NBFC Registration

September 16, 2022

12 min read

An NBFC is a non-banking financial company is a financial institution that provides various banking services such as providing loans but does not have a banking license. For instance, there are some restrictions on the performance of NBFCs, including not being allowed to receive or take demand deposits such as funds savings accounts from the public. The Dodd-Frank Wall Street Reform and Consumer Protection Act Defines NBFCs as companies engaged in financial activity. The main criterion is when an NBFC satisfies the basic condition of at least 85% of its gross turnover or assets being used for financial activities. NBFCs are not governed by Banking laws, rules, and regulations but are required to comply with regulations as specified by Section 45 IA and Chapter III B of the RBI (Reserve Bank of India) Act1934, and the Companies act 2013. NBFCs are most useful for the financial services they provide to the unorganized sector.

NBFCs are mainly involved in certain financial services like marketplace lending, investments or provide financial information, anything excluding what the cooperative or commercial banks do. One of the main activities of NBFCs is to provide for borrowers by raising funds from investors and public depositors as they act as an alternative to banks or financial institutions and help with the finances of the unorganized sector of society. However, a Non-Banking Financial Company cannot provide all the services that banks provide except to help borrowers by raising money. Still, they have become as important as banks and financial co-operations in the Indian financial system.

Types of NBFCs

There are several types of NBFCs based on different criteria

On the basis of activities, there are

NBFC Investment and Credit Companies (NBFC ICC) – ICC is a common license for all businesses that allow a business to do different types of investments, wholesale and retail loans, the ETA for which is 120 days.
NBFC infrastructure finance company (NBFC IFC) – utilizes almost 75% of its assets in infrastructure loans.
NBFC systematically invested in core investment companies NBFC CIC ND SI – focuses on investment in preference, equity shares, loans of companies, or debt.
The infrastructure debt fund (IDF NBFC) – mainly facilitates long-term debt flow into infrastructural projects.
Microfinance institution (NBFC MFI) – It is involved in providing loans in rural areas where the annual income does not exceed Rs. 1 lakh or to semi-urban/urban areas where income does not exceed Rs. 1,60,000.
NBFC Peer-to-peer lending platform (NBFC P2P) – P2P provides a platform for secured credit and risk assessment checks where it is done automatically in the online platform to check the credit risks or automatically publish requirements for loans with the profiles of borrowers and their risk ratings. This license may take 180 days to get the appropriate approval of RBI after which the applicant must undergo a mandatory CISA audit.
NBFC Account aggregator (NBFC AA) – A newly added NBFC category that acts as a consent broker that allows the sharing of data across different financial sector organizations.
Mortgage guarantee company (MGC) – which is an undertaking of mortgage guarantee business
Non-operative financial holding company (NOFHC) enables promoter groups or promoters to establish new banks.

Based on liabilities, NBFCs are further classified into

NBFC ND SI – having an asset size of at least Rs 500 crores or more, as mentioned in the previous year’s audited balance sheet, which has to follow the regulations given by the RBI with the exemption from credit concentration norms.
NBFC ND non-SI- They are exempted from prudential norms except for the Annual certificate.

Functions of NBFCs

Providing a digital platform using the latest technology to provide loans
Wealth creation
Employment generation
Infrastructure development
Financial assistance to weaker sections of society
Aid in economic development
Growth of the financial market
Provide specialized credit
Facilitate faster processing of loans
Development of MSMEs and the education sector

More about NBFCs

The different sectors that qualify to be NBFCs include

Insurance Companies
Investment Banks
Mortgage lenders
Money market funds
Hedge funds
P 2 P or person-to-person lenders

Some of the services provided by NBFCs are

Funding mergers
Lending money
Retirement planning
Currency Exchanges
Underwriting
Financing money markets

There are, however, some restrictions on NBFCs, and these are:

Agricultural transactions or funding
Sale or purchase of goods and services
Sale or purchase of immovable property
Industrial activity

Difference between NBFCs and Banks

Almost all the activities of NBFCs are similar to that of banks except:

NBFCs do not accept demand deposits
NBFCs cannot issue self-drawn cheques
Deposits of NBFCs are not insured
NBFCs do not get involved with business related to agriculture or industrial activities, sale/purchase of goods (except securities), and construction or property businesses.

Banks or NBFC: Which is better for Business Loan?

NBFC Registration

NBFC registration is a long drawn process with a lot of preparation and also plenty of documentation. The table below provides details about the long-drawn systematic preparation procedure as well as a list of the documents that will be required for the registration process.

Specific Requirement	Documents Required
Company Registration under Companies act 1956 or Companies Act 2013	Net worth certificates of the company and directors
A 5-year business plan needs to be prepared and submitted	Documents of the educational qualifications of the Directors
A minimum net owned fund (NOF) of Rs 2 crores, tax paid	Business profiles of the directors and shareholders.
The credit history of the company, its directors and shareholders need to be good.	Experience certificates of the owners and directors of the NBFC.
Quality Capital test to ensure that all statutory laws have been complied with.	IDs and KYC details of the company along with PAN, GST and address proof.
In case there is foreign investment, FEMA compliances need to be met. It may be noted that 100% foreign investment in an NBFC is permitted.	Bank account details of the company in which Rs 2 crores are required to be shown as NOF (net owned funds).
Directors’ experience- at least 33% of directors on the board of the company must have experience in the field of finance for the NBFC to be eligible for registration.	Income tax returns of the company.
Detailed action plan of the company for the next five years. The plan must include fair practices code and the risk assessment policy of the NBFC.	An audited balance sheet of the company for the last 3 years.
The company’s proposed name should include the words fin serve, investment, capital or leasing.	Business structure and loan structure of the company.
There must be a plan for the registered office, branches and cities of operation. All these are to be documented with a firm plan, such as the acquisition of office space.	Details of board formulation for the NBFC registration process

Eligibility to apply for NBFC Registration

The NBFC applying for registration should be registered under the companies act 1956 or 2013.
The NBFC must have net-owned funds (NOF) of Rs 2 crores.

