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The Definitive Guide to Registering an NBFC in India

Article by Pulkit Arora. Edited by Richaa Mukhopadhyay.

Non- Banking Financial Companies (NBFCs) are financial organization which are actually not banks, but they do carry out activities which are similar to banks and it has been defined in the Section 45 (f) of the RBI Act, 1934.

It provides various services such as loan and credit facility.

NBFCs provide loans and credit facilities to unsecured depositors.

NBCFs gained importance when several depositor lost their money, during the failure of the various banks the year 1960s.

NBCFs emerged as booster of the financial sector in India and RBI enacted clause to regulate the NBFCs in India. Non-banking activity was also prevalent in the earlier times when banks were not capable enough to provides loan as per the economic demand.

NBFCs have flourished in India since the 1980s and has helped boost the economic activity of entrepreneurs.

However, in order to protect the interest of the public as well as that of the NBFCs, the RBI enacted the Non-Banking Companies (Reserve Bank) Direction, 1977 to govern the functioning of the NBFCs.

Further, for the registration process for NBCFs, before starting a non-banking activity every entity must register with the RBI and must hold certificate of registration.

There are various types of NCBFs such as Investment Company, asset finance company, Loan Company etc. registered with the RBI. Furthermore, if the any corporate body or entity carryout the non-banking activities without certificate of registration then the certificate will be cancelled and the person has to face various legal consequences.

Therefore, in this article, I am going to provide an in-depth guide on how you can register an NBFC in India, as well as provide some background on the workings of an NBFC.

WHAT  IS NBFC (NON-BANKING FINANCIAL COMPANY)?

Non-Banking Financial Agency is a financial organization registered under the Companies Act, 1956 or the Companies Act, 2013 and engaged in the business of financial institution.

According to Section 45 I (e) of the Reserve Bank of India Act, 1934, ‘‘non-banking institution’’ means a company, corporation or cooperative society. It provides services related to the banking like investment, credit facilities, private education funding and loan etc.

NBFC’s adjunct banks by providing the infrastructure to distribute the resources to individuals and companies with deficits. It also promotes competition in financial institution. These institutions do not hold large reserve of money, so there is a limit to the amount of loan that it provides to the consumer.

Such companies also offer wealth assurance such as controlling portfolios of stocks and shares, discounting services, chit business etc. But it does not include any institution whose main activity is that of agricultural, purchase of a sale of goods and provides any services to the sale/ purchase/ construction to the immovable property.

Further, NBFCs can not accept demand deposits, nor does it constitute part of the payment and cannot issue cheques drawn on itself. Further, deposit insurance facility of Deposit insurance and Credit guarantee corporation is also not available to depositor of NBFCs.

GROWTH OF NBFCs IN INDIA

The non-banking finance company gains its importance since the 1980s against the diabolic of the highly regulated banking sector. NBFC became essential source of growth of financial sector and it came to integral part of the financial institution of India.

Non Banking Financial Companies are growing in popularity day by day in India.

It has enhanced the competition and diversification within financial sector. The Banking sector has always been a highly regulated organization, whereas the non-banking financial sector came into light when it got properly regulated by the Companies Act.

Therefore, NBFCs provide simplified procedure and flexibility to get loans and a hightened reduction in all the formalities, which is required in banks. This resulted in NBFCs getting an edged over the banks in providing loan and funds.

However, in many cases due to inefficient management, it led to great problems in adverse portfolio selection, as well as in competency to handle both the asset and liability side.

Many times, due to non-availability of plentiful credit from the banking sector, then NBFC has to count on unsecured public deposit for their holdup by paying higher rate of interest. This ultimately resulted in greater risk of their depositor, which in some cases had led to crisis of confidence and credibility.

Under those circumstances, RBI had decided to protect the interest of the depositor and it took instant action by issuing Non-Banking Companies (Reserve Bank) Direction, 1977 guidelines on discreet norms and also conducted several other changes from time to time for regulating the activities of NBFCs.

During 1977 the Central Government imbibed Section 58A into Companies Act, 1956 to govern acceptance and renewable of deposit.

In keeping with the spirit of financial sector liberalization, the Government made much effort to integrate the NBFC into mainstream of the financial sector.

IT IS NECESSARY FOR NBFCs TO REGISTER WITH THE RBI?

According to section 45-I (a), no NBFCs can carry out the business of a non-banking financial institution without obtaining the certificate of registration from the Reserve Bank of India or without having net owned fund of Rs. 2 crores.

Register your nbfc with RBI or other institution as provided for.

However, the following list of companies need not register with the RBI-
  1. Venture Capital Fund / Merchant Banking companies / Stock broking companies registered with SEBI.
  2. Nidhi companies, or mutual benefit companies.
  3. Chit Fund companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982.
  4. Insurance companies which hold a valid Certificate of Registration issued by IRDA.
  5. Housing Finance Companies regulated by National Housing Bank
  6. Stock Exchanges
However, most of these companies need to register via different means and with other organisations. And, that's why in order to prevent dual registration, that the RBI has done away with their registration.

