Start Finance Business 

If you are an aspiring entrepreneur looking to start your own finance business in India, then there are few things you should know before taking the leap. Starting a finance business in India is no easy feat and requires in-depth knowledge about the industry, government regulations, and financial literacy among others. However, with the right guidance and plan in place, you can successfully establish a thriving finance business in the country. In this blog post, we will discuss the essential steps you need to take to start your finance business in India and make it a success. Whether you have experience in finance or are a novice in the field, this guide will help you navigate the complexities of starting and running a finance business in India. So, let’s get started on this exciting journey towards financial success.

1. Understand the Needs of Your Customers

Starting a finance business in India can be a daunting task. However, with proper knowledge and guidance, it can be a rewarding venture. The key to starting a successful finance business is understanding the needs of the customers. A finance company is established with the primary purpose of providing loans to individuals and businesses. Small finance companies serve the financial needs of individuals and businesses on a smaller level. They offer financial assistance to those who cannot access mainstream banking services. Small finance companies are especially useful in rural and backward sectors where traditional banking assistance is out of reach. The customers may include small and marginal businesses/farmers/entities belonging to the unorganized sectors. Small finance companies can assist in the economic development of the country by providing loans without demanding any collateral.

2. Decide on the Type of Finance Business

To start a finance business in India, the first step is to decide on the type of finance business. There are various options available, each with its own advantages and disadvantages. The most common type of finance business in India is the non-banking finance company (NBFC). However, getting an NBFC license from the Reserve Bank of India is a difficult and time-consuming task.

Another option is to register a trust or society, which is a popular form of finance business in India. This option is best for those who want to start a finance business at a smaller level, such as at the district level. However, getting a society license is becoming increasingly difficult due to the prevalence of fraud.

The best and easiest option to start a finance business in India is to register a Nidhi company. This type of company can be started with a minimum capital of Rs. 5 lakh and can be registered in 15 to 20 days. Nidhi companies can accept deposits and grant loans, making them a good option for those who want to provide financial services to individuals and businesses.

Ultimately, the decision on the type of finance business to start will depend on several factors, including the level of capital and the target customer base. It is important to consider the pros and cons of each option before making a final decision.

3. Obtain Proper Licensing through Reserve Bank of India

Starting a finance business in India requires obtaining proper licensing through the Reserve Bank of India (RBI). The first step in the process is to decide whether your business will be a profit or non-profit institution.

Once you’ve made that decision, you’ll need to liaise with the RBI to obtain the proper license. In general, small finance banks provide loans, accept deposits, and offer some insurance-based services, catering to the needs of small businesses and marginalized individuals who don’t have access to traditional banking services.

Before granting a license, the RBI will ensure that your business meets strict regulations. Small finance banks can provide loans of less than Rs. 25 Lakhs, accept deposits, and offer other financial services. However, these banks cannot demand collateral for loans and must charge affordable interest rates.

The government recognizes the importance of small finance institutions for the development of rural and backward sectors, which is why the RBI has released detailed guidelines on how to start a small finance company in India, applicable for both profit and non-profit institutions. So, one can smoothly start a small finance business in India by obtaining the proper license from the RBI.

4. Overview of the finance industry in India

The finance industry in India is a crucial segment of the economy that plays a vital role in the country’s growth and development. In recent years, India’s finance sector has experienced significant growth due to increased globalization and economic liberalization. As a result, a number of Non-Banking Financial Companies (NBFCs) have emerged, catering to the financial needs of various sectors. NBFCs offer a range of services, including loans, investments, and credit facilities to both individuals and corporations, making the industry a lucrative one. However, starting a finance company in India is not an easy feat as getting a license for finance company registration can be a challenging task, as it requires strict compliance with the Reserve Bank of India (RBI) regulations. Despite the challenges, there are options available for entrepreneurs who want to venture into the finance industry.

5. Understanding the legal requirements for starting a finance business in India

Starting a finance business in India requires proper licensing from the Reserve Bank of India (RBI). The first step is deciding whether to set up a profit or non-profit company under the Companies Act 2013. A profit-making non-banking finance company (NBFC) may acquire stocks, equities, and debts, while a non-profit company must register itself under the Indian Trust Acts 1882/Societies Registration Act 1860/Companies Act 2013.

Once the business structure is established, legal documentation must be drafted and submitted to obtain a GSTIN. It is crucial to understand the specific licensing requirements for the kind of financial services provided, as they differ for payment services, peer-to-peer services, retail service providers, and financial management/investment.

Partnering with a reliable company like 3E Accounting could ensure compliance with the rules and regulations for licensing. A web presence is also necessary for FinTech businesses, making website design and development a priority. Starting a finance business in India is a competitive yet promising endeavor that requires thorough planning and expert guidance.

