With the increasing demand for credit in the Indian market, Non-Banking Financial Companies (NBFCs) are becoming an increasingly popular option for borrowers. However, just like any other financial institution, NBFCs need to comply with certain regulations and obtain proper licensing to operate in the country. This is where the NBFC registration process comes into play, and it’s crucial for anyone looking to start an NBFC. In this blog post, we’ll take a closer look at NBFC registration in India, its types, and the steps involved in the process. So, whether you’re an entrepreneur or an investor looking to enter the Indian financial market, this post has everything you need to know about NBFC registration.
1. Definition of NBFC in India
A Non-Banking Financial Corporation, or NBFC, refers to a company that is incorporated under the Companies Act of India and engages in the business of providing loans and advances or acquiring stocks, equities, and other marketable securities issued by the government or local authorities. The Reserve Bank of India (RBI) further defines an NBFC as a company carrying out financial activity as its principal business. The company must meet the 50-50 test, which means that at least 50% of its assets and income must be derived from financial activity. The NBFC business excludes activities related to the purchase or sale of goods or the provision of services. NBFCs are regulated by both the RBI and the Ministry of Corporate Affairs.
Aside from loans and investments, an NBFC may engage in chit business, leasing, hire-purchase, or insurance business. However, an NBFC cannot accept demand deposits and issue cheques drawn on itself, unlike banks. Unlike bank deposits that are insured by the Deposit Insurance and Credit Guarantee Corporation, deposits in NBFCs are not insured. NBFCs are classified into deposit-taking and non-deposit taking NBFCs, and they may be further categorized based on their size and type of activity.
For a company to operate as an NBFC, it must first be registered under the Companies Act of 1956 or 2013, as a private or public limited company, with a minimum net owned fund of Rs. 2 Crore, and its directors must possess finance experience. The CIBIL records of the company must be clean, and it must have a detailed business plan for the next five years. The company must also comply with capital compliances and FEMA. Once the company is registered, it must obtain a certificate of registration and adhere to guidelines set forth by the RBI, such as not receiving deposits payable on demand and ensuring that public deposits are for a minimum of 12 months and a maximum of 60 months.
Overview of NBFC registration process in India
Non-Banking Financial Company (NBFC) registration in India is a process that does not involve the complexities of registering a bank. NBFCs offer financial products and services such as loans, advances, acquisition of shares, hire-purchase finance, leasing, and chit funds. Unlike banks, NBFCs cannot accept savings and current account deposits, issue cheques drawn on themselves, and their depositors do not receive deposit insurance and credit guarantee coverage. To register an NBFC, a company must have a minimum net owned fund of Rs. 2 crores or more and be registered under the Companies Act 2013. Additionally, a good CIBIL score is required. After submitting an application form on RBI’s official website, a CARN number is generated, and the hard copy of the application is sent to the regional branch of RBI. Once the application is checked and verified, the license is given to the company.
To continue an NBFC license, a company’s total assets should comprise more than 50% of financial assets, and more than 50% of gross income must be generated from financial assets, among other criteria. NBFCs have played a crucial role in the growth of the financial sector in India due to user-friendly loan policies, customised loan products, faster processing loans, and the use of advanced technology and digital reach. The role and functions of an NBFC in India involve developing sectors such as infrastructure, providing financial assistance to economically weaker sections, offering loans through a digital platform, contributing to the state exchequer, and aiding in the growth of the financial market. NBFCs in India can be categorised based on liabilities, with Systemically Important NBFCs being those with an asset size of Rs. 500 crores and more.
Documents required for NBFC registration
NBFCs are financial institutions that offer various banking and non-banking services to customers in India. To commence an NBFC business, a company needs to acquire a Certificate of Registration from Reserve Bank of India (RBI). This involves a lengthy process of documentation and compliance with RBI rules and regulations. For NBFC registration, an applicant company must provide required documents continuously from the company incorporation to obtaining the Certification of Incorporation. A good credit score of the director/subscriber, a net owned fund of Rs. 2 crore, and the appointment of an independent director are necessary for NBFC registration. Furthermore, the applicant needs to submit documents online on RBI’s official website and submit a physical copy to the regional branch of RBI. After verifying the documents, the RBI grants the Certificate of Registration to the applicant company.
