What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged 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 any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).NBFC registration or NBFC License can be obtained in 90-120 days.

Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
NBFC cannot accept demand deposits;
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

What are the types of NBFCs in india?

All NBFCs are either deposit taking or Non-deposit taking. If they are non-deposit taking, ND is suffixed to their name (NBFC-ND). The NBFCs which have asset size of Rs.100 Crore or more are known as Systematically Important NBFC. They have been classified so because they can have bearing on financial stability of the country. The Non-deposit taking NBFCs are denoted as NBFC-NDSI. Under these two broad categories, the different NBFCs are as follows:
Asset Finance Company(AFC)
Investment Company (IC)
Loan Companies (LC)
Infrastructure Finance Company (IFC)
Systemically Important Core Investment Company (CIC-ND-SI)
Infrastructure Debt Fund (IDF-NBFC)
Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
Non-Banking Financial Company – Factors (NBFC-Factors)

What are the advantages of nbfc?

Though the NBFC’s have been around for a long time, they have recently gained popularity amongst institutional investors, since they facilitate access to credit for semi-rural and rural India where the reach of traditional banks has traditionally been poor. NBFC’s have also had a major impact in developing small business in rural India through local presence and strong customer relationships. Usually the loan officers in such NBFC’s know the end customer or have a strong ‘informal’ understanding of the credibility of the borrower and are able to structure their loans appropriately.

Few of the advantages of NBFC are listed below:
Provides loans and credit facilities
Supporting investments in property
Trading money market instruments
Funding private education
Wealth management such as Managing portfolios of stocks and shares
Provides retirement planning
Advise companies in merger and acquisition
Prepare feasibility, market or industry studies for companies

How to get NBFC License in India

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act that is engaged in the business of loans and advances, receiving deposits (some NBFC’s only), acquisition of stocks or shares, leasing, hire-purchase, insurance business, chit business. Therefore, NBFCs lend and take deposits similar to banks; however there are a few differences a) NBFC cannot accept demand deposits, NBFCs cannot issue cheques drawn on itself and NBFC depositors are not covered by the Deposit Insurance and Credit Guarantee Corporation.

When is NBFC License with RBI Required?

The Reserve Bank of India regulates and supervises Non-Banking Financial Companies which are into the principal business of lending or acquisition of shares, stocks, bonds, etc., or financial leasing or hire purchase or accepting deposits. Principal business of financial activity is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 percent of the gross income. A company which fulfills both these criteria must have NBFC license. This test for NBFC license is popularly known as the 50-50 test.

Therefore, companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial activity in a small way, will not require NBFC registration.

Financial Companies NOT requiring NBFC License

The following types of entities that are involved in the principal business of financial activity do NOT require NBFC License: Housing Finance Companies – Regulated by the National Housing Bank;

Insurance Companies – Regulated by Insurance Regulatory and Development Authority of India (IRDA); Stock Broking – 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 that run Collective Investment Schemes – Regulated by Securities and Exchange Board of India;

Mutual Funds – Regulated by Securities and Exchange Board of India;

Nidhi Companies – Regulated by the Ministry of Corporate Affairs (MCA);

Chit Fund Companies – Regulated by the respective State Governments.

The above types of companies have been exempted from NBFC registration requirements and NBFC regulations of RBI as they are regulated by other financial sector regulators.

Requirement for Obtaining NBFC License

To apply and obtain NBFC License, the following are the basic requirements:

A Company Registered in India (Private Limited Company or Limited Company);

It should be a company having minimum net owned funds of INR 2 crores.

The online application is available on RBI's website (COSMOS).

Submission of hard copy of the application along with attached documents shall be submitted RBI Office.

The license will be granted only after vigilant inspection of the application and documents attached with it

Why is NBFC good choice for Finance Startups?

NBFC can be registered with a Net owned fund Rs. 2 Cr only and even for small bank Net owned fund should be Rs. 100 Cr
NBFCs are primarily focused in meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.
The processing of loans from NBFCs is much faster as compared to the Banks. Also, there is less paper work and less stringent compliances in the case of availing loans from NBFCs.
Banks accept deposits, however only those NBFCs are entitled to accept deposits from public who have been granted license from RBI to accept such deposits.
Banks can issue cheques drawn on itself while NBFCs cannot as they do not form part of Payment and Settlement system.
NBFC Registration can be completed in 90 to 120 days where as even for small bank registration it takes 12 to 24 Months.
The costs in establishing NBFC is usually low making it a more lucrative option as compared to banks.
Less compliance in NBFCs in comparison to the bank.

Documents Required for NBFC Registration

Before filing your application for NBFC Registration

Certified copy of Certificate of Incorporation issued by the registrar of companies.
Extract of the main object clause in the MOA clearly depicting the financial business.
The Audited balance sheet and Profit & Loss account along with directors & auditors report for the entire period of company's existence, or for last three years, whichever is less.
Copy of the certificate of Director's highest educational and professional qualification.
Copy of Director's experience certificate in the Financial Services Sector (including Banking Sector).
Bankers report depicting details of deposits and loans balances as on the date of application and the conduct of the account.

Activities before getting registration from RBI

Any NBFC activity.

Accepting any public deposit.

What is Deposits Taking NBFC?

Only the NBFCs which have been issued a license to accept a deposit in its certificate of Registration from RBI are allowed to accept public deposits. To ensure, NBFCs don't misuse the License issued by Government, there have been certain limits imposed and conditions specified, for accepting deposits by the NBFCs, which varies depending upon various factors.

The limits for deposits vary on the basis of following factors :

Whether it is an Asset finance Company or Loan/Investment Company.
Based upon the Net Owned Funds of the Company.
Based upon the prudential norms as prescribed by the RBI.
Credit Rating.
Based on the combination of factors mentioned above, NBFCs are allowed to accept public deposits as a multiple of Net Owned Funds. There is also the requirement to maintain a certain portion of deposits as liquid assets helpful in making repayment at the time of maturity.

NBFC Registration

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