Article by Pulkit Arora. Edited by Adhip Ray.
Non-Banking Financial Companies (NBFCs) are financial organizations carry out activities which are similar to banks (while not being banks themselves). It has been defined in the Section 45I(f) of the RBI Act, 1934 as –
“(i) a financial institution which is a company;
(ii) a non-banking institution which is a company, and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.”
A Brief Introduction on Non-Banking Finance Companies
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. Over the years, it has underwent several revisions and several other circulars has also been published which now govern the regulation of NBFCs in India
Therefore, in this article, I am going to show you the ins and outs of the working of an NBFC as well as how you can register an NBFC in India.
What an NBFC Can and Can Not Do
NBFCs had been established in order to induce competition in the financial market. It performs a multivariate number of tasks 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 can it facilitate as a payment gateway or send or receive payments for its depositors.
A Non-Banking Financial Company cannot issue cheques drawn on itself. Further, deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is also not available to depositors in an NBFCs.
Different Types Of NBFCs
NBFC can be classified into various categories:
- By the type of liability it undertakes, into deposit and non-deposit accepting NBFCs,
- Non-deposit taking NBFCs can be further classified by their size into systemically important and other non-deposits hold companies like (NBFC-NDSI and NBFC-ND),
- By the type of activity, they perform.
Based on the criteria of the activities performed by NBFCs, the Non Banking Financial Companies 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 requires at least 75% of its overall assets in infrastructure loans, it must have at least Rs 300 crore net worth and it must have ‘A’ credit rating or equivalent. Here are some of the other qualifications prescribed by the Reserve Bank of India.
#5. Systemically Important Core Investment Company
It performs the business of 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% must be 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.
#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 as well as other financial institution via this institution. Basically this NBFC serves as a holding company for promoters operating various banks and other financial institutions. Here’s the RBI circular explaining it in more depth.
Growth of NBFCs in India
The Non-Banking Finance Companies gained their importance since the 1980s against the highly regulated banking sector regime. NBFCs helped in the growth of financial sector and it came to integral part of the financial institution of India.
It had enhanced the competition and diversification within financial sector. NBFCs provide simplified procedure and flexibility to get loans with a 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 problems in adverse portfolio selection, as well as incompetency in the financial management leading to rising Non Performing Assets (NPA).
However with the advent of the Insolvency and Bankruptcy Code, and the clear-up of the NPAs in the banking sector, NPAs are slowly becoming a thing of the past and therefore it is might not be much of a concern anymore.
How Does NBFC Registration and NBFC Licensing Work?
According to section Section 45-IA, 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.
However, the following list of companies need not register with the RBI-
- Venture Capital Fund / Merchant Banking Companies / Stock Broking Companies registered with SEBI.
- Nidhi Companies, or mutual benefit companies.
- Chit Fund companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982.
- Insurance Companies, which hold a valid Certificate of Registration issued by IRDA.
- Housing Finance Companies regulated by National Housing Bank
- Stock Exchanges
However, most of these companies need to register via different means and with other Governmental Departments / Organizations. And, that’s why in order to prevent dual registration, the RBI has done away with their registration as an NBFC.
Pre-Requirements to Register an NBFC and get a License for an NBFC
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- IA of the RBI Act, 1934 must follow these basic requirements:
- It should be a company registered under the Companies Act, 1956 or the Companies Act, 2013.
- It should have a least new owned fund of Rs 2 crores.
- It should have a full time director.
- One-third of the board of directors should have experience in the financial sector.
- The company must have a good CIBIL score.
- Your company and its directors must have a Digital Signature Certificate.
- How to Register a Private Company and a One Person Company
- How To Appoint Directors For Your Company
- All About Independent Directors as per Indian Company Law
How to Register an NBFC – The Procedure to Get an NBFC License Explained In-Detail
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 form that you need to fill up and submit, depends upon the type of NBFC you are opting for. The list of the required forms can be found in this webpage.
Your application needs to be submitted at the official site of the RBI.
First, visit the COSMOS page to apply for the registration of your NBFC, 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 regarding your company’s registration details and after doing so, upload it via the portal.
Then you will receive a Company Application Reference Number (CARN) that you need to note down and keep with yourself.
After that, you need to submit physical copy of the application form, referring the online Company Application Reference Number (CARN), 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.
Documents That You Will Need to Register a Non-Banking Financial Company in India
- Certificate of Incorporation of a Company issued by the Registrar of Companies.
- Detailed information on the key managerial personnel, as well as a company brochure
- A copy of the company’s PAN/Corporate Identity Number (CIN).
- Documents concerning the office location/address
- Certified copy of the Memorandum and Articles of Association of the Company.
- A list of directors’ profiles must be supplied, signed by each director.
- The Company’s Directors’ CIBIL/credit reports are necessary.
- A copy of the board resolution certifying that the company has not engaged in or halted NBFC activity and will not engage in any until the RBI registration is granted.
- A board resolution on the ‘Fair Practices Code’ must be passed, and a certified copy must be presented.
- Certificate by the statutory auditor certifying that the company does not hold and does not accept public deposits. (Related Read: How Private Companies Are Required to be Audited in India)
- A certificate from the Statutory Auditor stating the money owned as of the date of the application is necessary.
- It is necessary to provide information on the bank account, holdings, loans, credits, and so on.
- If relevant, an audited balance sheet and profit and loss statement from the previous three years, as well as the directors and auditors report, must be submitted.
- Bank statements and income tax returns must be self-certified.
- Information outlining the company’s plans for the future, often for the next three years, as well as projected balance sheets, cash flow statements, and income statements.
Power of RBI to Regulate NBFCs in India
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 promoters and directors have to run the company in accordance with the guidelines of the RBI.
RBI may also cancel the certificate of registration (that is the NBFC license) issued to the NBFC or restrict them from accepting deposits.
List of Registered NBFCs
You can find the list of registered NBFCs on the official site of the Reserve Bank of India, classified based upon the activities performed by NBFCs in India.
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.
They are easier to set up compared to banks due to the lower restrictions imposed on them by the Government. NBFCs in India are also favourable in terms of their 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.
If you found this article helpful, do give it a share. And, if you have any thoughts, do share them in the comments.