To fulfill the documentation requirements for NBFC registration, the applicant company needs to submit various documents in both physical and online forms. The required documents include the Certificate of Incorporation, Memorandum, and Article of Association. Detailed information about the directors and subscribers of the company, including their ID and address proof, evidence of directorships in other companies, is also mandatory. Annexure I, II, and III, which highlight the company and its workings must be duly disclosed. Besides the mandatory documents, the NBFC department can request additional necessary documents. Directors and subscribers must self-attest all documentation. Failure to comply with RBI regulations can lead to penalties. Therefore, fulfilling documentation requirements is crucial for NBFC registration and subsequent business operations.
Eligibility criteria for NBFC registration
Non-Banking Financial Companies (NBFCs) in India are financial institutions that provide various financial products and services to customers. However, unlike banks, NBFCs cannot accept savings and current account deposits, issue cheques drawn on itself, or provide deposit insurance or credit guarantee coverage. To be eligible for NBFC registration, a company must be registered under the Companies Act 2013 with a minimum net-owned fund of Rs. 2 crores or more. The company must comply with the Reserve Bank of India (RBI) guidelines, which state that an NBFC cannot carry out non-banking financial business without a certificate of registration from the RBI and must have net-owned funds of Rs. 2 crores. Net-owned funds can be calculated from the last audited balance sheet of the company, and detailed information about management and a company brochure, a copy of the PAN or Corporate Identity Number, and required documents must be submitted along with the application. Once the application is checked and verified, the RBI will grant a license to the company.
Registering an NBFC in India is an easy task compared to registering for a small bank. NBFCs are highly sought after in the fintech industry as entrepreneurs are looking for an easy funding source. However, considering the time and cost involved in opening a bank, NBFC registration is a more profitable and less time-consuming process. NBFCs offer considerably less loan amounts, making it easier for borrowers to repay their loans. Thus, NBFC registration is advantageous for aspiring entrepreneurs looking to earn a good return. To register, the company must first comply with the Companies Act 2013, and there must be at least one director in the company from the same background. A good CIBIL score must be presented to register as an NBFC. After filling out the application form on the RBI’s official website and submitting the required documents, a CARN number will be generated. A hard copy of the application must be sent to the regional branch of the RBI.
In conclusion, registering as an NBFC requires meeting specific eligibility criteria, including a minimum net-owned fund of Rs. 2 crores, detailed company information, and compliance with RBI guidelines. It is a less complicated and less costly process than opening a small bank. The NBFC sector is expanding in the fintech industry, making it an ideal option for entrepreneurs looking for an easy and profitable funding source.
Steps to apply for NBFC registration
To apply for NBFC registration in India, one needs to fulfill a complicated process and fulfill all the necessary documentation requirements. Swarit Advisors is an expert service provider that can help you attain NBFC registration certificate smoothly and efficiently. From company registration to securing the NBFC license, Swarit Advisors is a one-stop service provider for your NBFC registration requirements.
To start NBFC registration, one needs to go through an overview of NBFC registration and understand its eligibility criteria. NBFC or Non-Banking Financial Company is a company registered under the Companies Act 2013, primarily involved in the business of loans, advances, and acquisition of bonds or securities. To meet the eligibility requirements for NBFC registration, the total assets must comprise more than 50% of financial assets, and more than 50% of gross income must be generated from financial assets.
NBFCs in India are categorized into two types- deposit accepting NBFCs and non-deposit accepting NBFCs. One can choose from ten different forms of NBFCs, such as Asset Finance Company (AFC), Loan Company (LC), Infrastructure Finance Company (IFC), etc.
To register an NBFC, one needs to start by registering the company under the Companies Act 2013 or Companies Act 1956, with a minimum net owned fund of Rs. 2 crore or more. At least one director should be from the same financial background, and a good CIBIL score is mandatory. The application form for NBFC registration must be filled and submitted with all the necessary documents to RBI’s official website. Once the application is verified by the RBI, the company can expect to receive the NBFC license.
