Overview of NBFC Registration

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013, that engages in activities such as loans and advances, acquisition of government securities, bonds, stocks, leasing, insurance, hire-purchase, and chit business. While NBFCs in India do not have full banking licenses like commercial banks, after obtaining an NBFC license from the RBI, they offer valuable services to public depositors, borrowers, and investors in specific sectors.

Conditions for Maintaining an NBFC License:

• Asset Composition: More than 50% of the total assets must be financial assets.
• Income Generation: Over 50% of the gross income must come from financial assets.

Restricted Activities for NBFCs:

• Industrial activities
• Agricultural activities
• Sale or purchase of goods and services
• Sale or purchase of immovable property

Note: It is also possible to enter the finance business by acquiring an existing NBFC. However, obtaining a new NBFC registration is generally recommended.

Market Growth of NBFCs

While India has a significant number of banks, certain areas remain underserved by traditional banking institutions. This has led to a surge in demand for loans from NBFCs, which has, in turn, contributed to the rise in NBFC registrations. In recent years, the NBFC sector has seen tremendous growth and played a pivotal role in the development of the financial sector. This growth is driven by the provision of customized loan products, user-friendly policies, faster loan processing, and the adoption of advanced technology and digital platforms.

NBFCs have captured a significant share of the market, offering services similar to those of banks but focusing on specialized areas. With the continued advancement of technology, the NBFC sector is expected to grow further, providing even more financial solutions.

Role and Functions of NBFCs

The role of NBFCs in India can be summarized as follows:

• Supporting sectors such as infrastructure, education, and MSMEs
• Assisting in wealth creation
• Generating substantial employment opportunities
• Providing financial assistance to economically disadvantaged sections of society
• Ensuring faster loan processing
• Offering loans through digital platforms using advanced technologies
• Contributing to the economic development of the country
• Boosting government revenue
• Providing specialized credit options
• Supporting the growth of the financial market

Overall, NBFCs play a crucial role in the financial ecosystem, complementing the banking sector and driving economic growth through innovation and accessibility.

Different Types of NBFCs in India

NBFCs in India are primarily categorized based on their liabilities and activities. Here’s a breakdown of these classifications:

1. Based on Liabilities:

• NBFC-ND-SI (Systemically Important Non-Deposit Accepting NBFC):
  These are NBFCs with an asset size of Rs. 500 crores or more, as per the latest audited balance sheet. These companies are considered systemically important and must adhere to the policies mandated by the Reserve Bank of India (RBI). Additionally, they are exempt from credit concentration norms.

• NBFC-ND (Non-Systemically Important Non-Deposit Accepting NBFC):
  These NBFCs have an asset size of less than Rs. 500 crores. They are exempt from observing the Prudential Norms of 2015 (except for the annual certificate).

2. Based on Activities:

• NBFC - Investment and Credit Company (ICC):
  The ICC license is a consolidated license that combines the functions of loan companies, asset finance companies, and investment companies. This allows the license holder to engage in various types of wholesale, retail loans, and investment activities. The estimated processing time for an ICC license is around 120 days.

• NBFC - Microfinance Institutions (MFI):
  These NBFCs are primarily focused on providing credit to economically disadvantaged groups, aiming to promote financial inclusion.

• NBFC - Factors:
  These companies are involved in acquiring receivables from assignors and extending loans against the security of these receivables at a discount.

• NBFC - Peer to Peer Lending (P2P):
  P2P NBFCs operate digital platforms that connect lenders and borrowers, facilitating the mobilization of funds between individuals or entities.

• NBFC - Account Aggregators:
  These NBFCs specialize in collecting and organizing customer financial data from various sources, presenting it in a consolidated and easily accessible format as per the customer's request.

• Infrastructure Finance Company (IFC):
  IFCs invest at least 75% of their total assets in infrastructure loans, contributing to the development of key infrastructure projects.

• NBFC - Systemically Important Core Investment Company (CIC-ND-SI):
  These NBFCs focus on investing in equity shares, preference shares, debt, or loans of their group companies.

• NBFC - NOFHC (Non-Operative Financial Holding Company):
  NOFHCs assist promoters or promoter groups in establishing new banks.

• Mortgage Guarantee Company (MGC):
  MGCs are involved in providing mortgage guarantee services, primarily focused on the housing finance sector.

• NBFC - IDF (Infrastructure Debt Fund):
  These NBFCs primarily facilitate the flow of long-term debt into infrastructure projects, supporting the development of critical infrastructure in the country.

Each type of NBFC plays a distinct role in the financial ecosystem, contributing to various sectors of the economy and offering specialized financial services.

