NBFC Refers to the Non-Banking financial company. India is a country where most of the population lives in rural areas only. Our banking system has not been developed so far and has not reached the rural areas properly yet. The people living in these areas find it difficult to grow their businesses and to satisfy their financial needs.
Hence, this is the time where the concept of NBFC comes into the picture to rescue. One can register an NBFC and do the lending activities in the area where it is required the most and also to capture that market. However in urban areas as well the traditional lenders do the lending and financing activities in an unorganized manner. NBFC registration offers more organized and regulated form of lending business in India.
If you are willing to apply for NBFC License then the very 1st Step is to register a private limited or a public limited company mandatorily before going for NBFC Registration with the RBI. The Applicant Company must comply with the provisions of the Companies Act. 2013. The NBFC is primarily engaged in the business of granting loans and advances, acquisition of shares/ bonds/ stocks/securities/debentures issued by the Government or local authorities or other marketable securities of a like nature, leasing & hire-purchase but does not include any institution whose principal business is that of industrial activity, agriculture activity, sale or purchase of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. NBFCs are those companies which are not a proper uniform bank and don’t hold a banking license but provide a variety of helpful and support services to the borrowers, investors and public deposits in selected sectors of business.
The most preferred type for NBFC registration are financing and leasing, investment, hire-purchase, commercial and industrial loans & advances, deposits, etc. if you are planning to apply for NBFC License, always prefer for Loan Company. NBFC Loan Company is a very popular structure in India.
The technical director can be non-Executive. If you are not from the finance background, always prefer to hire a Mentor who can guide you. At Swarit Advisors, we have a wide network of Ex-Bankers. We can connect you to them and you can gain the idea from their experience.
Owned Fund is an addition of Paid-up equity capital + Preference Shares which are compulsorily convertible into equity+ free reserves+ balance in share premium account + capital reserves representing surplus arising out of sale proceeds of asset (excluding reserves created by revaluation of asset) Minus therefrom accumulated balance of loss, deferred revenue expenditure and Other intangible assets
Net Owned fund is a Owned Fund minus (the amount of investments of such company in shares of its subsidiaries companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group) to the extent it exceeds 10% of the owned fund.
The classification of NBFCs can be divided into following three broad categories:
a) Type I - NBFC-ND accepting public deposits / intending to accept public funds in the future and having customer interface/ intending to have customer interface in the future.
b) Type II - NBFC-ND Not accepting public funds/ Not intending to accept public funds in the future and or Not having customer interface/ Not intending to have customer interface in the future.
An Asset Finance Company is one of the second most popular categories of NBFC that provides finance to physical assets involving huge amount of funds such as automobiles, lathe machines, tractors, earth moving and material handling equipment's, generator sets, moving on own power and general purpose industrial machines. If you are willing to do assets financing then make sure while filling application for NBFC Registration you need to mention the Registration types as AFC.
Features of AFC (Assets Finance Company)
Loan Company is that category of NBFC whose only activity is to provide loans to the public at large for meeting their liabilities by making loans or advances or otherwise. It is very common in nature. RBI also issues the License for this category at ease in comparison of other categories.
It provides the following types of Loan which are as follows-
NBFCs MFI is another type of MicroLoan Company which targets the lower income group sector and disbursed the loan to them. If you are targeting to give a small loan or Payday loan you can choose normal Loan Company as stated above. The microfinance company has subsidies from the government. This MFI Registration takes more time as compared to normal loan companies.
Following are the key features of MFI (Micro Finance institution)
Peer to peer lending is a crowdfunding online model where people looking to invest their money with the people who want to borrow can do so. Peer to peer lending license you need same capital as NBFC Loan Company. RBI has centrally introduced a detailed guideline about the P2P Lending license. P2P Lending is a marketplace lending driven by the community. The concept comes with the purpose that the people who have surplus fund can earn more interest than saving or depositing in FD account and reduce the complex procedure of documents subject to risk. In India, P2P Lending is at the early stage however, only a few players are working. Examples are Lendbox, Faircent, i2i Funding, Shiksha Financial, GyanDhan, and Market Finance.
The payday loan is also known as a payday advance or salary loan. It is a small, short-term unsecured loan where repayment of the loan is linked to a borrower's payday i.e., the day they receive their pay that is why it is known as Payday loan. Examples are Rupeeredee, My Loan Buddy, Quick Credit, and Loan4smile. If you are planning to start Pay Day loan business, you need to Select Loan Company, while filing an application for NBFC Registration with RBI.
