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What is an NBFC?

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 basic requirement for NBFC Registration in India

  • It should be a Company registered under the Companies Act 2013.
  • The Company should have a minimum net owned fund of Rs. 2 Cr.
  • The main business activity of the Company should be financing and lending.
  • At least one Director of the Company should have the working with Indian Bank/ NBFC.

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.

What is the Meaning of "Owned fund" and "Net owned fund" for the purpose of NBFC Registration?

Owned Fund

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

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 types of NBFC Registration with RBI

The classification of NBFCs can be divided into following three broad categories:

  • On the basis of Liabilities.
  • On the basis of Size.
  • On the basis of Activity performed.

Classification of NBFC Registration for Filling of Application for CoR at RBI

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.

Within the broad categorization depicted by the chart, the different types of NBFCs are as follows

1. Asset Finance Company (AFC)

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) 

  • It provides finance for heavy physical assets like car, Machine
  • 60% total loan book and income must be from Assets financing Company
  • For NBFC registration as AFC, the Minimum Capital requirement is Rs. 20 Million.
  • The Capital must be in the form of Fixed Deposit. After RBI Approval you can use these funds for lending business.

2. Loan Company (LC)

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-

  • Personal Loan/ Cash Loan
  • Business loan (SME & MSME)
  • Loan Against Property,
  • Gold Loan,
  • Loan against shares etc,
  • Payday loan & all type of unsecured loan
  • For NBFC registration as Loan Company, the Minimum Capital requirement is Rs. 20 Million and Such initial capital need to keep as a fixed deposit in the account of the company until NBFC license has been granted by the RBI.  

3. Micro Finance Institution (MFI)

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)

  • It provides an unsecured loan to a lower income group. (Rural Rs. 1 lac p.a & 1.60 lac p.a in urban)
  • Loan Max Rs .60,000/-  in the first cycle and subsequent Rs. 1,00,000/-.
  • For Registration FD / NOF Rs. 50 Million is required.

4. Infrastructure Finance Company (IFC)

  •  IFC deploys at least 75 percent of its total assets in infrastructure loans,
  • Has a minimum Net Owned Funds of ₹ 300 crores,
  • Has a minimum credit rating of ‘A ‘or equivalent, and
  • A CRAR of 15%.

How you can apply for NBFC Registration?

  • Click on Get Started button on our Website.
  • Fil your Name, Cell No and Email id.
  • You will have directed to the Payment page, Pay the token Money or do not pay.
  • If you make a payment you order is generated and immediately our team will call you and   will send you a proposal.
  • Sign Service Level Agreement.
  • After Submission of Documents to RBI, it usually takes 90 days to 120 days.
  • Start you finance business.
  • Subscribe Swarit Advisors NBFC Annual compliance package.
  • Sign Internal Audit Package with Swarit Advisors.

New Innovations in The Financial Services Performed By The NBFCs

Peer-to-Peer (P2P) Lending Services

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.

Payday Loan

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.

Gold Loan

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

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.

Steps for NBFC Registration

  • Formation of Company under the Companies Act.
  • Opening of Bank Account.
  • Collection of all the documents from the Directors and Company.
  • Preparation of Business plan and other allied documents.
  • Preparation of Detailed application.
  • Deposit the amount of Rs. 20 Million in the Bank account of the Company.
  • Submission of application with the RBI.
  • NBFC License is subject to your background and Character.

Part A - Documents Checklist NBFC Registration (Under Companies Act 2013)

  • Identity proof (Copy of Pan Card) of proposed directors.
  • Address Proof (Bank Statement/DL/Voter ID Card) of proposed directors.
  • Passport sized photograph of proposed directors.
  • Scanned copy signatures of proposed directors (Sign same as on pan card).
  • Address proof of the proposed registered office address (Utility bill/Rent agreement/sale     Deed etc.).

