How to Start a NBFC Registration

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An Overview of NBFC Registration

NBFC stands for Non-Banking Finance Company, is a vital part of the Indian financial system and these companies have multiplied in huge numbers and serving the public at large to support the financial inclusion program with affordable credit at home. NBFCsare primarily engaged in providing loans and advances, acquiring shares and stocks and other investible securities. RBI grants License to the NBFCs to carry out the business of providing various kinds of loans such as Personal Loans, Asset Financing, SME Lending, Gold Loans, Loans against Property, Loans against Shares, Short term Personal Loans, etc.

In India, NBFCs are regulated by the RBI within the framework of the Chapter IIIB of the RBI Act, 1934 and any rules made thereunder or any directions issued under it under the RBI Act. In India, Non-Banking Financial Company is considered a rapidly growing business vertical and there are a lot of banks; however, some areas are still untouched and no banking facilities are available there; this consequently has resulted in the boosted demand for getting loans from NBFCs and ultimately more number of NBFC Registration. In the last few years, the NBFC Registration has taken a boom and played an essential role in the growth of the financial sector.

NBFCs have managed to attract a stake in the market in banking-related services. Non-Banking Financial Services are involved in the business similar to a bank but do not cover everything that a bank is indulged into. NBFCs can raise funds from the public directly or indirectly and can freely lend them to ultimate spenders.

Role and Functions of an NBFC

The role and functions of an NBFC in India can be summarised as follows:

  • To develop sectors like Infrastructure, Education and MSMEs;
  • To assist in wealth creation;
  • To generate substantial employment;
  • To provide financial assistance to the economically weaker section of the society;
  • Faster processing loan;
  • Digital platform to offer loans using advanced technology;
  • To assist in the economic development of the country;
  • To contribute to the state exchequer;
  • To provide specialised credit;
  • To help in the growth of the financial market.

What are the Focus areas of NBFC? 

NBFCs have grown rapidly as indicated by their asset growth pattern over the years:

  • Customised Loan Products: The need of one customer is different from others and so is the funds' requirement;
  • Flexible rate of interest: To stand with the Banking channels, NBFCs shall strive to serve competitive interest rates to the customers;
  • Quick Disbursal of Funds;
  • Minimal documentation requirement;
  • Serving the underserved section; and
  • Efficient Recovery Mechanism.

Principal Business of an NBFC in India

The principal businesses of an NBFC in India are as follows:

  • Secured Loan (LAP);
  • Gold Loan;
  • Unsecured Personal and Business Loan;
  • Marketplace Lending (Digital Lending );
  • Investment in Shares or Mutual Funds or Debentures;
  • NBFC must maintain 50% of its assets as Financial Assets and 50% of its income must be generated from Financial Activity.

In India, an NBFC does not include the entities with the principle business as follows:

  • Agriculture Activity;
  • Industrial Activity;
  • Purchase and Sale of any goods;
  • Purchase/ Sale/ Construction of an Immovable Property.

Different Types of NBFCs in India

Basically, NBFCs are categorised into two different parts and you can check the same below:

  • On the Basis of Liabilities:
  1. All NBFCs-ND whose asset size is Rs. 500 crores and more as per the last audited balance sheet is deemed as Systemically Important NBFC (NBFC-ND-SI);
  2. The asset size of the group companies to be clubbed;
  3. NBFC-ND-SI has to follow the policies suggested by the Reserve Bank of India mandatorily & exempt from Credit Concentration Norms;
  4. NBFC-ND- Non-Systemically Important is exempt from observing Prudential Norms, 2015 (except Annual Certificate).
  • On the Basis of Activities:
  1. NBFC- Investment and Credit Company (ICC): ICC is one common License for all types of financing business in India. Earlier, there were three different licenses, namely Loan Company, Asset Finance Company and Investment Company. Now, after the merger into one single License defined as ICC (Investment & Credit Company), it allows the license holder to engage in various kinds of wholesale, retail loans and Investment business. The ETA for the NBFC ICC License is estimated to be 120 days.
  2. NBFC-Microfinance Companies (MFIs): The NBFC-MFIs disburse loans to the households whose annual income in rural areas does not exceed ₹ 1,00,000 or urban and semi-urban household income does not exceed ₹ 1,60,000. In simple terms, it is formed to provide credit to economically disadvantaged groups.
  3. NBFC-Factors: It is concerned with the acquisition of receivables of an assignor/extending loans against the security of the receivables at a discount.
  4. NBFC-Peer to Peer Lending (P2P): P2P lending intermediaries provide an online platform consisting of highly secured credit and risk assessment fintech-driven platforms that run automatic risk assessment checks of the applicant and determine credit risk of the borrowers and Artificial intelligence-based Platforms, Automatically publish the loan requirement along with the borrowers profile and risk rating on the platform. With the peer-to-peer lending marketplace, borrowers can take loans from individuals who are willing to lend their money for an agreed interest rate to the borrower. For a P2P Lending License, it may take approximate 180 working days for the in-Principal Approval from RBI. And after In-Principal Approval, the Applicant will require to undergo the Mandatory CISA Audit.
  5. NBFC-Account Aggregators: This is the newest category of NBFC. NBFC Account Aggregators (AA) enable sharing of data across multiple financial sector organisations and act as "consent brokers", i.e., the intermediate data transfer among the financial organisations with the consent of the user. The activities of Account Aggregators involve the accumulation of financial data that involves gathering information on a single platform from varied accounts such as bank accounts, investment accounts, business accounts, consumer accounts and other related financial accounts. The Net-Owned Fund requirement for NBFC-AA is also INR 2 crores.
  6. Infrastructure Finance Company (IFC): This type of NBFC deploys at least 75 per cent of its total assets in infrastructure loans.
  7. NBFC-Systemically Important Core Investment Company (CIC-ND-SI):  It’s mainly involved in investment in equity shares, preference shares, debt or loans of group companies.
  8. NBFC-NOFHC (Non-Operative Financial Holding Company): Facilitation of promoter groups or promoters in establishing new banks.
  9. MGC (Mortgage Guarantee Company): Undertaking of mortgage guarantee business.
  10. NBFC-IDF (Infrastructure Debt Fund): The activities of this NBFC are mainly concerned with the facilitation of the flow of long-term debt into infrastructure projects.

New Scale-Based Regulations of NBFC

According to the revised framework, the Reserve Bank of India has notified 4 scale-based layers to regulate NBFCs, namely, the Base layer, upper layer, middle layer, and top layer. Below is the table that categories NBFCs into different layers:

Layers

Types of NBFCs

Base Layer

  • Non-deposit accepting NBFCs (comprising NBFC-ICC, NBFC-Factor, NBFC-MFI, and NBFC-MGC) with an asset size of below Rs. 1000 crore;
  • NBFC-AA;
  • NBFC-P2P;
  • NOFHC;
  • Those NBFCs that haven't availed public funds & don't have any customer interface.

Middle Layer

  • NBFC-D;
  • Non-Deposit accepting NBFCs with an asset size more than Rs. 1000 crores;
  • HFC;
  • CIC;
  • NBFC-IFC;
  • IDF;
  • SPD;

Note: Except for IDF & SPDs, all these NBFCs can be shifted to the upper layer.

Upper Layer

  • RBI will recognise NBFCs as warranting enhanced regulatory requirements;
  • RBI will examine the top 50 NBFCs as per their total exposure/identify other NBFCs to be included in this layer;
  • When the NBFC has been classified in the upper layer, it must remain in the upper layer for five years regardless of whether it satisfied the scoring criteria or not;
  • The top 10 NBFCs (Non-Banking Financial Companies), as per their asset size, will be in the upper layer;
  • The RBI shall intimate select NBFCs, and they are required to adopt a policy approved by the BODs (Board of Directors) within 3 months for an enhanced regulatory framework. Such a framework needs to be implemented within 24 months.

