NBFC stands for Non-Banking Financial Company which is involved in financial activities such as providing secured & unsecured loans, investments, marketplace lending, or information service providers and also any other business as mentioned under Section 45-IA of the RBI Act, 1934 and the Companies Act, 2013. However, NBFCs are different Banks as it does not require a banking license but it has to follow all the rules & regulations specified by the Reserve Bank of India (RBI). One must also make sure that they comply with all the requirements of NBFC Registration.
The Reserve Bank of India monitors and also regulates that the NBFCs are complying with the provisions provided under Chapter III B of the RBI Act, 1934. The principal business activity of any Non-Banking Financial Companies is for raising capital from the public depositors & investors; these can be lending further to the borrowers. Non-Banking Financial Companies are the bridge that connects the depositors as well as investors with the borrowers as if now they have become a good alternative to the financial and banking sector by providing financial solutions to unorganized segments of society now-a-days.
Functions of the NBFC
The Basic functions of the NBFC are as follows:
Credit provider: NBFCs extend loans and also provide credit facilities to individuals, businesses, and various sectors of the economy.
Asset Financing: NBFCs often specialize in providing financing for the purchase of assets for example vehicles, machinery, equipment, and real estate.
Microfinance: Many NBFCs focus on microfinance, catering to the financial needs of the low-income individuals and small businesses.
Housing Finance: Housing Finance Companies (HFCs), a subset of NBFCs, specialize in providing housing loans to individuals for purchasing, constructing, or renovating homes.
Investment Activities: Some NBFCs primarily engage in investment activities, such as investing in securities, stocks, bonds, and other financial instruments.
Money Lending: NBFCs often serve as an alternative source of credit for those who may not qualify for traditional bank loans.
Payment Services: With the advancement of technology, some NBFCs provide payment solutions, prepaid cards, and digital wallet services, contributing to the digitization of financial transactions.
Factoring and Discounting: NBFCs may offer factoring and invoice discounting services, assisting businesses in managing their cash flows by purchasing receivables at a discount.
Risk Mitigation Services: NBFCs may offer credit information and risk assessment services to financial institutions, helping them make informed lending decisions.
Difference between NBFC and Banks
Points of Difference
NBFCs gives banking services to people without holding any Banking license
Bank is a government authorized financial intermediary that aims to provide banking services to the public.
Companies Act 2013 & RBI Act, 1934
Banking Regulation Act 1949
NBFCs are mostly not allowed to accept demand deposits, except for certain specific types of the NBFCs such as NBFC-D (Deposit Accepting).
Banks are legally authorized by the RBI to accept on demand deposits from the public that can be withdrawn on demand by a depositor.
In the case of NBFCs, foreign investment is allowed 100%.
Foreign investment in this case allowed up to 74% for the private sector banks.
Payment and Settlement System
NBFCs typically use the banking channels or any other payment systems in order to facilitate transactions.
Banks have given direct access to the payment and settlement systems operated by the RBI, that are Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
Deposit Insurance Facility
NBFC deposits are not covered under the deposit insurance schemes.
Bank deposits are typically covered by the deposit insurance schemes such as the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a particular limit.
Lending and Borrowing
NBFCs mainly rely on their own funds, borrowings from financial institutions, or on the issuance of debt instruments for the lending activities.
Banks have a broader range of lending capabilities and can create credit through the process of filtering by the personal or corporate banking.
NBFCs also have prudential norms, but they are easy compared with that is applicable to banks.
Banks have specific prudential norms, like capital adequacy ratios, provisioning requirements, asset classification norms, and exposure limits which they must adhere to as per RBI regulations.
Advantages of having NBFC registration in India
There are few important advantages of having NBFC registration in India are as mentioned below:
Access to Credit
NBFCs can raise funds by accepting deposits from the public (for deposit-taking NBFCs) or through various borrowing methods. This access to funds allows them to provide loans and credit to individuals and businesses, contributing to financial inclusion.
Diversified Financial Services
NBFCs can offer a wide range of financial services, including loans, asset financing, investment products, and more. This diversification allows them to cater to specific market segments and niche financial needs.
Flexibility in Lending
NBFCs often have more flexibility in their lending criteria compared to traditional banks. They can tailor loan products to meet the unique requirements of their customers.
Support for Small and Medium-Sized Enterprises (SMEs)
NBFCs frequently play a vital role in providing financing to SMEs, which may have difficulty accessing credit from traditional banks due to their size or lack of collateral.