Role of RBI in NBFC registration
The Reserve Bank of India (RBI) plays a crucial role in the registration process of Non-Banking Financial Companies (NBFCs) in India. NBFCs are financial institutions registered under the Companies act 2013 that offer financial services to the public but do not require a banking license. Instead, they must comply with the rules and regulations set by the RBI. The RBI strictly regulates and ensures that all NBFCs comply with the provisions and regulations indicated in Chapter III B of the RBI Act 1934. Consequently, NBFC Registration is a lengthy and intricate procedure that requires vital documents and compliance with all the requirements of the RBI. The process involves application filing, online verification, and issuance of the NBFC registration certificate by the RBI. The RBI also establishes criteria that must be fulfilled by the NBFCs to maintain their license. These criteria include total assets being composed of more than 50% financial assets, and over 50% of the gross income being generated from financial assets. Through their stringent regulations, the RBI ensures the safety and soundness of the financial system in India and promotes sustainable financial growth.
2. The role of RBI in regulating NBFCs
The Reserve Bank of India has an important role in regulating non-banking financial companies (NBFCs) in India. NBFCs are financial institutions that provide loans and advances, acquire stocks, shares, securities, bonds, and debentures issued by the government or any local authority. They also engage in hire-purchase leasing, insurance business, and chit fund business. RBI is responsible for supervising and controlling the activities of NBFCs that are not covered by the Banking Regulation Act of 1949. RBI’s regulations for NBFCs include providing a certificate of registration before commencing business operations, a minimum net owned fund of Rs. 2 crore, a 12-60 month minimum and maximum period for accepting public deposits, and compliance with a ceiling interest rate prescribed by RBI.
It is mandatory for NBFCs to adhere to the provisions contained in Section 45-IA of the RBI Act 1934 regulation. RBI has classified different categories of NBFCs based on their activities and whether they accept deposits or not. In addition, the central bank has set specific regulations for them. For instance, the infrastructure finance company (IFC) must have a net owned fund (NOF) of Rs. 300 crore, maintain a credit rating of ‘A’ or equivalent, and have a CRAR of 15% and 75% in infrastructure loans. Systemically Important Core Investment Company (SI-CIC-ND) must have assets of Rs. 100 crore or more, with 90% of it deployed in the form of investment in shares, debt instruments, or loans within group companies, and 60% invested in equity shares or those instruments which can be mandatorily converted into equity shares. Lastly, RBI has the authority to impose penalties or cancel the certificate of registration granted to NBFCs for non-compliance with the regulations.
3. Differences between banks and NBFCs
Banks and Non-Banking Financial Companies (NBFCs) are two kinds of financial institutions that provide similar financial services to customers. However, they differ in certain aspects. Banks have the authority to issue cheques and demand drafts, whereas NBFCs cannot do so, and they are not a part of the payment and settlement cycle. While banks accept demand deposits, NBFCs can only accept term deposits. Banks are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, while NBFCs are regulated by the RBI under the RBI Act of 1934. Banks are also required to maintain reserve ratios, whereas NBFCs are not. Banks can create credit, but NBFCs are not involved in the creation of credit.
4. Categories of NBFCs in India
NBs or Non-Banking Financial Companies are a crucial part of the Indian financial system. Reserve Bank of India regulates NBFCs and categorizes them based on their deposit-taking capacity and business activity. There are different categories of NBFC registration in India, such as Deposit-taking Non-Banking Financial Company (NBFC-D) and Non-Deposit taking Non-Banking Financial Company (NBFC-ND). NBFC-Ds are authorized to accept and repay deposits, whereas NBFC-NDs cannot accept deposits. NBFCs are also classified based on their business activity, such as Infrastructure Finance Company, Microfinance Company, and Peer-to-Peer Lending Platforms. RBI recently merged three NBFCs into one named NBFC-Investment and Credit Company to ease operational flexibility. Furthermore, an Infrastructure Finance Company must have at least Rs 300 crores net-owned funds and require the best credit rating from all credit rating agencies. The regulatory classification of NBFCs in India is comprehensive and primarily based on their operational capacity and business focus.