New Scale-Based Regulations for NBFCs

The Reserve Bank of India (RBI) has introduced a scale-based regulatory framework that categorizes Non-Banking Financial Companies (NBFCs) into four different layers. These layers are designed to regulate NBFCs based on their size and activities. Below is an overview of the categories and the requirements under each layer.

NBFC Categorization Based on Layers

Revised Regulatory Framework for NBFCs – 2021

The revised regulatory framework, introduced on October 22, 2021, categorizes NBFCs based on their activities and asset sizes. The key aspects of the updated regulations include:

• IPO Financing Limit: A ceiling of Rs. 1 crore per borrower for financing subscription to IPOs.
• NOF (Net Owned Fund) Requirement Changes: The NOF requirements for various NBFCs have been revised, as indicated in the table below.
• Loan Classification: NBFCs are required to classify loans overdue for more than 90 days as NPAs by March 2026, and loans overdue for more than 150 days by March 2024.

Current and Revised NOF Requirements for Different Types of NBFCs

These changes aim to provide a more tailored and stringent regulatory environment for NBFCs, ensuring that they can operate efficiently while safeguarding against financial risks. The revised framework is designed to create a more robust system for supervising NBFCs based on their size, operations, and risk profile.

Advantages of NBFC Registration in India

In India, the advantages of an NBFC Registration are:

• Saves Time and Cost: In contrast to small banks, the process of incorporating an NBFC is much simpler. Opening a bank involves a large amount of capital, time and cost, whereas the same is not in the case of an NBFC. One just needs the assistance of a good NBFC consultant with prior experience to obtain NBFC Registration in India.
• Easy Recovery of Loan: NBFCs work systematically and offer customised loan products with achievable repayments. It becomes a convenient process for the borrowers as they can repay the loan amount quickly within the prescribed time period.
• Economic Growth: Businesses and individuals are looking for an easy and reliable source of credit for their financial requirements. NBFCs provide affordable and secure credit facilities to an unserved market for their personal and business-related credit requirements. Therefore, NBFCs have contributed to the country's economic growth by providing financial freedom to MSMEs, self-employed professionals and individuals.
• Trading Money Market: NBFCs serve the benefits of trading in money market instruments.
• Provide Multiple Choices: Due to technological advancement, NBFCs are providing multiple choices to reach a huge audience at a quicker step. Non-Banking Financial Company covers both the large businessperson & small sectors by providing them multiple choices to avail themselves the credit facilities.
• Allowed FDI: Under NBFC, up to 100%, FDI (Foreign Direct Investment) is also an amazing advantage of NBFC Registration. Non-Banking Financial Companies are the largest propellants of starting finance in the country. Also, the financing process is faster & easier compared to Banks.
• Give Loans to Poor Credit Scorers: Generally, banks check the credit score first and in case of a poor credit score, the bank rejects the loan application. However, NBFCs provides loan to people having less credit score.

Documents Required for NBFC Registration

To complete the NBFC registration process, the following documents are required:

1. Certified or original copies of the Memorandum of Association (MOA), Articles of Association (AOA), and Certificate of Incorporation (COI).
2. Net worth certificate for the shareholders, directors, and the company.
3. Business profile of the proposed directors and shareholders.
4. Income Tax Returns for the company and its directors/shareholders.
5. Educational qualification certificates of the proposed directors.
6. KYC details, including the PAN of the company, GST number, and address proof.
7. Experience certificate highlighting the highest level of experience of the directors.
8. Bank account details of the company.
9. A Board Resolution format approving the NBFC registration.
10. IT returns for the last three years.
11. Loan and business structure details.
12. Credit reports of the directors and shareholders.
13. Audited balance sheets for the last three years.
14. Related party disclosures.
15. A detailed action plan for the next five years, including a Risk Assessment Policy and Fair Practice Code.
16. Banker's report confirming no lien on any fixed deposit.

These documents ensure that the company meets the eligibility requirements for NBFC registration and complies with the necessary regulatory framework.

Procedure for NBFC Registration

The process for NBFC registration involves several steps, as outlined below:

1. Engage an Experienced Consultant:
   The first step is to hire a qualified NBFC consultant with at least 10 years of experience. The consultant should have a professional team that includes Chartered Accountants (CAs), Lawyers, Company Secretaries (CS), and Senior Bankers.

2. Select a Company Name:
   Choose a name for the company that reflects its business focus, such as "Fintech," "Finance," "Capital," "Finserv," "Investment," "Leasing," etc.

