What is a Non-Banking Financial Company (NBFC)?
An NBFC, also known as Non-Banking Finance Company is a private or public limited company registered under Companies Act, 2013 and also have obtained COR (Certificate from Registration) from the reserve bank of India. The NBFC is primarily engaged in the business of providing loans and advances, acquisition of 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, Loan against Property, Loan against Shares, Short term Personal Loans etc.
Principal Business of the NBFC?
- Secured Loan (LAP)
- Gold Loan
- Unsecured Personal and Business Loan
- Marketplace Lending (Digital Lending )
- Investment in Shares or Mutual Fund or Debentures
- NBFC must maintain 50% of its assets as Financial Assets and 50% of its income must be generated from Financial Activity
Different Categories of NBFCs registered with RBI
- Investment and Credit Company (ICC) : ICC is one common license for all types of financing business in India. Prior to feb 2019 there were three different licenses namely Loan Company, Asset Finance Company and Investment Company. Now after merger into one single License defined as ICC, It allows the license holder to engage in various kinds of wholesale retail loans and Investment business. The ETA for NBFC ICC License estimated to 120 days.
- NBFC-Microfinance Companies (MFIs): The NBFC-MFIs disburse loans to the households whose annual income in rural areas does not exceeds ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000. Around 85% of the financial assets of MFIs shall lie in the nature of qualifying assets as above. The minimum Net owned funds of MFIs shall not be less than INR 5 crores. The ETA for NBFC CIC License could be 200 days.
- NBFC-Factors: Engaged in the principal business of factoring, constituting at least 50 percent of its total assets and the income derived from factoring business should not be less than 50 percent of its gross income.
- 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 runs an automatic risk assessment checks of the applicant and determines 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 peer-to-peer lending market place, borrowers can take loans from individuals who are willing to lend their money for an agreed interest rate to the borrower. For 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 with the Mandatory CISA Audit.
- NBFC-Account Aggregators: This is the newest category of NBFC. NBFC Account Aggregators enables sharing of data across multiple financial sector organizations and act as “consent brokers”, i.e., they intermediate data transfer among the financial organizations with the consent of the user. The activities of Account Aggregators involves accumulation of financial data that involves gathering of 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.
- Infrastructure Finance Company (IFC): This kind of NBFCs deploys at least 75 per cent of its total assets in infrastructure loans. Also, it has to maintain a minimum Net Owned Funds of ₹ 300 crore and shall also seek a minimum credit rating of ‘A ‘or equivalent with a CRAR of 15%. The ETA for NBFC IFC License could be 240 days.
- Core Investment Companies (CIC): These kind of NBFCs carry on the business of acquisition of shares and securities and also fulfill the following conditions:
- Holding of 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;
- Not to carry out any other financial activity except as listed in point (a) above;
- The ETA for NBFC CIC License could be 180 days.
Can NBFCs accept deposits?
- NBFC Can accept deposits - but in recent few years, RBI has followed strict approach while granting the NBFC-D (Deposit) License.
- After 2016 RBI has been encouraging - the Application for non-deposit taking NBFC and large number of new license has been approved in year 2017 to 2019.
- Easy to raise fund from Bank – Even Non deposit taking NBFC is allowed to raise fund from bank at very cheaper rate.
- Principal business as Finance - Non Depositing taking NBFC will primary engage in the lending activities and shall not accept the public deposits in the form of Savings Deposits, Recurring Deposits and Fixed Deposits
- Be careful during Deposit taking NBFC Application - Even if you are planning to takeover the deposit taking NBFC License, in such circumstances at the Time of granting the approval for change in management and change in ownership of NFBC, RBI may downgrade to Non deposit taking NBFC.
We encourage our clients to submit fresh Application for NBFC Registration rather taking over the old NBFC. Advantages and disadvantages of both option can be evaluated.
How are the NBFCs different from Banks?
Non-acceptance of Demand Deposits by the NBFCs
Inability to issue cheques drawn upon themselves
Non-availability of Deposit Insurance Facility provided by Deposit Insurance and Credit Guarantee Corporation to the depositors
Minimum Capital requirement for NBFC
- The minimum paid-up Capital – the Net owned fund of NBFC-ICC (Investment credit company) must be more than Rs. 2 Crores over the life of the NBFC unless otherwise prescribed the RBI.
- Gift From Family Members – Shareholders should introduce own 2 crores as share capital, However shareholders can give or take gifts from Close relatives or Spouse
- No Blockage of Fund - it shall mandatorily hold a Net owned funds of INR 2 crores at the time of registration and at all times thereafter. However, you can use the minimum capital for the lending or investment purpose.
- Capital Must be tax Paid - The Applicant will require to produce the Proof of tax payment against the capital invested in the NBFC.
- Need to Qualify the Quality of Capital Test - RBI Conducts quality of capital test and ensure that Capital invested by the shareholders are free from any possible defects or non-compliance with Indian or international laws.