5. Criteria for NBFC registration in India
To register as an Non-Banking Financial Company (NBFC) in India, certain criteria must be met to fulfill the regulatory requirements set by the Reserve Bank of India (RBI). As per the Companies Act 2013, any financial institution that provides services similar to banks is considered an NBFC. RBI sets a minimum limit of INR 2 crore as the Net Owned Funds (NOF) for NBFC registration. The company should also have a minimum credit rating, meet the eligibility criteria for the activities involved, and provide information and documents required by the RBI. Fulfilling these criteria ensures that the NBFC follows proper procedure for registering and conducting business, while also providing safety and trust to potential clients.
6. Types of NBFCs which do not require registration
NBFCs that do not require registration with the Reserve Bank of India (RBI) are entities that are involved in financial activities but are regulated by other financial sector regulators. These types of companies are exempted from NBFC registration requirements and regulations by the RBI. Housing Finance Companies, regulated by the National Housing Bank; Insurance Companies, regulated by the Insurance Regulatory and Development Authority of India; Stock-Broking Companies, regulated by Securities and Exchange Board of India; Merchant Banking Companies, regulated by Securities and Exchange Board of India; Venture Capital Companies, regulated by Securities and Exchange Board of India; Companies running Collective Investment Schemes, regulated by Securities and Exchange Board of India; and Nidhi Companies, regulated by the Ministry of Corporate Affairs, are among the entities that do not require NBFC registration. Chit Fund Companies are regulated by the respective State Governments and do not require registration either.
7. Company requirements for NBFC registration
Non-Banking Financial Company (NBFC) is a financial institution that offers financial products and services to customers without having a banking license. NBFCs in India are primarily into loans, shares acquisition, finance leasing, hire-purchase, chit fund and more. However, it is different from a bank as it cannot accept savings, current account deposits and issue cheques drawn on itself. Its depositors do not get deposit insurance and credit guarantee coverage.
For NBFC registration in India, the company should already be registered under Company Act 2013 or Company Act 1956 as a private or public limited company. The company should have a business financial planning for at least 5 years and a good CIBIL score or credit rating. The minimum net owned funds shall be Rs. 2 crore or above and the minimum assets should be worth Rs. 200 crore or above. One third of directors should have financial experience.
8. Financial and capital compliance requirements for NBFCs
Non-Banking Financial Companies (NBFCs) have become a crucial avenue for credit disbursement and financial inclusion in India. As a result, NBFCs have attracted both domestic and overseas investors. However, setting up an NBFC in India involves numerous requisites, including the fulfillment of specific capital requirements mandated by the Reserve Bank of India (RBI) as a regulator. These requirements are critical in ensuring that NBFCs meet the minimum financial capital standards that mitigate any risks involved in their operations. Therefore, NBFCs must abide by the capital compliance requirements to register and commence their operations.
For an entity intending to operate as an NBFC in India, the RBI specifies certain conditions that must be fulfilled. These conditions include having a minimum net owned fund (NOF), which is the mandatory capital specified by the Reserve Bank of India. The NBFC must also have a viable business plan outlining the market products, services offered, technology, and operational system for the next five years. Moreover, the company and its directors must have a robust credit history, and the directors must have ten years of experience in the financial sector. Finally, companies must also ensure that they comply with the norms of the Foreign Exchange Management Act (FEMA) 1999 if planning to incorporate foreign direct investment.
According to Section 45-IA of the RBI Act 1934, every non-banking financial company must create a reserve fund and transfer not less than 20% of its net profit annually to this fund before declaring dividends. NBFCs cannot pertake in agricultural or industrial activities, purchase-sale of goods (except securities), or provide services related to immovable property. Moreover, NBFCs cannot issue cheques drawn on themselves, and depositors cannot avail the deposit insurance facility. Accompanying this, NBFCs cannot claim the availability of Credit Guarantee Corporation and do not form a part of payment and settlement systems typical of banking institutions.
Obtaining a certificate of registration from the RBI is a mandatory requirement to ensure that an NBFC can commence its business. An NBFC must be a company registered under section 3 of the Companies Act 2013 and possess a minimum net owned fund of Rs 200 lakhs. Moreover, the company must be compliant with the provisions of the FEMA Act, and the directors should have a clear credit history. Before operationalizing, an NBFC must have a comprehensive business plan outlining its vision, goals, and objectives ready for the next five years.