Part B – Documents checklist for NBFC Registration with RBI

  • Certified copy of Certificate of Incorporation issued by the registrar of companies.
  • Memorandum and Articles of Association of the company.
  • The Audited balance sheet and Profit & Loss account along with director’s & auditor’s report for the entire period of the company's existence, or for last three years, whichever is less.
  • Copy of the certificate of Director's highest educational and professional qualification.
  • Detailed profile of each director, separately filled up and signed by each director.
  • Copy of Director's experience certificate in the Financial Services Sector (including Banking Sector).

Part C - Documents checklist for NBFC Registration with RBI in case of FDI

  • In case the promoter is Individual.
  • Identity proof of proposed foreign investor.
  • Address Proof (Bank Statement/DL/Voter ID Card) of the proposed foreign investor.
  • Passport sized photograph.
  • Net worth certificates.
  • Details of the bank accounts/bank balances/ complete postal address of the branch/bank, loan/credit facilities etc. availed.

Note: All the above documents should be notarized and apostilled by a public notary of the State of the applicant.

In case the NBFC is a Joint Venture of Indian and Foreign Company

In addition to the documentation requirements mentioned in the Part A and B following additional documents will be required for the same:

  • Identity and Address proof of Promoters and Directors of the foreign entity.
  • Certificate of Registration of the Foreign Company.
  • Copy of Annual Returns of both the Entities.
  • A Valuation report shall be required from the registered merchant banker.

Note: All the above KYC documents should be notarized and apostilled by a public notary of the State of the applicant.

Advantages of NBFC Registration

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

  • Authorization to do the financing activities all over India.
  • A registered form of organization.
  • More Reliability.
  • Increased customer base.
  • Easy expansion.
  • Easy funding.
  • High recognition.

What is Deposit-taking NBFC?

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-

  • Based upon the Net Owned Funds of the Company.
  • The class of the NBFC, such as Asset Finance Company or Loan/Investment Company.
  • Credit Rating.
  • Based on the combination of factors mentioned above, after the NBFC License, the Company is allowed to accept public deposits as a multiple of Net Owned Funds. There is also the requirement to maintain a certain portion of deposits as liquid assets helpful in making repayment at the time of maturity.

Why Deposit-taking NBFC Registration is not allowed?

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.

Compliance requirement after NBFC Registration in India

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 Registration

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.

Registration with Credit information companies

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.

Registration and Reporting to E-KYC

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.

Annual Compliance requirement after NBFC Registration

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.

Why fresh NBFC registration is better than NBFC takeover?

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:

  • NBFCs are not considered as a part of the payment and settlement system in the country and hence NBFCs cannot issue cheques drawn on itself.
  • While banks are incorporated under the Banking Act, NBFC is a Company, incorporated under The Companies Act, 2013.
  • As far as lending is concerned banks tend to target corporate as well as retailers. On the other hand, NBFCs focus towards the retail sector. For example, this could be in vehicle finance, consumer loans etc.
  • Banks tend to frequently issue debit/credit cards and other pre-paid instruments depending on the needs of the customers, while NBFCs cannot do so.
  • Rating is another key difference between banks and NBFCs. For example, the deposits of NBFCs are rated, while the deposits of banks are not.

How NBFC P2P (Market Place lending) works as different from Banks?

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.

NBFC as “Fintech Start-ups”

“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:

  • NBFC can be registered with a Net owned fund Rs. 2 Cr only and even for the small bank Net owned fund should be Rs. 100 Cr.
  • NBFCs are primarily focused on meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.
  • The processing of loans from NBFCs is much faster as compared to the Banks. Also, there is less paperwork and less stringent compliances in the case of availing loans from NBFCs.
  • NBFC Registration can be completed in 90 to 120 days whereas even for small bank registration it takes 12 to 24 Months.
  • The costs of establishing NBFC is usually low making it a more lucrative option as compared to banks.
  • Less compliance in NBFCs as compared to the banks.
  • Credit growth of NBFCs is noted at 24.3% per year as against 21.4% for banks.

What is an Alternative Credit scoring model?

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.

Future of NBFCs in India

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.

Frequently Asked Questions on NBFC

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.

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