NBFC

What is NBFC?

A Non-Banking Financial Company (NBFC) is a type of financial institution that offers financial and non-financial services to individuals, business enterprises, and entrepreneurs. Unlike cooperative and commercial banks, NBFCs do not require a banking license but must comply with the rules and regulations set forth by the RBI. NBFCs are registered under the Companies Act of 2013 and offer services such as asset financing, chit business, peer-to-peer lending, and insurance business.

To become an NBFC, the financial institution must first be registered under the Companies Act of 2013 and then obtain an NBFC license from the RBI under Section 45-IA of the RBI Act of 1934. The RBI closely regulates NBFCs and ensures compliance with the regulations outlined in Chapter III B of the RBI Act. The primary business activity of NBFCs is to raise capital from public depositors and investors and lend these funds to borrowers.

NBFCs serve as a bridge between depositors and investors and borrowers, providing financial solutions to the unbanked and unorganized segments of society. They have become a popular alternative to the traditional banking and financial sector.

How NBFC’s are Different from Banks?

Both NBFC and Banks are involved in financial activities but some features are different in them. Some of them are:
1. Acceptance of Deposits.
2. Cheques drawn on itself.
3. Being a part of the payment and settlement system.
4. Facility of insuring Deposits, available with Deposit Insurance and Credit Guarantee Corporation. Applicable only to bank deposits.

NBFC Incorporation Registration Procedure

Step No.1: The First Step is to incorporate a company with a minimum of Rs. 2 crores net worth (in the form of equity share company and not preference share capital)
Step No.2: The Next Step is to Open a Bank account
Step No.3: The Next Step is to apply for Certificate of Registration to Reserve Bank of india online and Submitting hard copy of documents to the Regional Office of RBI along with the documents and enclosures.
Step No.4: Once the submitted documents are found to be ok, the regional office sends the application to the central office of the RBI. There, the application and the documents are verified, and a thorough background check is conducted.
Step No.5: If the company meets all the terms and conditions specified in Section 45-I A of the RBI Act, the NBFC License shall be granted.

Preconditions for incorporating NBFC

According to Section 45-IA of RBI, below mentioned conditions must be fulfilled by a company to be registered as an NBFC:
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  • The financial institution must be registered as a company under Section 3 of the Companies Act 2013.
  • At least one-third of the Directors must have a minimum of 10 years of experience in finance and must be employed as full-time Directors.
  • The company must have a detailed business plan for the next 5 years.
  • The Net Owned Fund (NOF) of the company must be at least Rs. 2 Crore and must only comprise of equity paid-up share capital.
  • The CIBIL score of the company, its Directors and its members must be good, with no write-offs or wilful defaults on the repayment of loans to NBFC/Banks.
  • If the company anticipates any foreign investment, it must comply with the FEMA Act.

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What Is Not Included Under NBFCs?

NBFCs don’t include the following entities whose principal business is of:
• Industrial activity.
• Activities related to agriculture.
• Giving services related to the sale or purchase or construction of an immovable property.
• Sale or purchase of goods other than securities.

Classification of NBFC’s

1. Investment Companies
2. Loan Companies
3. Finance Companies

Advantages of Non-Banking Finance Companies

  • Offers loans and credit facilities by using an alternative credit scoring model to evaluate loan applications.
  • Supports property investment.
  • Facilitates trading of money market instruments.
  • Provides funding for private education.
  • Assists in retirement planning.
  • Offers advice to companies regarding mergers and acquisitions.
  • Provides wealth management services.
  • Conducts feasibility, market, or industry studies for companies.
  • Contributes to balancing the financial needs of the country.

Deposits Under Nidhi Company

1. Nidhi Company can accept three types of deposits; Fixed deposit (FD), recurring deposit (RD) & Savings.
2. Nidhi Company can pay interest up to 12.5% on FD & RD and 6% on savings accounts.
3. Nidhi Company can take deposits up to 20 times the funds invested. Invest 5 lakh and accept 1 Cr.

Documents Required for NBFC Registration

Following are the documents required for NBFC Registration in India:

  • Company management and administration documents
  • Certificate of incorporation of the Company
  • Memorandum and Articles of Association of the Company
  • Documents pertaining to the Company’s registered office address
  • Detailed information about the Company’s Directors or Partners
  • Audited accounts of the Company for the past three consecutive years
  • Board resolution in favor of establishing an NBFC
  • Bank account statement reflecting a minimum paid-up equity share capital of INR-2 Crore
  • PAN card for income tax purposes
  • Latest KYC documentation
  • Net worth certificate
  • Clean bank report
  • Educational qualification proof
  • Any other relevant documents as requested.

RBI Conditions for Granting NBFC License

  • NBFCs must ensure timely payment of claims to current and future investors.
  • NBFCs must conduct their operations in a manner that does not harm the interests of existing or future investors.
  • The management and board of NBFCs must not act in a way that is prejudicial to the interests of the public or depositors.
  • NBFCs must have a strong capital structure and earning potential.
  • The licensing of the NBFC must serve the public interest and not negatively impact the financial sector, while also being consistent with relevant RBI policies.
  • The grant of registration should not compromise monetary stability, economic growth or other relevant policies of the RBI.

FAQ on Non-Banking Financial Company

Q1. Is NBFC A Financial Institution?
Yes, NBFC is a company registered under the new Companies Act, 2013. After the registration, one needs to obtain a certificate of registration from the RBI.

Q2. What Do You Mean by Principal Business In Matters Related To NBFC?
If the NBFC has more than 50% of total assets or revenue from the financial services and comprises more than 50 % of the gross income. Then, in this case, it is eligible to apply for an NBFC license.

Q3. What Is the Main Difference Between Banks From NBFCs?
A very minor difference in there between NBFCs and banks, NBFCs give financial services which are similar to banks. But the NBFCs are more concentrated on unorganized sector of the society which are having low or no credit rating score.

Q4. How Is the Funding Done In NBFC?
The funding in NBFC is provided from different sources like financial institutions through debentures, commercial papers and other inter-corporate loans.

Q5. What Are the Requirements for NBFC Takeover?
We need approval from RBI to initiate NBFC takeover. The company needs to send an application on the company letterhead to the regional office of RBI for getting approval. After the approval is granted, a public notice shall be published in leading newspaper. After this, the parties sign the share-purchase agreement and takeover takes place.

Q6. Can all NBFC’s Accept Deposits?
All NBFCs are not permitted to accept public deposits. Only the NBFCs which have taken specific permission from RBI to do so, are allowed to accept/hold public deposits. To get permitted by RBI, they must have an investment-grade rating to a limit of 1.5 times of its NOF.