In conclusion, capital compliance requirements and creating a reserve fund are critical obligations that NBFCs need to fulfill before starting operations in India. By fulfilling these requirements, NBFCs can ensure that they meet the minimum capital standards international banking systems rely on and mitigate any potential risks associated with their operations. This, coupled with creating a comprehensive business plan, helps in maintaining transparency and efficiency in the operations of the NBFC.
9. Guidelines for public deposits taken by NBFCs
The Reserve Bank of India (RBI) provides guidelines to regulate and govern Non-Banking Financial Companies (NBFCs) operating in India. These companies are not allowed to accept demand deposits and cannot issue cheques. RBI is responsible for ensuring the healthy growth of these institutions while keeping them within the policy framework of the financial system. The aim is to avoid any systemic aberrations that may arise from their functioning and existence. RBI regulates and supervises NBFCs to ensure their compliance with the regulatory requirements and guidelines.
Public deposits taken by NBFCs must adhere to certain guidelines. For instance, NBFCs should display their Certificate of Registration (CoR) prominently on their websites and in their offices. This CoR should make it clear that the NBFC has been authorized by RBI to accept deposits. Depositors must also verify that the NBFCs they invest in are authorized to accept deposits from the list of deposit-taking NBFCs available at https://rbi.org.in. Additionally, the maximum interest rate payable on public deposits should not exceed 12.5%. These precautions are necessary, especially in the digital age, where fraudulent NBFCs can easily deceive unsuspecting customers.
Depositors must also be aware that public deposits with NBFCs do not have access to the Deposit Insurance facility. This means that the depositor is not guaranteed any compensation in the event of fraud or bankruptcy. It is therefore essential that depositors demand proper receipts for every deposit made with the NBFC. The receipt must include information such as the depositors’ name, the deposit amount, the rate of interest payable, the maturity date, and amount. Brokers and agents collecting public deposits on behalf of the NBFC must also be authorized to do so by the concerned NBFC. These precautions protect depositors from fraudulent and unauthorized deposits, ensuring that they invest in trustworthy NBFCs.
In conclusion, public deposits taken by NBFCs must adhere to strict guidelines to protect depositors from fraudulent and unauthorized deposits. RBI provides the necessary regulatory framework to ensure that these companies operate within the financial system’s policy framework and do not lead to systemic aberrations. Deposit insurance is not available to NBFC depositors, meaning that they must take additional precautions to protect their investments. Proper documentation, CoR verification, and authorized brokers and agents are all critical to ensuring that depositors invest in trustworthy NBFCs. These guidelines are crucial in safeguarding public deposits and should be strictly followed to ensure a transparent and robust financial system. 
10. Frequently Asked Questions about NBFC Registration in India
NBFC Registration in India is a common topic of inquiry among entrepreneurs and professionals, with many questions arising due to limited knowledge about NBFC. This article aims to answer the top 10 frequently asked questions about NBFC Registration in India.
NBFC refers to Non-Banking Finance Companies registered under the Companies Act, engaged in businesses such as acquisition of securities, leasing, hire-purchase, insurance, chit fund, agricultural activity, industrial activity, purchase or sale of goods, or providing any service related to construction of immovable property.
An NBFC cannot accept deposits, but certain NBFCs holding a certificate of Registration by RBI can accept deposits under specific criteria. However, NBFCs are allowed to accept deposits from Non-Resident Indians under certain conditions.
NBFCs can avail loans from banks in the form of working capital and term loans. They can also issue debentures following RBI guidelines.
To register as an NBFC, a company must be registered under either Companies Act 2013 or Companies Act 1956 as a private or public limited company, have a business financial planning for at least 5 years, good CIBIL score, net owned funds of at least Rs. 2 crores, assets of worth Rs. 200 crores or above, and comply with capital compliance and FEMA.
The categories of NBFCs in India include deposit accepting and non-deposit accepting NBFCs, which are further classified into 10 forms including Asset Finance Company, Infrastructure Finance Company, Investment Company, and Non-Banking Financial Company-Micro Finance Institution.
The registration process involves submitting required documents and filling in an application form on RBI’s official website. Once verified, the RBI grants the license to the NBFC.
Compliance with RBI guidelines is mandatory for NBFCs to operate in India, including having a certificate of registration and net owned funds of Rs. 2 crores or more.