Top Layer

  • RBI will not categorise an entity or company to the top layer if it doesn't find any systematic risk to the NBFC in the upper layer;
  • The Reserve Bank of India shall identify & shift NBFCs to the top layer if it believes that the NBFC carries potential systematic risk.

Revised Regulatory Framework for NBFCs – 2021

On October 22, 2021, the RBI introduced a scale-based revised regulatory framework for NBFCs with a view to having a tight oversight of the sector. According to this revised framework, there will be more categorised of NBFCs as per their activity with strict rules.

The key highlights of the revised regulatory framework for NBFCs:

  • There will be a ceiling of Rs. 1 crore per borrower for financing subscription to IPO;
  • The regulatory structure of the Non-Banking Financial Companies will comprise y layers, as we discussed above.
  • The NOF requirement will be hiked for all NBFCs to 10 crores with certain exceptions and you can check the table below:

NBFCs

Present NOF

By Mar 2025

By Mar 2027

NBFC-ICC

Rs. 2 crores

Rs. 5 crores

Rs. 10 crores

NBFC-MFI

Rs. 5 crores

Rs. 7 crores

Rs. 10 crores

NBFC-Factors

Rs. 5 crores

Rs. 7 crores

Rs. 10 crores

  • In the case of NBFC-AA, P2P, and NBFC without any public funds & no customer interface, the NOF will be Rs. 2 crores;
  • NBFCs will be required to identify loans overdue for more than 90 days as NPAs by March 2026 & over 150 days by March, 2024.

Current and Revised NOF Requirements for Different NBFCs

Type of NBFC

Current NOF Requirements (INR)

Revised NOF Requirements (INR)

NBFC P2P

2 crores

No Revision

NBFC-AA

2 crores

No Revision

NBFC-ICC without public funds & without customer interface

2 crores

No Revision

NBFC-Factor

5 crores

10 crores

HFC (Housing Finance Company)

20 crores

No Revision

SPDs undertaking core Activities

150 crores

No Revision

SPDs undertaking non-core Activities

250 crores

No Revision

NBFC-IDF

300 crores

No Revision

NBFC-IFC

300 crores

No Revision

Other NBFC-ICC

2 crores

10 crores

NBFC-MFI

5 crores

10 crores

NBFC-MGC

100 crores

No Revision

 

Advantages of NBFC Registration in India

In India, the advantages of an NBFC Registration are:

  • Saves Time and Cost: In contrast to small banks, the process of incorporating an NBFC is much simpler. Opening a bank involves a large amount of capital, time and cost, whereas the same is not in the case of an NBFC. One just needs the assistance of a good NBFC consultant with prior experience to obtain NBFC Registration in India.
  • Easy Recovery of Loan: NBFCs work systematically and offer customised loan products with achievable repayments. It becomes a convenient process for the borrowers as they can repay the loan amount quickly within the prescribed time period.
  • Economic Growth: Businesses and individuals are looking for an easy and reliable source of credit for their financial requirements. NBFCs provide affordable and secure credit facilities to an unserved market for their personal and business-related credit requirements. Therefore, NBFCs have contributed to the country's economic growth by providing financial freedom to MSMEs, self-employed professionals and individuals.
  • Trading Money Market: NBFCs serve the benefits of trading in money market instruments.
  • Provide Multiple Choices: Due to technological advancement, NBFCs are providing multiple choices to reach a huge audience at a quicker step. Non-Banking Financial Company covers both the large businessperson & small sectors by providing them multiple choices to avail themselves the credit facilities.
  • Allowed FDI: Under NBFC, up to 100%, FDI (Foreign Direct Investment) is also an amazing advantage of NBFC Registration. Non-Banking Financial Companies are the largest propellants of starting finance in the country. Also, the financing process is faster & easier compared to Banks.
  • Give Loans to Poor Credit Scorers: Generally, banks check the credit score first and in case of a poor credit score, the bank rejects the loan application. However, NBFCs provides loan to people having less credit score.