6. Step-by-step guide to obtaining proper licensing through Reserve Bank of India

Starting a finance company in India requires proper licensing through Reserve Bank of India (RBI). This is a critical step and can take up to 5-6 months to complete the procedure. The minimum capital requirement for a non-banking finance company (NBFC) is Rs. 2 crore, with the possibility of accepting foreign investment up to a certain limit, which is an advantage. However, obtaining the RBI license is a challenging task, and there is no guarantee of getting it.

Another option is to register as a Trust or Society, which is a popular form of finance business in India. However, societies’ licenses are getting difficult to obtain due to increasing frauds. One can work up to the district level and can provide finance only to members.

The best and easiest option to start a finance business in India is through the registration of a Nidhi Company. A Nidhi Company can be started with a minimum capital of Rs. 5 lakh and can be registered in 15-20 days. This option allows accepting deposits and granting loans. The basic requirements for Nidhi company registration are identity proof, address proof, rent agreement, and a minimum of seven persons, out of which three will be elected as directors of the company.

To obtain proper licensing through RBI, one needs to fulfill strict regulations and meet all the guidelines mentioned in the RBI guidelines in detail. One must also decide if they want to set up an MFI as a Profit Institution or as a Non-Profit Institution and register accordingly. Once the company is formed, it can assist in the development of rural and backward sectors and contribute to generating livelihoods and decision-making at the household and community levels.

7. Compliance and regulatory obligations for finance businesses in India

Finance businesses in India are required to comply with several regulatory and compliance obligations to operate legally. One of the most vital obligations is obtaining proper licensing through the Reserve Bank of India (RBI). The RBI monitors and regulates finance companies in India, and they require a minimum capital of INR 2 crore (INR 5 crore in case of micro finance) to start a non-banking finance company (NBFC). Getting an RBI license can be a challenging task and can take up to six months for the complete procedure.

Apart from licensing, finance companies in India must also adhere to anti-money laundering (AML) regulations and know-your-customer (KYC) norms. They must maintain accurate records and submit regular reports to the RBI to avoid penalties. Additionally, finance companies must comply with various other regulations like the Companies Act, GST, Income Tax Act, and other relevant laws.

Moreover, finance businesses must ensure the security of customer data, as data privacy laws in India are stringent. They must implement appropriate security measures and policies to prevent data breaches. Non-compliance with the regulations and compliance obligations can lead to costly penalties, which can harm the reputation of the business. It is advisable to seek expert guidance to ensure compliance with the regulatory and compliance obligations for setting up a finance business in India.

8.. Consider Non-Banking Finance Company (NBFC) Registration

To start a finance business in India, one can consider registering a Non-Banking Finance Company (NBFC). An NBFC is a company registered under the Companies Act that engages in the business of loans, advances, acquisition of stocks or shares, leasing, hire-purchase, insurance, and chit business.

While NBFCs lend and take deposits similar to banks, they cannot accept demand deposits, issue cheques drawn on itself, and depositors are not covered by the Deposit Insurance and Credit Guarantee Corporation. However, if a company’s financial assets constitute more than 50% of the total assets and income from financial assets constitute more than 50% of the gross income, they need NBFC registration.

Companies engaged in agricultural operations, industrial activity, the purchase and sale of goods, providing services, or construction of immovable property as their principal business and are doing some financial activity in a small way will not require NBFC registration. Additionally, certain entities like Housing Finance Companies, insurance companies, and stockbroking companies regulated by specific regulators do not require NBFC registration.

To obtain NBFC registration, the basic requirements are a company registered in India with a minimum net owned fund of Rs. 200 lakhs. Determining net owned funds would be based on the last audited balance sheet of the company, including paid-up equity capital, free reserves, balance in share premium account, and capital reserves representing surplus arising out of sale proceeds of assets.

9. Explore Trust and Societies as an Option

One option for starting a finance business in India is to explore trust and societies. Trust and societies are a popular form of finance business in India, especially those who want to operate a district level. Registration costs for trust and societies are relatively low compared to other options. However, registrars of society have become more reluctant to issue licenses due to past frauds. These entities can only provide finance to members, and ownership can change with elections. Despite these limitations, trust and societies can be a good option for those looking to start small, with a focus on a specific community or region. It is important to conduct research and understand the risks and benefits before choosing any option for starting a finance business in India.