- FATF Member Investment – RBI Only recognize and Approves NBFC Registration or takeover from FATF Member Country Investment in India
- 100% FDI is Allowed – In NBFC Sector 100% FDI is allowed from FATF member countries and under auto route.
Prerequisites for NBFC Registration
- Capital Test: The Quality of Capital is equally important and as right composition of board. The seed capital should be obtained from the legitimate sources and shall be commensurate with the Net Worth declaration and certification of all the shareholders.
- Profile of the Promotors: Directors, being the face of the Company, shall be the individuals of higher integrity and knowledge. It is not necessary for each of the Directors should be from the Banking or Finance background. However, it is expected that 25 % of the Board shall should have financial background.
- High level Business Plan: A detailed business plan is the life line of the NBFC license. It shall be in the form of a road-map for next 5 years. With the advent of a large number of lending institutions across the country, it becomes very important to grant license to genuine and capable promoters.
- Area of Operation: Despite of the fact that many regions of the country are devoid of the adequate Banking facilities, there are certain high-priority regions which shall be looked into on an urgent basis. Coming up with an NBFC in Tier-2, Tier-3 and Tier-4 cities will make the way towards license little easier.
- Targeting the untouched segment: The section of the population which is devoid of loan facilities due to their credit rating or lack of documentation shall be the targeted segment for the upcoming NBFCs. A well-planned risk management strategy shall be adopted to mitigate the risks at all the levels.
NBFC Registration Process with RBI
Unique Name of the company
Physical Submission of Application
Certificate of Registration from RBI
Documentation Requirement for NBFC Registration
- 1 KYC of All Shareholders and Directors
- 2 Business Profile of shareholders and Directors
- 3 FD Certificate Receipt
- 4 Bankers Report
- 5 Net Worth Certificates
- 6 Credit Rating Reports
- 7 Educational Qualification Certificates
- 8 Experience Certificates
- 9 Related party disclosure
- 10 Income Tax Returns
- 11 Business Plan for 3-5 years .
NBFC Business Commencement Process
Pre Loan Disbursal Requirements: Before a newly licensed NBFC starts its operations, it shall mandatorily seek registrations from all of the below:
- Credit Rating agencies such as CIBIL, ICRA, Equifax and Experian;
- CERSAI Registration
- Registration under Anti-Money Laundering Act;
- Adoption of fair practice code.
Apart from this, there should be in place all the agreements and policies concerning all types of loans and lending procedures, organisational structure, Recovery measures, etc.
NBFC Compliances Post Approval from RBI
Apart from the one-time registrations , every non-deposit taking NBFCs shall be responsible for maintaining certain annual compliances as below:
- Filing of NBS-9 on online RBI portal i.e. COSMOS;
- ROC Filings such as Annual Returns, Balance Sheets, Profit and Loss Accounts, etc;
- Maintenance of proper accounts;
- Appointment of Statutory Auditor;
- Income Tax Returns and GST Returns;
- All such compliances as may occur from time to time.
- Adopt Fair Practice code as prescribed the RBI and Also Adopt NBFC Prudential norms as prescribed the RBI.
- Always meet and Maintain 50:50 PBC Criteria
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 other and so is the funds requirement;
- Flexible rate of interest: To stand in par 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.
Circumstances under which the NFBC application is being rejected -
- Inadequate Financial Experience:
- Inappropriate Profiles of Directors and Shareholders:
- Uncertain sources of Capital:
- Incompetent Business Plan:
- Inadequate Net Worth of the Promoters:
- Inexperienced NBFC Consultants
- Unfavourable of State or area of operation
If you want to register an NBFC of your own or willing to take over NBFC, feel free to write us at [email protected]
Frequently Asked Questions (FAQs)
Yes. NBFC Can accept deposit with deposit taking license.
Gold Loan, SME Lending, Personal Loans, Loan Against Property, Loan Against Shares Asset Financing etc.
The minimum NOF for NBFC registration is INR 2 crores. It shall be kept in the current account of the newly formed company in the form of Fixed Deposit.
Minimum 1/3 or ¼ directors must have financial or banking experience
Right Team, Clean Capital, Business Plan and Area of Operation.
Lifetime unless otherwise cancelled due to non-compliance with the law.
Fintech based lending, P2P and NBFC-AA.
50% of total assets must be financial and 50% of total income must be generated from financing business.
Yes. Subject to the requirement and convincing business Plan
For carrying loan or investment business in India, you must apply for NBFC License otherwise unlicensed lending or financing business is deemed to be illegal.
NBFC with assets size more than Rs. 500 crores deemed to SI and higher compliance has been set for NBFC-SI.
RBI Does not regulate insurance, Chit fund, all such entities regulated by SEBI, Nidhi company etc.
Public funds includes ICD, Loan from Banks but Public deposits mainly includes souring of funds from individuals.
Interest rate is subject to business plan submitted by the Applicant company to the RBI.