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Everything to Know About NBFC Registration in India

by CorpSeed Pvt Ltd Environment | Compliance | Finance

NBFC stands for Non-Banking Financial Company; NBFC’s are registered under the Companies Act, 2013 and governed by RBI with principal activities similar to the bank except for some exceptions. NBFC is recognized to provide financial services to businesses and individuals. One of the primarily objective of an NBFC (Non-Banking Financial Company) is to provide loans (any type), shared investments, other stocks, and debenture issued by the Government or any other authorized authorities, insurance business, leasing, and also offers a Market Place Lending Platform (P2P) for businesses.

Primarily NBFC’s are trying to shorten the financial gap which is not been catered by banks. It is because of the fact that banks in the recent times are more focused on providing banking services to the Mid-Size/Large size Companies & individuals based their credit rating / CIBIL score, which has created bigger opportunities for NBFC’s to enlarge their presence in the financial market.

NBFCs are famous to provide quick loans without too much stress on the credit rating of an individual or an organization. In India, less than 10% of people have good credit history to directly apply for a loan. Due to huge opportunities in financial businesses, NBFC’s in India are growing at a rate of 24.4% which more than the growth rate of traditional banks.

NBFC Registration with Corpseed

Our Expert team will complete end to end NBFC application process with RBI. For more information contact our customer care on +91-7558-640-644 or info@corpseed.com.

Some of the principal activities of an NBFC (Non-Banking Financial Company) are:

Advances and Loans
Acquisition of the debentures/securities/shares and bonds of any nature.
Leasing
Insurance Business
Hire Purchase
Chit Business

Things that are not the principal activities of an NBFC (Non-Banking Financial Company):

Agriculture Activity

Sales & Purchase of any type of goods

Industrial Activity

Providing services such as purchase/construction/sales of a fixed asset

Why NBFC is different from Traditional Banks?

An NBFC can only accept the Public deposit but not the demand deposit.
An NBFC does not guarantee insurance or the credit facility.
An NBFC cannot issue cheque drawn on itself. It's because NBFC’s are not the part of the settlement system or the part of the payment system.

RBI Ceiling on interest rate charged by the NBFCs to their borrowers

RBI has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the NBFC Company is managed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be crystal clear and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.

RBI Ceiling on acceptance of Public Deposits by an NBFC

As a matter of public policy, Reserve Bank has decided that only banks should be permitted to accept public deposits if its incorporated before 1997, public deposit is not for new NBFCs registered after 1997.

Currently, the utmost rate of interest an NBFC can propose is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are permitted to accept/renew public deposits for a minimum period of 1 year and maximum period of 5 years. They cannot accept deposits repayable on demand.

Why NBFC is the best Choice for Fintech Startups in 2020?

The fixed cost to run a traditional bank in India is very high. On the other hand, starting and operating an NBFC is extremely cost-effective with a maximum of the bank functionalities.

NBFC opportunities areas are outskirts regions where banks cannot be able to provide full-fledged services. Also, the whole process of getting loan from the Traditional Bank is much slower in contrast to the NBFC and involves cumbersome paperwork. Credit Decision in NBFC takes slighter time which is a biggest benefit when it comes to loaning money from the banks.

Key functionalities of the Fintech businesses

It helps in addressing accumulation problems and customer possession process.
It helps in determining the customer behavior which then attracts online loan procedure.
It helps in creating an app-based loan system in a fraction of minutes.
It creates an alternate digital financial banking system that can be opted for by many other organizations.
It uses the tools like big data, Machine Learning, and Artificial intelligence to minimize fraud to a maximum level.

Various Classification of Non-Banking Financial Company (NBFC) on the basis of nature of activities

An NBFC can be a deposit-taking or non-deposit taking company. However, there are various subcategories one can apply to get License, subcategories are based on the nature of the activity untaken by the organization. They are as under:

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Various types of Non-Banking Financial Company (NBFC) on the basis of classification

RBI Regulations for Non-Banking Finance Companies (NBFC’s)

It is mandatory for all NBFCs to have a reserve between (5 to 25)%. This is the number of deposits outstanding on the last working day when the business closes of the second preceding quarter.

Also, as per RBI its mandatory for NBFCs to invest a certain amount of reserves into approved securities. However, these securities should not have value at a price more than the current market price.