NBFCs provide loans against security of gold jewelry. Although banks are also involved in the gold loan business, NBFCs' gold loans have witnessed phenomenal growth due to their customer friendly approaches like simplified sanction procedures, quick loan disbursement etc. Branches of gold loan NBFCs increased significantly during the last couple of years mostly housed at semi-urban and rural centers of the country. For Loan, Company RBI has issued a detailed guideline which needs to follow after CoR has been granted. Make sure if you are planning to apply for NBFC Registration and you target loan product is Gold Loan then you need to create a strong business plan for NBFC, Justification of success of your business model is the must.
Loan against property as the name implies refers to a loan given or disbursed against any kind of property (residential or commercial) through a mortgage. This loan is generally given as a certain percentage of the property's market value which is usually around 40% to 60%. Financial lending institutions have seen a strong growth in the loan against property market over the years. Whether it is banking establishments or non-banking institutions, both have logged double and even triple-digit year on year growth in recent times. LAP is a very popular loan product as its secured by an immovable property. LAP business can be carried in Loan Company. Hence, while applying for NBFC License need to mention about the LAP. Also, Your NBFC Business plan must have sufficient details about the Loan against property.
Note: All the above documents should be notarized and apostilled by a public notary of the State of the applicant.
In addition to the documentation requirements mentioned in the Part A and B following additional documents will be required for the same:
Note: All the above KYC documents should be notarized and apostilled by a public notary of the State of the applicant.
Many people do the financing activities in an organized manner. However, it is not legal in India. If you want to undertake any lending or investment activities then you need to take the NBFC License from RBI for carrying out such activities.
There are following advantages of getting an NBFC License
NBFCs making the application for issuance of Type-I, NBFC Companies are considered as deposit-taking NBFCs. There are certain limits on accepting the deposits from the public in order to ensure that the funds accepted by the NBFCs are not used by the promoters for their personal benefits.
The limits for deposits vary on the basis of numerous factors. Some of them are being listed below-
The experience of RBI with NBFCs-D "Type-I" had not been positive in the past. The Companies accepted Deposits from the public at large and had defaulted in the repayment of the same. Due to the non-compliances with the norms and considering the Public interest at large the RBI is very stringent in issuing the certificate to Deposit-taking NBFCs. Nowadays it has stopped the issuance of Licenses to NBFCs in "Type-I" category.
Once RBI has granted the NBFC License, you need to follow certain other additional requirements are there to be complied with such as:
FIU-IND is the central national agency of India responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.
FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering, related crimes, and terrorist financing. As NBFCs are primarily engaged in the financial activities, it is mandatory on their part to report their transaction and take the registration with the FIU-IND.
CIC or Credit Information Company is an independent third party institution that collects financial data regarding loans, credit cards and more about individuals and shares it with its members. Banks and NBFCs are required to take registration with the all four CICs.
The E-KYC has been set up with an objective to reduce the burden of producing KYC documents and getting those verified every time when the customer creates a new relationship with a financial entity. The RBI has mandated all the financial entities to get the registration with the Authority.
Once NBFC registration is done with the RBI, have to make certain annual compliances. The NBFCs having the net asset size of less than Rs. 100 cr. have to file an Annual Return in Form NBS-9 also at the end of March every year, all NBFCs are required to submit an annual certificate duly certified by the Statutory Auditors that the company is engaged in the business of NBFC requiring it to hold the CoR.
People always confuse in whether should I go for fresh NBFC Registration or should I go for NBFC Takeover. However, if compared the timeline and the contingencies involved in the takeover is much higher as in the case of Fresh Registration. We have experienced 90% Success ratio in case of NBFC Registration and only 30% Success in NBFC takeover.
The functioning of NBFC is similar to that of Banks only for the lending activities. There is a significant difference in the functioning of both the entities. We have enlisted few of them:
RBI has centrally introduced a detailed guideline about the P2P Lending license. P2P Lending is a marketplace lending model. The concept comes with the purpose that the people who have surplus fund can earn more interest than saving or depositing in FD account and reduce the complex procedure of documents subject to risk.
P2P model is basically an online financing model in which NBFCs develops an online platform to fulfill the short-term financial needs of the public at large. Through this mechanism, people who are having the surplus funds can lend their money for comparatively a short period at interest thereby earning a good amount of return on their investment. At the P2P platform, both the lenders and borrowers are unknown to each other. They register themselves on the portal by uploading their personal documents.
