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What is NBFC Registration?

NBFC registration is the process of obtaining NBFC license from the Reserve Bank of India for commencing the business of loans & advances and other financial activities.

NBFCs are Non-Banking Financial Company indulged in the process of providing loans & advances, hire purchase, lease & hiring, assets mortgage, acquisition of shares, etc.

As per Section 45-IA of the RBI Act, every NBFC requires NBFC license from RBI for commencing the business of Non-Banking Financial Institution.

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. Furthermore, the Deposit Insurance and Credit Guarantee Corporation don’t cover NBFC depositors.

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.

NBFC carries several financial activities such as:

  • Provides loans on the basis of alternative credit scoring model for assessing the loan application;
  • Lending or acquisition of bonds or stocks or shares;
  • 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

Types of NBFCs in India

NBFCs are categorized into two classes. Further, these are classified based 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)
  • 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

One of the most important things for obtaining NBFC registration is document. If you fail to submit any of the documents or furnish any information incompletely, RBI will reject your application. Hence, you need to submit all these documents to RBI to avoid any rejections or complications in acquiring NBFC license.

Documents essential for getting NBFC registration are as follows:

  • 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

After you have prepared the documents required for NBFC registration in India, you need to submit it with the NBFC application to the regional office of RBI. Further, you must follow the steps described below:

Step 1: Submit the application on COSMOS

The NBFC license willing applicant needs to apply online on the RBI’s official website of COSMOS.

Step 2: Opt for the company registration

On the COSMOS website, you are required to click on the ‘CLICK’ option for registering your company on the login page of the COSMOS application.

Step 3: Download the application

After logging on to the COSMOS, you can download the appropriate application form- NBFC or RC/SC from the website.

Step 4: Provide the correct regional office name in C-8

The applicant is supposed to provide the proper name of the regional office in the Annex-I Identification Particulars” in the Excel application form.

Step 5: Allotment of Company Application Reference Number

Finally, the applicant will receive the Company Application Reference Number for the purpose of filing application of CoR (Certificate of Registration) online.

Step 6: Send the documents to the Regional Office

After that, the applicant needs to submit the hard copy of the documents and application form to the concerned Regional office. 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.

Where is the Application of Approval to be submitted?

Application for registration has to be made online at RBI’s official COSMOS website after the physical submission of copy of the application at the Regional Office of RBI.

NBFC Registration Departments

Both online and offline NBFC application procedures are required to be followed by the applicants. There are two departments of the Reserve Bank of India that supervise and regulate the functioning of NBFCs in India.

  • DNBR (Department of Non-banking Regulation)

    It is the responsibility of this department to conduct Fresh NBFC Registration process and making regulations for NBFC. It has a clear and advanced evaluation process pertaining to the NBFC application.

    As a part of the registration process, if any additional documents are required, this department will send you a formal notice or an e-mail asking for the same. A response to the e-mail/notice is expected by the RBI within 30 days of the receipt of the e-mail/notice as a per the NBFC regulations.

  • DNBS (Department of Non-Banking Supervision)

    The post registration compliances by a company and other administrative issues are responsibility of this department. The NBFC license can be expected by the applicant in 90 to 120 days post the successful acceptance of the NBFC application.

    Thereafter, company will be registered on the website and the applicant will be required to download an excel form and upload the same again after filling in all the relevant details. Post this; Company Application Reference Number (CARN) will be generated.

    Upon receipt of CARN, the applicant will be required to submit the application form physically along with all the relevant documents to the Regional Office of the RBI.

    If RBI finds everything appropriate, then license will be issued to 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 obtain the NBFC License from RBI for carrying out such activities.

Here are the 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.

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.

The functioning of NBFC is similar to that of Banks only for lending activities. There is a significant difference in the operation of both entities. We have enlisted a 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 on 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 crucial difference between banks and NBFCs. For example, the deposits of NBFCs are rated, while the deposits of banks are not.

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 specific 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 a 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.

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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