Pre-Requisites for NBFC Registration

The Pre-Requisites for NBFC registration are as follows:

  • Company Registration: The company must be registered under the Companies Act, 1956 of Companies Act, 2013.
  • Experience of Director: 1/3rd of the company's directors must have an experience of a minimum 10 years in the finance field and he or she must be employed as a full-time director.
  • 5-Year Business Plan: An applicant company needs to draft a detailed business plan for the next five years.
  • Minimum NOF: The applicant must possess a minimum Net Owned Fund (NOF) of Rs. 2 crores and tax must be paid on it. However, based on the increase in prices, GDP and regulatory judgment, the entry point norms proposed to be revised from Rs. 2 crores or 20 Crores. Applicable immediately for new Registration and existing may be given time of 5 years.
  • Qualify Capital Test: The Reserve Bank of India undertakes a quality of capital test to check that invested capital is free of non-compliance with the prescribed laws.
  • Quality of Capital: An applicant company must fulfil the mandatory compliances.
  • Credit History: The Company’s credit score, directors, and its shareholders must be fine, and they must not have defaulted on loan repayment purposely to banks or NBFCs.
  • FEMA Compliances: In the case of involvement of foreign investment, the company must have fulfilled the FEMA Act. 100% FDI is allowed from FATF member countries.

Documents Required for NBFC Registration

The following documents are required for NBFC Registration as follows:

  1. Certified or original copy MOA (Memorandum of Association), AOA (Articles of Association), COI (Certificate of Incorporation);
  2. Net worth certificate of Shareholders, Directors, and Company;
  3. Business profile of Directors and Shareholders;
  4. Income Tax Returns;
  5. Educational qualification certificates of the proposed directors;
  6. KYC details such as PAN of the company, GST Number, address proof of the company;
  7. Highest experience certificate;
  8. Bank account details of the company;
  9. Format of Board Resolution regarding NBFC Registration;
  10. IT Policy;
  11. Loan and Business Structure;
  12. Credit report of directors and shareholders;
  13. Last 3 years of the audited balance sheet;
  14. Related party disclosures;
  15. Detailed action plan for next 5 years, including Risk Assessment Policy & Fair Practice Code;
  16. Report of Banker confirming no lien on fixed deposit.

Procedure for NBFC Registration

The steps involved in the process of NBFC Registration are as follows:

  • In the first step, the applicant needs to incorporate a company in accordance with the provisions of the Companies Act 2013;
  • The applicant should ensure that the minimum NOF of the company is maintained as per the type of NBFC;
  • Then you need to fill out the application form at the official website of the RBI;
  • Submit all the vital documents required for NBFC Registration along with the application;
  • When the application is submitted along with the documents, CARN Number will be generated, which will aid you in tracking the application status;
  • Then the applicant needs to dispatch the application form to the regional office of the RBI;
  • If your application fulfils the minimum requirements prescribed by the regulatory authority, the Registration will be granted.

NBFC Registration with RBI

The RBI has two separate departments to regulate & supervise the functioning of NBFCs in India:

  • Department of Non-Banking Regulation (DNBR): This is responsible for conducting the new or fresh NBFC Registration and it is responsible for preparing the policies & regulations for the NBFCs. The DNBR has a transparent & innovative assessment process for NBFC application. The Department of Non-Banking Regulation will send you an email & a formal notice if they require any extra documents at the time of the NBFC Registration process. The Reserve Bank of India expects your submission or response to the given notice within 7 or 15 or 30 days as per the NBFC Regulations.
  1. Investigation of Shareholders or Directors' profiles;
  2. Regulates & administers NBFC Business;
  3. Publish Circular, Order, and Notifications for NBFC;
  4. Assessment of application submitted for NBFC License (all categories of NBFC);
  5. Communication with applicant company in the pre-registration process;
  6. The communicated final decision to the company with the Approval of RBI (Executive Director Office).
  • Department of Non-Banking Supervision (DNBS):
  1. It is responsible for complying with the NBFC Rules &Regulations issued by the Reserve Bank of India;
  2. Cancel or suspend NBFC License in case of Non-Compliance with the laws;
  3. After approval, DNBR collects the Net Owned Certificate and bankers report before they issue you the original NBFC License;
  4. It is responsible for complying with the NBFC Rules & Regulations issued by the Reserve Bank of India;
  5. On-site inspection or conduct audit from time to time;
  6. Conduct & educate a seminar for the general awareness regarding the NBFC Compliance, Business, and Regulations.