How to go about the NBFC Registration

The first requisite for successfully registering an NBFC is to hire a consultant with at least 10 years of experience in the field. The consultant should have a highly professional team of chartered accountants, lawyers and bankers.
The registration needs to be for a public limited or private limited company.
A certificate of incorporation needs to be obtained from the Registrar of companies.
The minimum NOF (net-owned funds) must be deposited in the registered bank account of the company.
The business plan for the next 5 years needs to be submitted, This plan must contain an executive summary, a product plan, a lending model, a risk model, details of peer and SWOT (Strength, weakness opportunity, threats) analysis and financial projections.
In this step, the NBFC shall apply for registration with the RBI under the RBI act of 1934. With this step, the actual registration process of the NBFC begins. The registration application is to be filed online on the official website of the Reserve bank of India.
Once the online application is completed and accepted by the portal, a reference number (CARN) will be generated. This number is to be used for all future correspondence and interaction with the RBI.
The next step is the submission of the required documents in person to the nearest office of the RBI. These documents shall be examined and scrutinized by RBI officials,
The application with the submitted documents is sent to the central office of the RBI. The central office shall sanction the registration of the NBFC only after it is found to comply with the requirements under Section 45 IA of the RBI act 1934.

More information – https://www.rbi.org.in/Scripts/BS_ViewNBFCForms.aspx

RBI Conditions for Granting NBFC License

The conditions of the RBI before granting licenses to NBFCs are

The affairs of the NBFC are not against the interests of depositors at any point in time,
That the NBFC has sufficient capital and earning capability,
That the NBFC is able to pay their depositors as and when claims are made from them,
That the character of the board members of the NBFC and the management shall not be biased against depositors,

Getting legitimacy for an NBFC

Getting an NBFC registration is a lengthy process but the registration is well worth the effort. Not only does the NBFC get legitimacy, it can safely conduct its financial activities and also get legal protection for the necessary loan recovery process. Applicants need to be well prepared and prepare all the documents needed to receive their registration letter.

Advantages of NBFC Registration

There are several advantages of NBFC registration. Some of them are

Easy loan recovery- This is the biggest advantage of NBFC registration. This step gives NBFCs legal protection for loan recoveries. Depositors are also able to repay loans conveniently with affordable EMIs.

Loans for people who are not eligible to get them from banks- One of the biggest advantages of NBFC registration is that loans become accessible to people with poor credit scores and other disadvantages such as lack of income proof. NBFCs prove helpful and readily offer loans to such needy people.

Funding for money markets- Another advantage of registered NBFCs is their ability to provide money to the money markets and enhance their viability.

NBFC Registration FAQs:

1. Which division or department of the RBI directly does the registration process for NBFCs?

The DNBR (Department of Non-Banking Regulation) deals with the registration of NBFCs and also provides rules and regulations for the functioning of the NBFCs.

2. How long is the registration of an NBFC valid?

An NBFC is required to begin its operations within 6 months of getting its registration. If the commencement exceeds 6 months, the registration is likely to become null and void, and the NBFC will have to re-apply for registration.

3. Are there any penalties for NBFCs not complying with RBI regulations?

The DNBR (Department of Non-Banking Regulation) conducts periodic audits and checks of NBFCs to assess compliance. If any non-compliance is found, there may be imprisonment for 1 to 5 years with s fine of upto Rs 1.5 lakhs.

4. Have there been any revisions to the RBI framework for NBFCs?

There has been a recent revision in which there is now a limit of Rs 1 crore per borrower for financing a subscription to IPO.

5. Does the RBI have any conditions for providing licenses to NBFCs?

The main conditions of the RBI for granting licenses to NBFCs are sufficient earning capability of the business, to ensure that the interest of the public is fulfilled and that the NBFC shall contribute to the country’s growth.

6. What are the advantages of an NBFC getting registered?

Some of the main benefits of an NBFC getting registered are the facility for the NBFC to provide wealth management of stocks and shares, provide loans to needy people and have legal protection for recovery of loans.

7. What are the major differences between a bank and an NBFC?

An NBFC cannot create credit, cannot accept demand deposits, does have deposit insurance and cannot provide transaction services that a bank can. An NBFC, however, does not need to maintain reserve ratios that a bank needs to maintain.

8. Do banking laws govern NBFCs?

Banking laws do not apply to NBFCs. They are, however, governed by the RBI act of 1934.

9. Can a registered NBFC conduct chit funds?

Yes. A registered NBFC is authorised to conduct chit funds.

10. How many types of NBFCs are presently in existence?

There are three types of NBFCs based on the size of their asset. They are the NBFC ND, the NBFC ND SI and the NBFC ND non SI. An NBFC ND SI is exempt from credit concentration norms, while an NBFC ND non-SI is exempt from observing prudential norms. NBFCs are also classified on the basis of activities into NBFC ICC for providing investment, NBFC IFC for infrastructure loans, IDF NBFC and NBFC MFI, NBFC NOHFC for non-operative financial holding companies, Mortgage guarantee companies and NBFC account aggregators.

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