What is a NBFC?

An NBFC or a Non-Banking Financial Company is that kind of financial institution which provides various financial and non-financial services to individuals, business enterprises, entrepreneurs, etc. They are different from the Cooperative and Commercial Banks, They do not need to hold a banking license but must strictly follow the rules and regulations provided by RBI from time to time.

NBFCs, most commonly, operate in the field of industrial and commercial loans and advances, deposit’s, leasing, hire-purchasing, investment funds, chit fund business, insurance business, instruments of the capital & money markets such as stocks, debentures, bonds, and many other similar activities.
India’s financial sector has shown consistent growth for the past two decades. The NBFC part of this sector has transformed tremendously over the past few years. And NBFCs have been at the forefront in driving new credit disbursals for the country’s underserved retail and MSME market.

NBFC License must be taken from RBI u/s 45-IA of the RBI Act of 1934. A financial institution wishing to be registered as an NBFC must, be duly registered either as per the Companies Act of 2013, or earlier Act of 1956.
RBI strictly regulates and ensures that the NBFCs are complying with the provisions and regulations provided in Chapter III B of the RBI Act.
The principal business activity of an NBFCs is to raise capital from the public depositors & investors and lend these further to the borrowers.

NBFCs are the bridges that link the investors or depositors with the borrowers. They have become a better alternative to the banking and financial sector by providing financial solutions to the unorganized segments of society.

Principal Business

The precise meaning of a “Principle business” has not been defined by the RBI Act. Therefore, RBI, in an attempt to bring clarity, has defined financial activity. It has defined that the principal business will be considered as a financial activity only, if the company fulfills the following conditions:
• Its Total Assets comprise of more than 50% financial assets.
• Income from financial assets constitutes more than 50% of the gross income.
This is also known as 50-50 criteria.

But below activities are not considered of being financial in nature:
• agricultural activity,
• industrial activity,
• purchase/sale of any goods and services (excluding securities), and
• Sale/purchase/construction of immovable property.

How NBFCs are Different from Bank

Because both NBFC and Banks are both involved in financial activities but some features are different in them. Some of them are:

• Acceptance of Deposits.
• Cheques drawn on itself.
• Being a part of the payment and settlement system.
• Facility of insuring Deposit’s, available with Deposit Insurance and Credit Guarantee Corporation. Applicable only to bank deposit’s.

Types of NBFCs

NBFCs have been broadly classified on the following basis:

1. Liabilities:
• The deposit accepting NBFCs and
• Non-Deposit accepting NBFCs,

(Non-deposit taking NBFCs are classified further as per their size:)

• systemically important (NBFC-NDSI) and
• others
2. Activities:
• Factors
• Mortgage Guarantee Companies
• Investment Credit Company
• Infrastructure Debt Fund
• Micro Finance Institution
• Non-Operative Financial Holding Company
• Systemically Important Core Investment Company

Application for an NBFC License can be made in any of the following categories:

• Non-Banking Financial Companies – Factors (NBFC-Factors): These are NBFCs that have factoring as their principal business activity. Factoring is a financial transaction. A kind of “debtor finance” in which an entity can sell it’s invoice or bills (accounts receivables) to a third party (NBFC-Factor) at a discount. It is also commonly known as bill discounting or invoice financing.
• Non-Banking Financial Companies – Mortgage Guarantee Companies (NBFC-MGC):NBFC-MGC must be registered with the RBI as a Mortgage Guarantee Company. It’s principal business is that of providing a mortgage guarantee. This guarantee is provided for repaying an outstanding housing loan and interest accrued on it, up to the guaranteed amount to a creditor institution, when a trigger event happens. The minimum NOF requirement and financial asset criteria are different for this kind of NBFC.
• Non-Banking Financial Companies – Investment Credit Companies (NBFC-ICC):Any financial organization whose primary business is- Asset finance. The finance is provided by loans/advances or otherwise, for any activity other than it’s own and acquiring securities. And it’s activities must not fall under some other category defined by the RBI.
• Non-Banking Financial Companies – Infrastructure Finance Companies (NBFC-IFC): These types of Companies invest in the debt securities of infrastructure companies or in public-private partnership projects, who have a minimum NOF of Rs. 300 crore. The principal business and rating requirements are also different for such NBFCs.
• Non-Banking Financial Companies – Microfinance Institution (NBFC-MFI): A non-deposit taking NBFC lending on a short-term basis to low-income groups in India, with at least 85% of it’s assets, satisfying a few conditions:

  1. the loan provided to a borrower with a rural household must have an annual Income of less than Rs. 60,000, or in case of an urban and a semi-urban Household, the annual Income of Income must not exceed Rs. 1,20,000.
  2. the amount of lending must not exceed Rs.35,000 in the first cycle and Rs.50,000 in all the subsequent cycles.
  3. the total obligation of the borrower doesn’t exceed Rs.50,000.
  4. if the amount is more than Rs.15,000, then the loan term must be of at least 24 months, with prepayment and without penalty,
  5. loan to be extended without any mortgage,
  6. the aggregate number of loans provided for income generation must not be less than 75% of the total loans given by the MFI,
  7. the frequency of repayment, whether weekly, fortnightly, or monthly installments, to be selected by the borrower.

• Non-Banking Financial Companies – Non-Operative Financial Holding Company (NBFC-NOFHC):b. Non-Banking Financial Companies – Systemically Important Core Investment Company (NBFC-SI-CIC): These NBFCs obtain shares, stocks, and securities. The transactions must fulfill the below conditions: The financial organization through which promoter or promoter groups will be permitted to set up a new bank. It is a wholly-owned NOFHC that shall hold the bank as well as all other companies involved in financial services, regulated by RBI or other regulators, to the extent permissible under the applicable regulatory prescriptions.
• Non-Banking Financial Companies – Systemically Important Core Investment Company (NBFC-SI-CIC): These NBFCs obtain shares, stocks, and securities. The transactions must fulfill the below conditions:

  1. It holds at least 90% of it’s total assets as an investment in equity or preference shares, and debt/loans in group companies,
  2. It’s investments in the equity stock/shares (including instruments that are convertible into equity shares within a period of not more than 10-years from the date of issue, in group companies) must not be less than 60% of it’s total assets,
  3. It does not trade it’s investments in stocks, debt or loans in group companies except by the way of block sale for dilution or disinvestment,
  4. No financial activity, which is listed u/s 45-I(c) & 45-I(f) of the RBI Act, is being carried out by it. Other than for investments in bank deposit’s, government securities, money market instruments, loans to and investments in debt issuances of group companies or guarantees declared on behalf of group companies,
  5. It’s asset size is Rs.100 crores or above,
  6. It accepts public funds.

Pre-Conditions of NBFC Registration

Process of Applying for NBFC License

After your company has been incorporated and has accumulated the minimum NOF, you need to follow the below procedure to get it registered as an NBFC with RBI:

Please remember to keep the required minimum capital in a deposit account, free from all liabilities. Generally, this amount is kept as a Fixed Deposit (FD). RBI shall verify this amount, with the concerned bank and then approve your application.

Process of Registration

Documents Required

• Certified Copy of Certificate of incorporation (CoI): Take a Certified Copy of CoI, MoA (Memorandum of Association), and AoA (Articles of Association) from the Regional ROC (Registrar of Companies)
• Updated KYC: Latest KYC details, income proof, credit report, and Net-worth Certificate of Directors and shareholders.
• Net Worth Certificate: Collect updated net worth certificate of Directors, member/shareholders, and Company.
• Education: Education & qualification proof of the Directors.
• Company’s Details:Company’s PAN & GST number. Documents in support of the address of the company.
• Bank Account: Details of the bank account of the company. This account must have at least Rs.2 crores deposited as the minimum NOF requirement. And it must be well audited for the last 3-years.
• Banker’s Report:A report to be obtained from the bank confirming the No Lien remark on the Initial Fixed Deposit of Rs.2 crores.
• Board Resolution: The board’s resolution must include, “approving the formation of the NBFC”.
• Underwriting model: A detailed action plan, for the next 5-years, about the loan products, complying with the Fair Practices Code, credit, and risk assessment policy must be present.
• Organizational Structure: Complete plan of the organization hierarchy and decision-making process. The proposed criteria on which a loan application will get approved or rejected.
• IT Policy: The planned system and Information technology policy.

RBI Conditions for Granting NBFC License

For NBFC registration, the company shall apply in the format as specified by the RBI. Before registering the company as an NBFC, RBI may inspect the financial & other books to satisfy the following conditions:

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