3. Gather Required Documents:
   The next step is to arrange all the necessary documents required for the NBFC registration process.

4. File the Application:
   Submit the application along with the required documents to the concerned authority (RBI).

5. Document Verification:
   Upon submission, the RBI will verify the documents and the application to ensure that everything is accurate.

6. Issuance of NBFC Registration Certificate:
   If all conditions are met and the application is deemed satisfactory, the RBI will issue the NBFC registration certificate.

Conditions Set by RBI for NBFC Registration

After submitting the application, the RBI will review it and grant the license only if the following conditions are met:

1. The NBFC must demonstrate its ability to repay all dues to investors and ensure its business plan serves the larger public interest.
2. The proposed business should show strong earning potential.
3. The NBFC must comply with all RBI regulations.
4. The company’s activities must align with public interest.
5. The NBFC must have sufficient capital infusion capabilities.
6. The activities of the NBFC should not harm public interest.
7. The board should act in the best interests of the depositors and the public.

NBFC Registration with RBI

The RBI has two departments responsible for the regulation and supervision of NBFCs in India:

1. Department of Non-Banking Regulation (DNBR):

   • This department oversees the new NBFC registration process.
   • It is responsible for drafting policies and regulations for NBFCs.
   • The DNBR follows a transparent and innovative assessment process for NBFC applications. If additional documents are required during the registration process, the DNBR will notify the applicant via email, and the applicant must respond within the stipulated time (7, 15, or 30 days as per regulations).
   • The DNBR also handles the investigation of shareholders' or directors' profiles, the regulation of NBFC operations, and communication with the applicant company during the pre-registration phase.
   • Once approved, the DNBR sends the final decision, confirming approval from the RBI’s Executive Director Office.

2. Department of Non-Banking Supervision (DNBS):

   • This department ensures compliance with the NBFC rules and regulations set by the RBI.
   • It has the authority to cancel or suspend an NBFC's license in case of non-compliance.
   • After approval from DNBR, DNBS will collect the Net Owned Fund (NOF) certificate and a banker's report before issuing the original NBFC license.
   • The DNBS conducts on-site inspections and audits, ensuring NBFCs comply with applicable regulations.
   • The department also conducts seminars to educate the general public on NBFC compliance and regulations.

By following these steps and meeting the RBI’s conditions, the company can successfully obtain an NBFC registration.

Cancellation of NBFC Registration or License

The registration or license of an NBFC (Non-Banking Financial Company) can be cancelled under the following circumstances:

• The business plan does not meet the required standards.
• The consultants involved lack the necessary experience.
• Insufficient financial expertise or experience.
• Unsatisfactory business profiles of shareholders and directors.
• The area of operation for the NBFC is not promising.
• Capital is sourced from prohibited or unauthorized sources.

Penalties for Non-compliance with RBI Regulation

In India, the RBI has the power to impose a penalty on an NBFC for violating the provisions of the RBI Act. These penalties include:

• If a company carries out its operations without obtaining NBFC License, the RBI (Reserve Bank of India) can impose a fine of not less than Rs 1 Lakh, which can go up to Rs 5 Lakh or twice the amount involved in such a violation, whichever is more;
• If a company carries out its operation without obtaining NBFC License, the directors of the company are punishable with imprisonment up to one year;
• In case of non-compliance with RBI directions, then the defaulter will be liable for imprisonment of up to 3 years;
• Failure to produce documentation/answer queries: Fine, which may extend to Rs. 2000/- per offence and in case of continuous non-compliance, an additional fine up to Rs. 100/- per day is charged from the first offence;
• Acceptance of Deposits: Imprisonment or jail up to 3 years & a fine of twice the amount received.

FDI in NBFC

100% FBI is allowed for Non-Banking Financial Companies under automatic route if NBFC is involved in the following subject to the minimum capitalization requirements:

• Merchant Banking;
• Underwriting;
• Portfolio Management Services;
• Investment Advisory Services;
• Financial Consultancy;
• Stock Broking;
• Asset Management;
• Venture Capital;
• Custodian Services;
• Factoring;
• Credit Rating Agencies;
• Licensing and Finance (Financial Leases only);
• Housing Finance;;
• Forex Banking;
• Credit Card Business;
• Money Changing Business;
• Micro Credit;
• Rural Credit.

Some Benefits of Fintech-Based NBFC Business Model

1. Facility of online loan;
2. Use of AI, Big data & Machine Learning tools to minimise the fraud;
3. Working on financial inclusion app;
4. Addressing client problems using technology;
5. Creating space for the alternative online banking system, intruding conventional business model facing vital legal problems.