable and lucrative business idea, the process of NBFC registration can be challenging if done alone.
One of the main components of NBFC registration is ensuring that the business fulfils the minimum capital requirement for NBFC companies as provided by the Reserve Bank of India. The RBI has cancelled  around 1700 NBFC licenses in financial year 2018 due to their failure to meet minimum capital requirements. This makes it crucial for any new NBFC aspirant to consult skilled professionals who can help them with their end-to-end NBFC registration. Swarit Advisors has a team of NBFC experts who can assist you at each step of your NBFC registration and help you establish and operate a successful NBFC in India.