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NBFC

NBFC is a Non-Banking Financial Company. NBFC get its registration under the Companies Act, 2013 and is, also, regulated by RBI. It is a company engaged in activities very similar to the bank with some major points of differences

The principal objectives of NBFCs are to provide loans, personal loans, working capital loans, shared investments, other stocks and debenture issued by the Government or the other local authorities, leasing, insurance business. They also offer Market Place Lending Platform (P2P) for businesses. They are known to provide financial support and services to businesses and individuals.

Basically, an NBFC, to get and maintain its License, s can get involved in

  • the business of loans and advances,
  • acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature,
  • leasing,
  • hire-purchase,
  • insurance business,
  • chit business.

but does not include entities whose principal business activity is that of

  • agriculture activity, 
  • industrial activity, 
  • purchase or sale of any goods (except securities) or 
  • providing any services related to the sale/purchase/construction of an immovable property.

Classification of NBFCs

NBFC is a Non-Banking Financial Company. NBFC get its registration under the Companies Act, 2013 and is, also, regulated by RBI. It is a company engaged in activities very similar to the bank with some major points of differences

The principal objectives of NBFCs are to provide loans, personal loans, working capital loans, shared investments, other stocks and debenture issued by the Government or the other local authorities, leasing, insurance business. They also offer Market Place Lending Platform (P2P) for businesses. They are known to provide financial support and services to businesses and individuals.

Basically, an NBFC, to get and maintain its License, s can get involved in

  • the business of loans and advances,
  • acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature,
  • leasing,
  • hire-purchase,
  • insurance business,
  • chit business.

but does not include entities whose principal business activity is that of

  • agriculture activity, 
  • industrial activity, 
  • purchase or sale of any goods (except securities) or 
  • providing any services related to the sale/purchase/construction of an immovable property.

NBFC Registration Process

After you have formed a company and have the minimum NOF, you need to follow the below procedure to get NBFC License for your company :

    1. An application needs to be submitted online along with the required documents. And a Company Application Reference Number (CARN) is generated. This reference number is useful for all future enquiries and communications.
    2. The hard copy of the documents and the form as submitted above are sent to the Regional Office of the RBI.
    3. Once the submitted documents are verified and approved, the regional office sends an application to the central office of the RBI. There the application and the documents are examined thoroughly and a background check is conducted.
    4. If the company meets all the terms and conditions specified in Section 45-I A of the RBI Act, the License is granted to the applicant for the Non-Banking Financial Company.

    Just remember, the required minimum capital has to be kept in a deposit account, free from all liens. Generally, such amount is maintained in a Fixed Deposit (FD). On application to the RBI, this amount will be verified by it, as the deposit of the company with the concerned bankers.

    Documents Required for NBFC License

      • Certified Copy of Certificate of Registration (COR)

    Obtain a Certified Copy of COR, MoA, and AoA from the Regional ROC (Registrar of Companies)

      • Updated KYC & Net Worth Certificate

    Need the latest KYC details, income proof, credit report and Net Worth Certificate of Directors and shareholders. Education & qualification proof of the Directors.

      • Company’s Details

    Company’s PAN and GST number. Documents in support of the address of the company.

      • Net Worth Certificate

    Collect updated net worth certificate of Directors, Shareholders, and Company

      • Bank Account

    Company bank account details. This must have the minimum paid-up equity share capital of Rs. 2 crores. And well audited for the last three years.

    Also, a Banker report is to be obtained about the No Lien remark on the Initial Fixed deposit of Rs 2 Cr.

      • Board Resolution

    The resolution from the board in favor of getting NBFC registration.

      • Underwriting model

    A detailed action plan about the loan products, fair practice code, credit, and risk assessment policy. As planned for the next 5-years.

      • Organization Structure

    Plan of the organization arrangement and decision-making process. Basis of approval/rejection of a loan application as proposed.

      • IT Policy

    Submit planned system and Information technology policy.

    Compliance Requirements for NBFCs after COR

    There are certain compliances to be met after the completion of the NBFC Registration. Moreover, guidelines, circulars, and notifications, from the RBI, published in the public domain from time to time, are to be complied with.

    • Appointment of Statutory Auditor (CA with 5+ years of experience),
    • Statutory Audit,
    • Tax Audit,
    • GST Return Filing,
    • Income Tax Return Filing,
    • ROC Returns,
    • All other Compliances/Returns required by a competent authority.