RBI Conditions for Issuing NBFC License

The following conditions must be fulfilled before undergoing the process of NBFC Registration:

  • The Non-Banking Financial Company must be able to pay claims to its present as well as future investors in full;
  • It cannot carry out any operation in a manner prejudicial to the interest of both its existing or future investors;
  • The general character of the Board and the management must not be detrimental to the interest of the public and depositors;
  • An NBFC must have an adequate capital structure and earning potential;
  • It must not be unfavourable to the functioning of the financial sector if the RBI decides to grant an NBFC license to a company;
  • The company's work must be consistent with the economic growth, monetary stability, and other related policies of RBI.

Cancellation of NBFC Registration or License

  1. The business plan is not up to the mark;
  2. NBFC consultants are not experienced;
  3. It can be cancelled in case of insufficient financial experience;
  4. Shareholder and Directors business profile is not satisfactory;
  5. The area of carrying NBFC operations is not promising;
  6. Capital is arranged from a prohibited source.

NBFC Compliances After Getting NBFC License from RBI

  • Formalities Before Commencement of Business: After obtaining Registration but prior to the commencement of business, there are different types of compliances which should be followed for further operations. NBFCs must apply for the following:
    1. Central KYC;
    2. Adoption of FPC (Fair Practice Code);
    3. Adoption of Anti-Money Laundering Policy and IT Policy;
    4. CERSAI Registration;
    5. Registration with 4 credit rating agencies such as CIBIL, Equifax, ICRA, and Experian;
    6. FIU-IND Registration;
    7. Submission of financial information to information utilities;
    8. National e-governance registration.
  • Annual Compliances:
  1. Filing of Annual Return with the RBI;
  2. Tax filing – ITR & GST Returns;
  3. Statutory compliances with the ROCs (Registrar of Companies) Annual Return Filing, Filing of Financial Statements.

Punishment for Non-compliance with RBI Regulation

In India, the RBI has the power to impose a penalty on an NBFC for violating the provisions of the RBI Act. These penalties include:

  • If a company carries out its operations without obtaining NBFC License, the RBI (Reserve Bank of India) can impose a fine of not less than Rs 1 Lakh, which can go up to Rs 5 Lakh or twice the amount involved in such a violation, whichever is more;
  • If a company carries out its operation without obtaining NBFC License, the directors of the company are punishable with imprisonment up to one year;
  • In case of non-compliance with RBI directions, then the defaulter will be liable for imprisonment of up to 3 years;
  • Failure to produce documentation/answer queries: Fine, which may extend to Rs. 2000/- per offence and in case of continuous non-compliance, an additional fine up to Rs. 100/- per day is charged from the first offence;
  • Acceptance of Deposits: Imprisonment or jail up to 3 years & a fine of twice the amount received.

FAQ of NBFC Registration

Yes, an NBFC or Non Banking Financial Corporation can accept deposits.

The loans offered by NBFCs are Gold Loan, SME Lending, Personal Loans, Loan against Property, Loan against Shares Asset Financing, etc.

The minimum NOF for NBFC registration is Rs 2 crores.

An NBFC shall keep its NOF in the current account of the newly formed company in the form of a Fixed Deposit.

Yes, all the Directors in an NBFC must have financial or banking experience.

