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What is NBFC Registration?

The market of providing loans and advances in India is centuries old practice. It is the medium to disburse funds among those who are in need of the same from those who have excess of it. Earlier, the lending market was not as regulated as today. Now a days, the business of giving loans and advances and accepting deposits is under strict surveillance of the Reserve Bank of India. After many misfortunate events, wherein the business have eloped after accepting huge public deposits, RBI has applied strict norms over deposit-accepting Lending firms. As a result of this, the deposits market are more regulated while the lending market enjoys certain privileges  like no interest rate barriers, evolution of unsecured loans, short term advances, CIBIL access, Digital loans, Block chain technology etc.

Non-Banking Financial Companies or NBFCs are the Companies engaged in the business of Loans and Advances and  accepting of deposits after procuring the license for the same from Reserve Bank of India. The obtaining of the aforesaid license not only requires fulfilling the minimum capital requirement but also satisfying upon various other eligibility criteria and a owning a unique business plan.

The working and operation of NBFCs are quite similar to that of traditional banks. However, they differ from the banks in a few aspects such as NBFCs can’t issue cheques drawn in its favour while the Banks can. Furthermore, the Deposit Insurance and Credit Guarantee Corporation don’t cover NBFC depositors. Nevertheless, NBFC are fastest growing component in the Indian Financial Market owning to an ever increasing demand for funds for various purposes such as education, house, marriage, vehicle, leisure etc.

Functions of an NBFC in India

NBFCs play a vital role in managing the financial services and contribute almost 24.3% GDP to the Indian economy as compared to banks with 21.4%.

In the recent times, NBFCs have experienced unexpected transformation. In addition, the present NBFCs are adopting high-end tech based business model to help them grow and earn effectively. The growth of the Fintech segment have been contributed towards more and more use of internet, smart mobile phones etc, thereby reaching out the banking services in almost every corner of the country.

NBFC carries out several financial activities such as:

  • Providing loans using the method of alternative credit scoring model for assessing the loan application;
  • Lending or acquisition of bonds or stocks or shares or Marketable securities of a like nature;
  • Insurance business, leasing, chit business, hire-purchase;
  • Receiving deposits under any arrangement or scheme in instalment or in one lump sum either by contribution or in other manner.

How are NBFCs different from Banks?

To some extents, NBFCs are pretty similar to Banks, but NBFCs don’t perform every function performed by the Banks. Let's find out major differences between the two from the table constructed below:

Terms

NBFCs

Banks

Regulatory Body

Companies Act, 2013 and RBI

Banking Regulation Act, 1949

Demand Deposit (DD)

Not accepted by NBFCs

Accepted

Payment and Settlement system

Don’t take part

Performs in system

Foreign Investment

Allowed up to 100%

Allowed up to 74% for private sector (49% in case of FDI)

Maintenance of Reserve Ratios Like CRR, SLR

No requirement

Mandatory

Deposit insurance facility

Don’t provide

Provide

Credit creation

Don’t create credit

Create credit

Transaction services

Not provided

Provided

In general terms, although the NBFCs are yet to match with the quantum of facilities provided by the banks, yet the quality is far better and they have a wider reach. Banks are still unable to cover most of the territories which can be a flourishing ground for emerging NBFCs.

Types of NBFCs in India

NBFCs are categorized on the basis of two parameters- on the authorization to take deposits as well as on their operation.

Classification of NBFC based on the basis of Deposits

  • Deposit-taking NBFC
  • Non-Deposit accepting NBFC

Classification of NBFC based on the nature of their activities

  • Asset Finance Company (AFC)
  • Investment Company (IC)
  • Loan Company (LC)

As per the latest amendment, in order to provide NBFCs with greater operational flexibility, it has been decided to merge the three categories of NBFCs viz. Asset Finance Companies (AFC), Loan Companies (LCs) and Investment Companies (ICs) into a new category called NBFC - Investment and Credit Company (NBFC-ICC).