Microfinance NBFCs, in particular, contribute to financial inclusion by providing small loans and financial services to underserved and low-income individuals and communities.
NBFCs involved in investment activities have the opportunity to generate income through investments in various financial instruments, including stocks, bonds, and securities.
NBFCs can specialize in specific areas of finance, such as housing finance, gold loans, or infrastructure financing, allowing them to develop expertise in those sectors.
Eligibility Criteria for NBFC Registration
- Company should already be registered under Company Act 2013 or Company Act 1956, as private or public limited company
- Company should have a business financial planning for at least 5 years
- Good CIBIL score or credit rating
- Minimum net owned funds shall be Rs. 10 crore or above
- Minimum assets should be worth Rs. 200 crore or above
- Must comply with the capital compliance and FEMA
- One third of directors should have financial experience
PreRequisites for NBFC Registration in India
For NBFC Registration, every conditions must be fulfilled according to the Section 45-IA of the RBI Act, 1934:
- Company Registration: An applicant must require to have a company registered under Companies Act 2013.
- Director’s Experience: 1/3rd Directors of an applicant company must possess experience in the field of finance for applying to get an NBFC license.
- Five Year Business Plan: An applicant company requires to draft a detailed business plan for the next 5 years.
- Minimum (Net Owned Fund) NOF Requirement: The applicant company must have the minimum NOF of Rs. 10 Cr and also the required tax must be paid on it. However, based on increase in prices, the real GDP and regulatory judgment, an entry point norm is proposed to be revised from the ₹10 crore to ₹20 crore.
- Qualify Capital Test: In this RBI undertakes quality of capital test to check whether invested capital is free non-compliance within the specified laws.
- Credit History: The credit score of a company, of its directors and the shareholders must be good and they must not have defaulted loan repayment deliberately to banks or to any other NBFCs.
- Quality of Capital: The applicant company must be required to have complied with all the mandatory compliances.
- FEMA Compliances: In case any involvement of foreign investment, then the applicant company must have complied with the FEMA Act. As 100% FDI is allowed.
Documents Required for NBFC Registration
- The Company Incorporation Certificate;
- Detailed information of the management along with company brochure;
- Copy of PAN and of Corporate Identity Number (CIN) of the company;
- Documents of the office location/address;
- A Certified copy of the (MOA) Memorandum of Association and (AOA) Articles of Association;
- List of Directors' profiles that is duly signed;
- Qualification certificate of directors and also their experience certificate;
- CIBIL and credit reports of Directors of a Company;
- Board resolution on the 'Fair Practices Code' and a certified copy of it;
- Certificate issued by the statutory auditor declaring that a company doesn't hold any of the public deposit and does not accept it;
- Certificate specifying owned funds on a date of the application from a Statutory Auditor;
- Shareholder KYC, CIBIL report, ITR and banker report;
- All information on the bank account, balances, loans, credits, etc.;
- Audited balance sheet and also Profit & Loss statement with the directors and auditor's report of the last three years;
- Bank account details of the company that is [Rs. 10 Cr must have deposited as NOF]
- Self-certified copy of bank statement and ITR
Procedure required for NBFC Registration in India
The detailed procedure discussed as required for the NBFC registration in India are stated below:
Preliminary Due Diligence
- Choose the Type of NBFC: Determine the specific type of NBFC you intend to establish (e.g., deposit-taking NBFC, asset finance company, microfinance institution, etc.).
- Legal Structure: Establish a legal entity for your NBFC, such as a private limited company or a public limited company, as per local company laws.
- Management Team: Ensure that your management team meets the fit and proper criteria set by the regulatory authority.
Meet Regulatory Requirements
- Minimum Net Owned Funds (NOF): Ensure that your NBFC meets the minimum NOF requirement as specified by the regulatory authority.
- Compliance with Regulatory Guidelines: Familiarize yourself with the relevant regulatory guidelines and requirements, including capital adequacy norms, liquidity requirements, asset classification and provisioning norms, and other prudential norms.
Business Plan and Feasibility Study
- Develop a Business Plan: Prepare a comprehensive business plan that outlines the nature and scope of your financial activities, target markets, financial projections, and growth strategies.
- Feasibility Study: Conduct the feasibility study in order to assess the viability and sustainability of your NBFCs operations.
- Appoint a Banking Officer: Appoint a banking officer responsible for ensuring that the NBFC complies with all regulatory requirements and guidelines.