10. Consider Nidhi Company Registration

Nidhi Company registration is an attractive option for those who want to start a finance business in India. These companies are designed to encourage thrift and savings amongst its members. Unlike traditional financial institutions, Nidhi companies are used to cultivate saving habits among a group of people. To register a Nidhi company in India, the first step is to incorporate a Limited Company under the Companies Act 2013, which requires a minimum of three Directors and seven shareholders. During the incorporation process, it is important to ensure that the object of the Limited Company mentioned in the Memorandum of Association is to cultivate the habit of thrift and savings amongst its members. With Nidhi companies, The Reserve Bank of India has exempted Nidhi companies from the core provisions of the RBI and other regulations applicable to an NBFC since Nidhi Companies ONLY deal with shareholder-members money. The activities of a Nidhi Company does fall under the purview of Reserve Bank of India as it is similar to an NBFC. However, a Nidhi Company has certain limitations such as not being allowed to carry on businesses such as chit fund, leasing finance, or acquire securities from any body corporate.

11. Meet Capital Requirements

Starting finance business in India requires capital requirements to be met. These requirements are necessary to set up a successful finance company. Before setting up the business, it is necessary to research and gather information about the market space, the target customers, and the expected revenue per transaction. The planning should also include the fixed costs for the day-to-day operations, the business processes, and the need for financial partners such as banks or mortgage lenders. Once the planning is done, it is necessary to set up a business plan that serves many functions, including defining the goals of the business and providing a detailed description of the company for potential investors and lenders.

12. Elect Directors for Finance Company

Starting a finance company in India can be a challenging task, but selecting the appropriate option can make the process more manageable. One of the best options available is Nidhi Company registration, which requires a minimum capital of Rs. 5 lakh and can be registered within 15 to 20 days. To initiate a Nidhi Company, at least 7 individuals are required, with 3 of them serving as directors. To register, one needs to submit basic documents, such as Aadhar card and voter ID card as identity proof, a mobile bill or bank statement as address proof, and a rent agreement as proof of office space. As a Nidhi Company, a business can accept deposits and grant loans. This option provides a simple and efficient way to establish a finance company in India.

One of the greatest problems with starting a finance company in India is obtaining a license. The Reserve Bank of India (RBI) requires a minimum capital of Rs. 2 crore (5 crores in case of microfinance) for Non-Banking Finance Companies (NBFC) registration. Furthermore, the process is challenging and can take up to 5 to 6 months to complete. However, NBFC registration allows foreign investment up to a certain limit, providing a unique business opportunity.

Trust and societies, also known as credit cooperatives, are another option for finance business in India. Although popular at the district level, the process of obtaining a society license has become more challenging due to recent frauds. Registration costs for trusts and societies are minimal and they can offer finance only to members. Nonetheless, ownership can be changed through election, which can complicate the management process.

Directors play a crucial role in the success of any finance company in India. To establish a finance company, select the best option and then elect directors to ensure that all legal requirements are fulfilled. The right directors can help navigate the challenging process of registration and licensing requirements. Furthermore, directors can help shape and build the company’s vision for the future. Therefore, it is essential to carefully select directors who have the right combination of skills and experience to lead the company forward.

13. Prepare Required Documentation

To start a finance business in India, documentation is a crucial step. The required documents might vary depending on the type of finance business being started. If it is a microfinance business, then different documentation will be required than for starting a small finance bank. Generally, the following documents are necessary for any finance business:

Firstly, identifying the type of business and registering it accordingly is essential. For instance, microfinance might require registration under Section 8 company, while a small finance bank requires registration as a Public Limited Company under the Companies Act, 2013.

Secondly, applying for a license from the Reserve Bank of India (RBI) is necessary to operate a finance business.

Thirdly, preparing documents such as profit and loss statements, balance sheets, tax audit reports, and financial statements are crucial.

Fourthly, arranging for important documents such as identity proof, address proof, PAN card, and a bank account are important for opening and operating the finance business.

Fifthly, ensuring that all documentation follows RBI guidelines and regulations is critical.

In summary, preparing documentation is a vital step when starting a finance business in India. It is necessary to identify the type of business registration required, apply for an RBI license, prepare financial statements, arrange for essential documents, and ensure RBI guidelines are followed.

14. Engage a Qualified Consultant for Successful Financial Setup

Starting a finance business in India can be a challenging task. It requires setting up a comprehensive financial plan, complying with legal formalities, and implementing policies to ensure long-term growth. One way to facilitate this process is by engaging a qualified consultant. An expert consultant can guide entrepreneurs through the complex financial regulations, identify potential problems, and provide the necessary support to overcome them. A consultant can help businesses in India with financial analysis and planning, exploring potential business opportunities, providing legal advice on various financial matters, and managing taxation-related affairs. Their expertise and experience can ensure a successful financial setup, enabling businesses to focus on core operations and growth strategies. A qualified consultant must have relevant qualifications, years of experience, and a proven track record of successful financial operations. Their inputs can enhance the financial stability of the business and enable a smooth transition into the market. In conclusion, consulting with a qualified financial consultant can make the financial setup process an effortless and profitable venture.