  • Infrastructure Finance Company (IFC)
  • Systematically Important Core Investment Company (CIC-ND-SI)
  • Infrastructure Debt Fund: Non-banking Financial Company (IDF-NBFC)
  • Non-Banking Financial Company- Micro Finance Institution (NBFC-MFI)
  • Non-Banking Financial Company – Factors (NBFC Factors)
  • Mortgage Guarantee Companies (MGC)
  • NBFC- Non-Operative Financial Holding Company (NOFHC)

Basic requirements for obtaining NBFC Registration in India

As prescribed under Section 45 I (a) of the RBI Act, 1934, every entity desirous of obtaining NBFC registration in India must meet the following requirements:

  • The company must be registered under Section 3 of the Companies Act, 2013.
  • It must possess a minimum net owned fund (NOF) of Rs. 200 lakh or 2 crores.

Mandatory documents for getting an NBFC license in India

Documentation contains the major part of the licensing process. In case of failure to submit any document or to provide any information as asked for, RBI shall reject the application. Hence, it is critical for the applicant to be very particular in respect of providing any document or information in respect of an NBFC application.

Documents essential to be attached along with the application for NBFC License are as follow:

  • Updated KYC of all the directors and shareholders of the applicant company;
  • Certified copies of MOA (Memorandum of Association) and AOA (Articles of Association);
  • Copy of the company’s Certificate of Incorporation;
  • Credit report of every shareholder and director of the company;
  • Clean banker’s report with no lien remark on an FD (Fixed Deposit) of Rs. 2 crores;
  • An NOF (Net-owned Fund) certificate of all the shareholders and directors;
  • A comprehensive action plan of the proposed NBFC along with the organization’s structure;
  • The financial statements of the company;
  • Director’s report and auditor’s report;
  • The highest qualification of all the directors of the company;
  • Other documents as required.

The Process of obtaining NBFC Registration

Once the company is formed for the purpose of license and all the documents have been prepared, the application is to be submitted to the regional office of RBI. Further steps to be followed are described below:

Step-1: Registration of a Private Limited/Public Limited Company

Incorporation of the company is the first and foremost step towards NBFC License. A private or public company with Finance objectives shall be formed.

Step-2 Business Plan and Documentation

A detailed business plan consisting of various parameters of business such as capital induction, products, costing, expansion etc shall be prepared along with other documents.

Step-3: Submit the application on COSMOS

The online filing of the application shall be done on the RBI’s official website of COSMOS.

Step 4: Send the documents to the RBI in physical

After that, the applicant needs to submit the hard copy of the documents and application form to the concerned office of the RBI. Further, the applicant should also provide the Online Company Application Reference Number.

Step 7: Track the status of the application

Once you have completed all the steps successfully, you can monitor the application’s status on the COSMOS’ website by entering the company application reference number.

In reality, RBI issues the NBFC license in 3-4 months or even more, but this holds true in the case the documents of the applicant is valid and complete. However, Swarit Advisors will help you get the license in just 90 days. All you need to do is to provide us with all the documents essential for obtaining an NBFC license.

Why is fresh NBFC registration better than NBFC takeover?

People often get confused whether they should go for fresh NBFC Registration or NBFC Takeover. However, if we compare it with the timeline and the contingencies involved in the takeover is much higher as in the case of Fresh Registration. We have experienced a 90% Success ratio in case of NBFC Registration and only 30% Success in NBFC takeover.

Is NBFC a viable business nowadays?

Banks and NBFCs are both essential elements of a sound and stable financial system. Banks usually overpower the financial system in most countries because every segment of the society be it business, households and the public sector, all rely on the banking system for a wide range of financial products to meet their financial needs. NBFCs, on the other hand,  have gained considerable popularity by providing additional and alternative financial services. In one hand these companies help to facilitate long-term investment and financing, which is often a challenge to the banking sector and on the other, the growth of Non-Banking Financial Companies widens the range of products available for individuals and institutions with resources to invest. Through their operation NBFC’s can mobilize long-term funds necessary for the development of equity and corporate debt markets, housing financing factoring and venture capital. Another important role which NBFC’s play in an economy is to act as a buffer, especially in the moments of economic distress. An efficient NBFC’s sector also acts as a systemic risk mitigate and contributes to the overall goal of financial stability in the economy.

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 their important matters. Various new business models have been developed in the financial sector as well, 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 is required to wait in  long queues 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.

Advantages of Fintech-based NBFC Model

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 Start-ups:

  • 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.

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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