Key advantages of a Non- Banking Finance Company (NBFC):

1. Registering an NBFC is an easy task as compared to Bank.

2. NBFC Registration fee is low as compared to a bank.

3. At present, the fintech industry is growing at a cumulative annual growth rate (CAGR) of around 25%, greater than a bank. Also now a day’s everyone needs an easy source of funding, which an NBFC is sufficient to fulfill.

4. Since NBFCs are very systematic and also, the loan amount offered is low, therefore borrowers return the amount easy which makes it suitable for lenders.

RBI Pre-Requisites’ for a Non-Banking Finance Company (NBFC) Registration:

In order to obtain a secure and proper registration, some of the mandatory requirements are given as under:

Company should be registered under the Companies Act, 2013 OR Companies Act, 1956
Company should have minimum Net Owned Fund of INR 20 million

Importance requirements to get a Non-Banking Finance Company License (NBFC License) from RBI for Fintech Companies in India

There are various perquisites that are required before filing the application for COR with RBI for the NBFC License. The requirements are mentioned below:

Middle name of the company must be a keyword such as Finance, Investment, Leasing, Capital Fintech, etc.
Documents with the highest qualification of the directors associated.
CA certified Net worth certificate of the shareholders, company, and directors.
Company must be registered as a Public Limited or a Private Limited.
There should be a clear clause in the memorandum of association explaining the financial or Investment of the company.
Income proof document of the founders, shareholders, and directors of the company along with their KYC.
Having a Banker Report regarding No Lien comment on the Initial Final deposit of Rs 200 Million.
A company must have an experienced NBFC Consultant or must hire a consultant from market (Corpseed just does that)
Credit the card analysis report of all the shareholders and directors of the company.
One of the directors’ must have a financial experience of 10+ years as a Senior Management in Bank or NBFC.
It is important to have the credit report of the directors and the shareholders verified which keeps them from repaying the loan or financial facilities over life. In case there is a proper clarification of the delay, the RBI may accept the application for the same.
The Initial capital of Rs. 200 Million cannot be a borrowed capital.
Detailed business plan in order to get through the process of an NBFC License.
A detailed action plan must be in place about the loan products and Credit & Risk Assessment Policy.
A highly structured decision making as well as the organizational hierarchy for the approval or the rejection of the application of a loan.
Copy of the Audited Balance Sheet with Profit & Loss (P&L) account along with the auditor’s report of 3 years holding the company. This is compulsory if the applicant is a subsidiary of the Public Limited or Private Limited or Foreign Company.
In case of an FDI, all the compulsory FDI Compliance as per the FEMA Act must be compiled.

NBFC’s (Non-Banking Financial Companies) not regulated by the Reserve Bank of India (RBI):

The Reserve Bank of India supervises and regulates the companies that are engaged in the financial activities as their principal business. Any Company with the financial asset of more than 50% of its total asset is termed as an NBFC and is regulated by the Reserve Bank of India.

NBFC Registration (Non-Banking Financial Company Registration) Process in India

Steps to Incorporate NBFC in India

Step No.1: Setup a company with Minimum Net Owned Fund of INR 20 million

Step No.2: Open a Bank Account (deposit entire sum of INR 20 millions in the bank’s account)

Step No.3: Apply Online for (COR) Certificate of Registration from RBI

Step No.4: Submit online form along with all mandatory documents to the Regional Office of RBI

Step No.5: Certificate Granted by RBI !

Documents Required to Register a Non-Banking Finance Company (NBFC) in India

COI Copy issued by ROC
AOA & MOM of the company
Board of Resolution accepting the following before getting registration from RBI:
Adherence to the “Fair Practices Code” As per RBI Guidelines
Non-carrying out of acceptance of any public deposit
Audited Balance Sheet along with P&L account with directors and auditor’s report for a period of last three years
Director’s Highest Educational & Professional Qualification certificates
Director’s experience certificate in Financial Services
Details of deposits & loans balances as on date of application & conduct of account (Bankers report)

Penalties for Deposit Taking without Authorization from RBI

If any company either (Proprietorship / Partnership) or an NBFC is found accepting public deposits without valid authorization from RBI, that company is liable for criminal action. Also, if any of the NBFCs connect themselves with proprietorship/partnership firms accepting deposits in breach of RBI Act, they are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors (in Financial Establishments) Act, if passed by the State Governments.