An NBFC needs a minimum of 2 directors.

The factors considered by RBI are the Right Team, Clean Capital, Business Plan, and Area of Operation.

An NBFC License remains has lifetime validity. However, the same is liable to be cancelled due to non-compliance with the law.

The new areas that can be explored in the NBFC segment are Fintech based lending, P2P, and NBFC-AA.

The PBC criteria for an NBFC are that out of the total assets, 50% must be financial, and the remaining 50% must be generated from the financing business.

Yes, an Existing NBFC or shareholder can form a new NBFC but with subject to the requirement and convincing business Plan.

Yes, the Directors can be common in 2 or more NBFCs.

Yes, for carrying a loan or investment business in India, one needs to apply for NBFC License.

All the unlicensed lending or financing business is deemed to be illegal.

NBFC with asset size more than Rs 500 crores deemed to systemically important NBFCs.

Yes, higher compliance has been set for NBFC-SI.

No, RBI does not regulate insurance, Chit fund, as all such entities are regulated by SEBI, Nidhi Company, etc.

The main difference between the both is that Public funds include ICD, Loan from Banks. However, Public deposits mainly include the souring of funds from individuals.

Yes, the Interest rate is subject to the business plan submitted by the Applicant Company to the RBI.

A Non-Banking Financial Company (NBFC) is a financial institution registered under the provisions of Companies Act, 2013, that deals in financial services.

NBFCs are registered under the Companies Act, 2013, whereas Banks are registered under the Banking Regulation Act, 1949. Further, an NBFC is not allowed to accept all kinds of deposits. However, Banks can easily accept the demand and time-based deposits from their customers.

The two categories of NBFCs are based on Liability and based on Activities.

In India, some of the renowned examples of NBFCs are Muthoot Finance Ltd; HDB Financial Services; Aditya Birla Finance Ltd; L&T Finance Ltd; Tata Capital Financial Services Ltd.

Yes, an NBFC can provide loans to the people in various forms, such as Unsecured Personal Loan, Business Loan, Secured Loan against property, Loan to MSMEs, Loan against Securities, Gold loan, etc.

Yes, an NBFC can list its shares on a recognized stock exchange.

Power Finance Corporation Limited has listed its shares in National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Any company registered under the Companies Act, 2013, can incorporate an NBFC.

No, the FD in NBFC is not as safe as Bank FD. Although the returns offered on deposits by NBFCs are higher compared to bank FDs, however, the risk factor is higher as well.

In India, NBFCs play a crucial role in promoting inclusive growth by catering to the various financial needs of bank-excluded customers. Moreover, it often takes the lead role in offering innovative financial services to the MSME sector suitable to their diverse business needs.

The term “crisis” denotes that IL&FS scam, after which NBFCs in India faced a severe liquidity crisis.

Type 1 NBFC refers to the Non- Deposit taking NBFCs (NBFC-ND) and Type 2 NBFC refers to the Deposit-taking NBFCs (NBFCs – D).

Type 1 NBFCs denotes the NBFC that do not accept public deposits or have any customer interface.

Type 2 NBFC refers to the Deposit-taking NBFCs (NBFCs – D) that accept public deposits and have customer interface.

RNBC stands for the Residuary Non-Banking Company. It is a type of NBFC in which a company is engaged in the business of receiving deposits.

A minimum of 12 months and a maximum of 60 months period is prescribed for an NBFC to accept deposits.

No, an NBFC cannot accept Demand Deposit or DD.

The working and compliance of an NBFC is regulated by the RBI within the framework of the RBI Act, 1934 (Chapter III-B) and the guidelines issued by it.

The formula for calculating NOF is the Share Capital + Share Premium + Reserves and Surplus - Accumulated Losses.

Yes, it is mandatory to obtain NBFC Registration in India.

The functions of an NBFC are Hire Purchasing, Leasing, Retail Financing, Rural Financing, Venture Capital Services, MSME Financing, and Trade Financing.

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