    Compliances for NBFCs by RBI

    • Adoption of Fair Practice Code,
    • COSMOS Registration,
    • FIU-IND Registration,
    • CIC Registration,
    • C-KYC Registration,
    • CERSAI Registration,
    • Filling of NBS-9 by using the Online Platform of RBI (COSMOS),
    • Secretarial compliances,
    • Compliance of KYC Anti-money Laundering.

    Penalty of Non-Compliance to RBI Regulations

    RBI takes strict regulatory action if a company has its principal business of lending, accepting deposits or making investments but has not obtained the CoR of NBFC License. A heavy penalty or fine can be imposed on it. Or it can even be prosecuted in a court of law.RBI invites reporting of any entity which does non-banking financial activity but does not figure in the list of authorized NBFC on the RBI website. And accordingly, appropriate action will be taken for contravention of the provisions of the RBI Act, 1934.

    Moreover, RBI goes through market intelligence reports, complaints, and exception reports from statutory auditors of the companies, information received through SLCC meetings, etc. to find out companies violating its instructions/norms. RBI also shares this information with all the financial sector regulators and enforcement agencies in the State Level Coordination Committee Meetings.

    Why Choose NBFCLicenseIndia

    At NBFC License India, we understand that the actual work starts after receiving the license. We know that the critical issues of drafting company policies, business strategies, marketing, compliances prop up after the COR is accepted. And NBFC License India can help you during all these complex challenges. We support in all the below matters:

    • New Registrations
    • Mergers/Demergers
    • Takeovers
    • Business Re-structuring
    • Setting up Business Plans & Policies
    • Contract Drafting
    • Approval for Management Change from RBI
    • Designing Financial Services
    • Marketing Digital Loan Products
    • Meeting RBI Compliance
    • Internal Audit Services

    NBFC Registration or NBFC Takeover: Which is Better

    Applying for a new NBFC License is considered a better option than taking over an existing one. The experts always advise to go for a new NBFC registration instead of buying one.

    Part of the reason is that the government has made the process of NBFC registration simpler than before. Especially for Foreign Companies, intending to enter into the Indian financial industry. Let’s weigh the advantages of getting a fresh registration over buying so that we can decide better.

    • Low Legal Risk: For NBFC buying or takeover, the past transactions must be clean. Any non-compliance, on record, will have more chances of leading to the cancellation of the NBFC License.
    • Timeline: Time required for a fresh NBFC Registration is typically anywhere between 3-5 months (depending on correct document filing) whereas the process of buying an NBFC usually takes 2-3 months.
    • Capital: For a new application, you are required to block Rs. 2 Crore in a bank account. However, in the case of buying, the proposed shareholders need to submit the Banker’s report. This report is a certification by the bank that their bank balance is equivalent to the book value of the shares.
    • Ownership: There is no title risk of who owns the company in case of a new registration. You are invariably the first shareholder of the new company. Whereas, you will not be able to establish the precise title of shares, in an existing NBFC.
    • Tax Liability: The organization which is buying the existing NBFC is responsible to ensure that it has no tax liability pending.

    Frequently Asked Questions

    Q. What is NBFC?

    An NBFC or Non-Banking Financial Company is a financial institution that facilitates financial services but does not have a full banking license. It refers to:
    i. a financial firm that is a company.

    ii. a non-banking organization that is a company with the principal business of loan/advances, receiving deposits in some form, etc.

    iii. such other organization registered under RBI with prior approval of the government.

    NBFCs cater to the regions and clients, belonging to rural and semi-urban areas, not being served by the more organized banking sector. The requirements by NBFCs for customers are flexible to meet their financial needs. NBFCs may specialize in a certain sector and develop a data advantage.

    Q. What is the process of getting NBFC registration?

    1) . Apply online on the RBI website for the NBFC license. The application format has been prescribed and is available there. The application form needs to be accompanied by the relevant supporting documents. On submission, a CARN (company application reference number) gets generated.

    2) . Send hard copies of the application as submitted online and the documents to the Regional Office of RBI.

    3) . After some checks and approval of the application, the regional office sends the application to the Central branch of RBI.

    4) . Here, the application and documents are thoroughly examined and if all the terms under section 45-I A of RBI Act, 1934 are complied with then the NBFC license will be granted.

    Q. What documents are required to apply for NBFC license?

    1) .Documents related to the administration, management of the company

    2) .Certificate of Company incorporation

    3) .The MoA and the AoA

    4) .Documents describing the location of the company

    5) .Detailed information about Directors or Partners of the Company

    6) .Accounts of the company well-audited for last three consecutive years

    7) .Board Resolution in favour of NBFC formation

    8) .Bank Account with a minimum paid up equity share capital of INR-2 Crore

    9) .Income tax PAN, etc.