- Prepare Documentation: Gather all required documents, including the company's incorporation documents, business plan, financial statements, KYC and AML policies, board resolutions, and other relevant information.
- Submit Application: Prepare and submit a formal application for NBFC registration to the relevant regulatory authority. Ensure that you pay the prescribed application and processing fees.
Background Checks and Due Diligence
- Regulatory Review: Regulatory authorities may conduct due diligence and background checks on the promoters and management team of the NBFC to assess their suitability and financial soundness.
- Credit Rating (if required): If mandated by the regulatory authority, obtain a credit rating from recognized credit rating agencies.
- Review Process: The regulatory authority will review your application and documents. They may seek clarifications or additional information during the review process.
- Approval: If the regulatory authority is satisfied with your application and compliance with regulations, they will grant approval for NBFC registration.
- Capital Adequacy and Prudential Norms: Ensure that you maintain the required Capital Adequacy Ratio (CAR) and adhere to prudential norms related to income recognition, provisioning, and asset classification.
- Regulatory Reporting: Establish a system for timely and accurate regulatory reporting to the relevant authority. This includes regular submission of financial statements, asset quality reports, and other required disclosures.
Revised Regulatory Framework with Scale-Based Approach for NBFC by RBI
On October 22, 2021, the RBI, announced a scale based revised regulatory for the (NBF) Non-Banking Financial Companies ensuring better control over the sector. The said framework has added in a few more categories of NBFCs in view of the activity with stringent rules.
The important highlights of the revision are mentioned below:
There can be a max limit of 1 crore/borrower for financing a subscription to IPO.
The regulatory structure will also include four layers as mentioned below:
- Base Layer- It comprises of non-deposit taking NBFCs having asset size of Rs 1000 crores;
- Middle Layer- It can have deposit-taking and non-deposit taking NBFCs with an asset size equal to or more than Rs 1000 crore.
- Upper Layer-The layer includes the top 10 eligible NBFCs on account of asset size.
- Top Layer-The top layer will remain an entity and only get populated if the RBI identifies a substantial increase in the potential systemic risk from NBFCs of the upper layer. In such an event, said NBFCs will find their way to the top layer.
RBI Conditions for Granting NBFC License
After filing an application for the NBFC Registration, RBI will scrutinize the file before granting NBFC license and only license will be given if following conditions are fulfilled:
- Ability of NBFC to repay the dues to investors and Business Plan of a company must fulfill for the larger interest of a society
- NBFC activities must not be detrimental to an interest of the Public at Large
- Capability to Infuse Sufficient capital
- Earning capability of a Proposed Business
- Activities must be carried out in such a manner that it must be in the public interest
- Board must act in the interest of public or depositors
- Granting NBFC license will contribute to an economic growth of a country
- Proposed NBFC must comply with the RBI regulations
NBFC Registration with RBI
The founders must follow both online and offline NBFC applications in order to obtain the NBFC License. The RBI is an autonomous body which has two different departments to manage and regulate a NBFCs function.
Department of Non-Banking Regulation (DNBR)
The DNBR is accountable for conducting the new NBFC Registration procedure and is also accountable for preparing the regulation and policies for respective NBFC. The DNBR has a clear and innovative assessment process regarding NBFC Registration. The DNBR will send you an email and the notice if they require any extra documents during the NBFC Registration. The Reserve Bank of India expects the response or submission to the given notice within 30 days as per the regulations of NBFC.
- Assessment of NBFC Application submitted for the NBFC License (for all NBFC Category);
- Examination of Directors or Shareholders profile;
- Communication with an applicant company in pre-registration process;
- Communicates Final Decision to an applicant or proposed company with a Consent of Executive Director Office of the Reserve Bank of India
- Administer and Regulates NBFC Business in India;
- Publish Circular, and Notifications for NBFC.
Department of Non-Banking Supervision (DNBS)
- DNBS is mainly accountable for post-registration compliance of the respective NBFC and other administrative problems
- After getting the Consent from DBNR collects bankers report and Net Owned Certificate – before they provide you the NBFC License in original;
- Accountable for complying the Rules and Regulations of NBFC issued by the RBI;
- Conduct the on-site inspection or audit from time to time;
- Cancel or revoke the NBFC License in case of Non-Compliance with any specified and mandatory laws;
- Conduct and educate a seminar for the awareness regarding NBFC Regulations, Business, and Compliance.