DIFFERENT TYPES OF NBFCs REGISTERED WITH RBI

NBFC can be segregated into various types:
  1. By the terms of the type of liability into deposit and non-deposit accepting NBFCs,
  2. Non-deposit taking NBFCs by their size into systemically important and other non-deposits hold companies like (NBFC-NDSI and NBFC-ND), and
  3. By the type of activity, they perform.
Judging on the criteria of the activities performed by NBFCs, they can be classified into-
  1. Asset Finance Company - An AFC is a financial organization carrying on as its main business of financing of physical assets, promoting productivity / economic activity, such as tractor, generator set etc. For this reason, the main business is defined as an aggregation of financial assets / physical assets that support economic function and the income that arises from this is not less than 60% of its total assets and total income, respectively.
  2. Investment company - A financial institution carrying on as its principle business the acquisition of securities.
  3. Loan Company - A financial institution carrying on as its principle business the providing loan for any other activity than its own but it does not include an asset finance company.
  4. Infrastructure finance company – It is non banking finance company which require at least 75% of its overall assets in infrastructure loans, it must have at least Rs 300 crore new fund and it must have ‘A’ credit rating.
  5. Systemically Important Core Investment Company - It performs business in buying and selling of shares and securities. It is also restricted in performing any other business activities. It has an asset size of a minimum of Rupees 100 crores of which not less than 90% is held in the form of investment in equity shares, preference shares, debt or loans in group companies. It is also bound to accept public funds.
  6. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) - It provides long-term debts for infrastructure projects. These companies can be sponsored by Infrastructure Finance Companies (#3).
  7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI) - These companies are engaged in the business of providing micro loans.
  8. Non-Banking Financial Company – Factors (NBFC-Factors) - This company is engaged in a principal business of factoring.
  9. Mortgage Guarantee Companies (MGC) - Their primary business, amounting to a minimum of 90% profit or turnover is from mortgage guarantee business.
  10. NBFC- Non-Operative Financial Holding Company (NOFHC) - Promoters of this company are permitted to hold banks via this institution.

PRE-REQUIREMENTS FOR REGISTRATION

A company registered under the Companies Act, 1956 or the Companies Act, 2013 and willing to start a business of a non-banking financial institution is specified under Section 45- I (a) of the RBI Act, 1934 must follow these basic requirements:
  1. It should be a company registered under the Companies Act, 1956 or the Companies Act, 2013.
  2. It should have a least new owned fund of Rs 2 crores.
  3. It should have a full time director.
If you don't have a company, learn how to register a private company or a One Person Company.

THE PROCEDURE TO REGISTER NBFCs WITH THE RESERVE BANK

It is necessary that you apply online as well as submit a hard copy of the application along with the necessary documents to the Regional office of the Reserve Bank of India. The list of the required documents can be found in this webpage.

essential documents for NBFC registration at RBI website

Your application needs to be submitted at the official site of the RBI. Here, it is not necessary for the applicant company to log in on the cosmos page and the user id is also not required.

You can visit to page of the COSMOS application for company registration, after which the login window will be showing a pop-up "Excel application form available for download".

From there, you can download the application form.

Now, fill in the necessary details for your company's registration and after doing so, upload it via the portal.

You may note to indicate the right name of the regional office in the field “C-8” of the “Annex-1 in the excel application form.

Then you will receive a Company Application Reference Number for the CoR application that is to be filed online.

After that, you need to submit physical copy of the application form referring the online company application reference number, along with the essential documents to the Regional office. You can check the status of the application from the official site of RBI by using the acknowledgement number that will be provided to you.

LIST OF REGISTERED NBFCs

A person can find the list of registered NBFCs on the official site of the Reserve Bank of India

ACTION AGAINST COMPANIES FOR FALSE CLAIM OF BEING REGISTERED WITH RBI

If any institution or company is making false claim or misleading the general public of being registered with RBI, then the entity will be liable under various legal provision of the Indian Penal Code. Information regarding the false claim can be logged in nearest office of Reserve Bank or to any police station.

THE ACTION AGAINST COMPANY RUNNING WITHOUT CERTIFICATE

If the institution or corporate body running their activity such as lending, investment or deposit acceptance as their principle business without registration with the Reserve Bank of India as NBFCs, then it may impose fine or prosecute them in the court of law.

If any person comes in contact with unauthorized non banking company they must inform to the regional office of RBI and appropriate action will be taken in accordance with the RBI Act, 1934.

THE POWER OF RBI TO REGULATE

Under the RBI Act, 1934 Reserve Bank holds power to regulate, register, inspect or issue guideline for the NBFCs. The RBI can impose penalty on NBFCs in case they violate any rules of the RBI Act.

NBFC owners and executives have to run the company in accordance with the guidelines of the RBI.

RBI may also cancel the certificate of registration issued to the NBFC or restrict them from accepting deposits.

WRAPPING IT UP

Non banking finance companies (NBFCs) have played a very vital role in raising the Indian financial system by competing with banks and by bringing in efficiency and the diversity in the financial inter-mediation. NBFCs are important for public because they can get loan very easily with fewer formalities in comparison to banks.

NBFCs in India are also favourable in terms of ease of operation, possessing quality assets as well as profitability.

With minimal regulations, when compared to a bank, this form of business is actually very favourable if you want to start a lending business and want to limit your liability.

Read Next
Author Bio - Pulkit Arora is pursuing B.A LLB (Hons.) from Institute of Law, Nirma University. Connect with him on LinkedIn.
Editor Bio - Richaa Mukhopadhyay is pursuing B.A.LLB (Hons) from Amity Law School, Amity University Kolkata. Connect with her on LinkedIn.

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