    10) .Latest KYC

    11) .Net worth certificate

    12) .Clean banker report

    13) .Education proof

    14) .Other relevant documents on request

    Q. What is the difference between banks and NBFCs?

    Though most of the activities of NBFC are very similar to that of a bank, yet there are several differences:

    a). NBFCs are registered under the Companies Act and RBI whereas banks are incorporated under the Banking Regulation Act, 1949.

    b). NBFCs are not part of the payment and settlement system, unlike banks. An NBFC cannot issue cheques drawn on itself, to its customers.

    c). NBFCs have to get approval from the RBI, specifying their need to accept deposits repayable on demand whereas banks are allowed to accept such deposits.

    d). With bank deposits, an insurance facility is available to the depositors, by DICGC (Deposit Insurance and Credit Guarantee Corporation), unlike NBFC depositors.

    e). Banks have to maintain reserve ratios like CRR or SLR. This is not compulsory for NBFCs.

    f). Banks can create credit but not NBFCs.

    g). Foreign Investments of up to 100% is allowed in NBFCs, after fulfilling certain conditions. Whereas this is limited for banks.

    h). Banks can provide transaction services, such as providing overdraft facility, transfer of funds, issue of traveller cheques, etc. to its customers. NBFCs are not permitted to provide these facilities.

    i). NBFCs are quite prominent in the unorganized and the rural sector, which has a low or no credit rating score and less access to financing. Whereas banks provide more services to the organized and urban/semi-urban sector.

    Q. What are the types of NBFCs?

    NBFCs are generally differentiated on the basis of:

    a). Type of liabilities –

    1. Deposit or

    2. Non-Deposit taking NBFCs.

    b). Type of Activities –

    1. Investment & Credit Company (NBFC-ICC) (this includes the earlier categories of Asset Finance Company, Loan Company, and Investment Company)

    2. Infrastructure Debt Fund (NBFC-IDF),

    3. Mortgage Guarantee Companies (NBFC-MGC),

    4. Infrastructure Finance Company (NBFC-IFC),

    5. Systemically Important Core Investment Company (CIC-ND-SI),

    6. Non-Operative Financial Holding Company (NOFHC),

    7. Micro Finance Institution (MFI), and

    8. Factors (NBFC-Factors), etc.

    Q. Does RBI regulate all financial companies?

    No. Housing Finance Companies, Nidhi Companies, Stock Exchanges, Merchant Banking Companies, Venture Capital Fund Companies, Stock-broking/Sub-broking Companies, Insurance Companies, and Chit Fund Companies are NBFCs but they do not need to be registered with the RBI Act, 1934 subject to certain conditions. They are controlled by other regulators.

    Q. What are the compliance requirements for the NBFCs?

    Compliance requirements differ according to the type of NBFC.

    I. Returns to be submitted by NBFC-Deposit Accepting are:

    1. NBS-1: Quarterly returns on deposits in First Schedule.

    2. NBS-2: Quarterly returns on Prudential Norms.

    3. NBS-3: Quarterly returns on Liquid Assets.

    4. NBS-4: Annual returns of critical parameters by a rejected company holding public deposits.

    5. NBS-6: Monthly returns on exposure to capital market institutions with total assets of Rs. 100 crore and above.

    6. ALM: Half-yearly returns with companies having public deposits of over Rs. 20 crore or asset size of over Rs. 100 crore

    7. Audited Balance sheet and Auditor’s Report.

    8. Branch Info Returns.

    II. Returns to be submitted by NBFCs-ND-SI

    1. NBS-7: Quarterly statement of capital funds, risk-weighted assets, risk asset ratio etc.

    2. Monthly Returns on Important Financial Parameters.

    3. ALM:

    a) Monthly statement of short term dynamic liquidity in format ALM [NBS-ALM1],

    b) Half-yearly statement of structural liquidity in format ALM [NBS-ALM2],

    c) Half-yearly statement of Interest Rate Sensitivity in format ALM – [NBS-ALM3].

    4. Branch Info returns.

    5. Quarterly returns on important financial values and basic information such as the name of the company, address, NOF, profit/loss during the last 3-years of NBFC-NDs with assets between Rs. 50 crore and Rs. 100 crore.

    Q. What are the powers of RBI on NBFCs?

    RBI is authorized to lay down policy, register, issue directions, regulate, supervise, inspect, and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. It can inflict a penalty on NBFCs for breaching any regulation or direction or order issued for NBFCs. The penalty may also result in the cancelation of the Certificate of Registration issued, or prohibiting the company from accepting deposits and alienating their assets or filing a winding-up petition.