Those who are in need of short-term finance like around for 1-10 days can place the requirement. The online system matches the requirement of the borrower with that of the lender. While Banks work traditionally. Lenders need to visit the offices of the bank and they need to open their account, deposit their surplus money into that account and only then they will be getting the return on their investment. Also, the rate of interest is very low in case of Bank deposit. Borrowers also face a challenge while getting the loan processed at the bank due to their extensive documents requirement and restrictions.
“Fintech” as the word suggests is a business model developed with the use of computer programs and other technology to support or enable banking and financial services. In the era of technological developments, everyone is looking for an online solution to his or her problems. In the financial sector also certain new business models have been developed where one can explore the opportunities and grab the market as it is in a developmental phase and comparatively a new field. Gone are the days when one needs to wait in long queue for processing their loan applications, waiting for the bank executives to answer their queries and even after that their application was rejected due to the lack of documentation and other technical requirements.
Nowadays, NBFCs are functioning in this area and new business models like a P2P marketplace, Payday Loan, Loan against Property, Alternative Credit Scoring and certain other new avenues have come into the market. All of this can be done only after getting a valid certificate of registration from RBI. Following are some advantages NBFCs carries for Fintech Startups:
In the financial market, credit rating plays an important role while you apply for a loan. Our existing credit rating agencies, however, unable to assign credit scores to many fresh loan applicants who haven’t borrowed earlier. This has drawn the attention of various private agencies to fill this gap using various unique techniques.
Banks are focusing more on retail customers, where first-time borrowers make up nearly half of all new retail applications. However, such applications are approved only when they are backed by a credit agency score and a report supporting the customer’s income claim and repayment record.
Alternative credit scorers use alternative measures to assess credit risk, typically analyzing a borrower’s Internet footprint, social media behavior and employing other means such as recording their ATM transactions, online payments etc. While lenders see the logic behind acquiring younger customers to expand their retail base and the need to use alternative credit assessment tools to ensure creditworthiness, they are yet to fully warm up to them.
Most credit Agencies do not take into account the repayment record on smaller loans such as those taken to buy electronic appliances or for short-term requirements, as they are small and repaid in a couple of months. But these models use this data point to keep a close tab on these transactions.
The financial sector of India is growing rapidly as various new Banks, NBFCs and other financial Institutions are coming in the market. They are backed by the current digital equipment and technology.
The banks being the sole financial intermediaries in the past have accumulated heavy debts, their lending capacity is declining day by day due to their increased NPA (Non-Performing Assets) and hence NBFCs are coming into existence and marking their presence in the financial market. The main reasons for the success of NBFCs are lower costs, wider reach, and strong risk management capabilities with a better understanding of customer segments. NBFCs have largely contributed towards the growth of the economy over the past few years.
It is believed that NBFCs have a strong understanding of the market than the banks which usually help them in positioning themselves as a better alternative to banks. With the increasing demand for digital innovations in the daily life of the consumers, NBFCs have to think about their strategy to enhance their position in the market and the process of an end to end customer facing.
In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every Company should get registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
Taking over an existing company always seems to be a better option for a person intending to do the Financing activity but considering the technicalities involved, it is always better to go for fresh NBFC registration as compared to NBFC takeover because an existing company may have defaulted or may not be regular in making the compliances also the RBI takes more time in approving the transfer of shareholding as compared with the approval for fresh NBFC License.
An investment Company is one whose main business activity is the acquisition of shares, bonds, debentures and other marketable securities, on the other hand, CIC is one who acquires securities and advances loan to its group companies only. NBFC License is required to operate as an Investment company while for CIC's License is not required until the net assets of the CIC are below Rs. 100 cr.
The RBI has allowed 100% FDI in the NBFC sector subject to them without any capitalization norms.
It is as per the mutual consent between the lender and borrower of the Company and also as per the Company's policy on the same. RBI does not play any role in this matter.
P2P Lending, Gold Loan, Vehicle Financing, Payday Loan, Short-term trade financing etc.
A payday loan is also known as the payday advance or salary loan. It is a small, short-term unsecured loan where repayment of the loan is linked to a borrower's payday i.e., the day they receive their pay that is why it is known as Payday loan.
No, an NBFC cannot issue these instruments.
Yes, there is Ombudsman for hearing complaints against NBFCs.
Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies, and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.