Penalty Provisions – In case of the non-compliance with RBI Regulations
The Penal Provisions for non-compliance with RBI Regulations are mentioned below:-
- Carrying NBFC Activities Without Obtaining any Certificate Of Registration From RBI: Penalty as Imprisonment of 1 to 5 years also Fine of Rs. 1 to 5 lakhs
- Non-Compliance of the RBI Directions: Penalty as Imprisonment up to 3 years
- Failure To Produce Documentation Or Answer Queries: Penalty as Fine which may extend to Rs. 2000 per offense and further in case of continuous non-compliance, also an additional fine up to Rs. 100 per day from the very first offense.
- Acceptance Of Deposits: Penalty as Imprisonment up to 3 years and a fine of twice an amount received.
Mandatory Compliances after obtaining NBFC License
NBFC has to apply for the following:
- Registration with 4 Credit Rating Agencies – CIBIL, ICRA, Equifax and Experian
- CERSAI Registration
- FIU-IND Registration
- Central KYC
- Adoption of the Fair Practice Code
- National E-Governance Registration
- Adoption of Anti Money Laundering Policy & IT Policy
- Submission of Financial Information to Information Utilities
- Filing of annual return with the RBI
- Statutory compliances with the ROC – Annual Return Filing, Filing of Financial Statements
- Tax Filing - Income Tax Returns & GST Returns
NBFC License Cancellation Cases
On The Following Grounds RBI May Cancel NBFC License:
- NBFC license will be canceled in case of the insufficient financial experience
- Directors and shareholders business profile is not satisfactory
- Business plan if not up to the mark
- Capital arranged from any prohibited source
- NBFC consultants if found are not experienced
- Area of carrying NBFC operations that are not encouraging
RBI Digital Lending Guidelines for NBFC
On 2nd September 2022, RBI has issued Digital lending guidelines applicable to NBFCs and have directed several regulatory checks on NBFC and in digital lending business with LSP (lending service provider or Digital lending Apps the Entire onus of compliance has been set on the NBFC defined as regulated entity (RE) and NBFC must ensure they are diligently handling customer grievances. The Reserve Bank of India (RBI) has issued guidelines to promote fair practices, transparency, and responsible lending. Here are the key points covered by the digital lending guidelines for NBFCs:
Fair Practices and Disclosure
NBFCs engaged in digital lending should disclose all relevant information, including terms and conditions, interest rates, processing fees, and other charges, in a clear and transparent manner on their website or mobile application.
The borrower should be provided with a loan agreement that clearly outlines the terms and conditions, including the interest rate, repayment schedule, applicable fees, and any additional charges.
Privacy and Data Security
NBFCs must ensure compliance with applicable data protection laws and maintain the privacy and confidentiality of customer data obtained through digital lending platforms. Adequate data security measures should be implemented to protect customer information from unauthorized access, data breaches, and cyber threats.
Grievance Redressal System
Prior consent of the borrower should be obtained before accessing their personal and financial information from external sources. An effective grievance redressal mechanism should be established to address customer complaints and disputes in a timely and transparent manner.
NBFCs should exercise due diligence while outsourcing any activities related to digital lending and ensure that the service provider adheres to the same standards of consumer protection and data security.
Fair Collection practices
NBFC should be fair, respectful, and in compliance with the applicable laws and regulations. Harassment or use of undue influence for loan recovery should be strictly prohibited.
NBFCs using digital lending platforms operated by intermediaries or NBFC aggregators should ensure that the aggregator is registered with the RBI and complies with all applicable regulations.
How StartupFino will help you?
Initial Consultation: We begin with an in-depth consultation to understand your business model, Founders vision and objectives. This enables us to devise a tailored roadmap for your NBFC registration journey.
Documentation and Preparation: Our team will assist you in gathering and organizing all the necessary documents required for the registration process, ensuring that you are fully prepared for submission of online application for NBFC and later our team will assist you in responding to RBI queries and objections.
Regulatory Compliance: We will guide you through the various regulatory steps, ensuring that your NBFC complies with all relevant RBI master directions, RBI guidelines and regulations are up to date. Highly experienced team and along with a minimum of Rs. 10 crores net owned fund required in form of fixed deposit while submitting application for Nbfc registration with RBI.
Application Submission: With our expert assistance, your NBFC registration COR application will be prepared and submitted to the Reserve bank of India.
Regular consultation: We keep you informed at every stage of the process and follow up on your application's progress, promptly addressing any queries or feedback from the RBI department of non-banking regulation.