    Q. What rules are applicable to ND-NBFCs with asset size of less than Rs. 500 crore?

    The applicable provisions are as under:

     

    a. An ND-NBFC shall not be subject to any statutes, whether prudential or conduct of business regulations. These are KYC, Fair Practices Code, etc., if they haven’t accepted any public funds and don’t have a customer interface.

    b. Those having a customer interface are subject to only conduct of business regulations including FPC, KYC, etc., if they are not accepting public funds.

    c. If public funds are accessed, NBFCs will be subjected to a few prudential regulations but not conduct of business regulations if they don’t have a customer interface.

    d. When both public funds are accessed and the customer interface is there, those companies are to comply to both the limited prudential regulations and the conduct of business regulations.

    Q. What action is taken if a financial institution does not get registered with RBI?

    Entities whose principal business is lending, investment or accepting deposits, that must be registered with RBI as NBFCs, are found to not have a registration, RBI can penalize or put a fine on them. A court of law can also prosecute them. RBI invites people from the public to report any such firm to the nearest Regional Office of the Reserve Bank. So that appropriate action can be taken against them for violating the provisions of the RBI Act, 1934.

    Q. What does the term public funds mean?

    Public funds do not mean the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received. Whether directly or indirectly from outside sources such as funds raised by the issue of Commercial Papers, debentures, etc. Even though public funds include public deposits, it may be noted that CICs/CICs-ND-SI are forbidden from accepting public deposits.

    Indirect receiving of public funds means funds received not directly but through associates and group entities that have access to public funds.

    Q. What is NOF or Net Owned Funds?

    First, let’s consider “Owned Funds”. It means the available funds to provide for losses. That is the aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, and balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets. Exclude reserves formulated for revaluation of assets.

    Now, deduct the accumulated balance of loss, deferred revenue expenditure, and other intangible assets. All the Investments, loans & Advances given, or deposits made with subsidiaries, group companies more than 10% of the owned funds. Thus, we get the Net Owned Fund (NOF) of the company.

    Q. Can all NBFCs accept public deposits?

    All NBFCs are not authorized to accept public deposits. Only those NBFCs who have received specific authorisation from RBI and have an investment-grade rating are allowed to accept or hold public deposits. The upper limit of public deposits they can hold is 1.5 times of its NOF.

    Q. What is the maximum rate of interest on deposits that NBFCs can give?

    NBFCs can offer a maximum interest of 12.5%. The interest may be paid or compounded at not earlier than monthly rests. The NBFCs can accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months. They cannot accept deposits repayable on demand.

    Q. What is meant by conducting financial activity as “principal business”?

    This term “principal business” has not been clarified under the RBI Act. Financial activity as the principal business is when a company’s financial assets comprise more than 50% of the total assets and income from financial assets form more than 50% of the gross income. The company fulfilling both these criteria will be registered as NBFC by RBI. This criterion is popularly known as a 50-50 test and is applied to ascertain whether or not a company is into financial business.

    Principal Business has been defined by RBI to ensure that only companies engaged predominantly in financial activity get registered with, are regulated and supervised by it.

    So any company engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as its principal business and, also doing some financial business in sidelines, will not be regulated by RBI.

    Q. Is it compulsory for every NBFC to be registered with RBI?

    In Section 45-IA of the RBI Act, 1934, no NBFC can commence or carry on the business of a non-banking financial institution nature without:

    1) getting a CoR (certificate of registration) from RBI, and

    2) without having an NOF of Rs. 2 crore.

    However, certain categories of NBFCs which are governed by other regulators are exempt from the CoR requirement.

    Q. What are systemically important NBFCs?

    NBFC-SI are those companies whose asset size, as per the last audited balance sheet, is of Rs. 500 crore or more. The activities of such NBFCs will impact the financial stability of the overall economy.

    Q. Can NBFCs accept deposits from NRIs?

    NBFCs can only accept deposits from NRIs by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account.

    Q. Are companies that do not fulfil the 50-50 condition but accepting deposits regulated by RBI?

    A company not having financial assets more than 50% of its total assets and not deriving at least 50% of its gross income from such assets is not an NBFC. Its principal business would be non-financial activities, such as agricultural/industrial activity, purchase or sale of goods, purchase/construction of immoveable property. It will be a non-banking non-financial company. Acceptance of deposits by a Non-Banking Non-Financial Company comes under the purview of the MCA (Ministry of Corporate Affairs).