NBFC Registration

What is an NBFC?

 

NBFCs or Non-Banking Financial Institutions are companies registered under the Companies Act, 2013 engaged in the business of providing financial services. They are financial intermediaries registered as companies, indulged in various financial services that range from providing loans and advances, accepting deposits, delivering credit, acquisition of shares, stocks, debenture, bonds, securities, hire-purchase insurance. and play an pivotal role in financial development of our economy. While the Indian financial system is dominated by banks, NBFC’s increase the financial inclusion of the corporate sector, facilitate credit to the unorganized sector & small and local borrowers by supplementing and posing competition to the banking sector in India.

The definition of NBFC doesn’t include any company engaged in the principal business of industrial activity, agricultural activity, purchase or sale of immovable properties or any other goods other than securities can not be an NBFC.

Types of NBFC

1. Investment & Credit Company (NBFC - ICC): (New Category) 

In order to provide operational flexibility per the principle of activity-based classification, the RBI has, in a recent update,  consolidated or harmonized 3 categories of NBFC’s Namely Loan Companies (LC), Asset Finance Companies (AFC) and Investment Companies, into a single Category named Investment and Credit Company (NBFC-ICC).

➲. Loan Company (LC)

Loan Company means a financial institution that is carrying out Loan disbursal to earn Interest income as its principal business, but it does not include an Asset Finance Company, an equipment leasing company, or a hire-purchase Company. A loan company can undertake the activities performed by a hire-purchase or leasing company. The nature of the business of a loan company, a hire-purchase company, a leasing company is similar, but the funding requirements for these companies are pretty different from each other.

. Investment Company (IC)

Investment Companies are those which carry out trading of securities on listed exchanges as a primary business and are also involved in NBFC operations.

. Asset Finance Company (AFC)

An Asset Finance Company (AFC) is a non-deposit taking NBFC which is involved in the primary business of financing of physical assets supporting productive/economic, like automobiles, tractors, lathe machines, cranes, generator sets, earthmoving and material handling equipment, moving on own power and general-purpose industrial machines as its principal business. The principal business is defined as aggregate of financing real/physical assets supporting economic activity and income arising from there is more or equal than 60% of its total assets and total income respectively.

2. Infrastructure Finance Company (IFC)

Infrastructure finance companies carry out financing of a minimum of three-fourths of their total assets in infrastructure loans. The Net Owned Funds (NOF) are more than 3 billion and a minimum crediting rating of 'A' with Capital to Risk-Weighted Assets Ratio is 15%.

3. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)

IDF-NBFC are companies registered as NBFC to facilitate the flow of long-term debt into infrastructure projects. IDF-NBFC raises resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

4. NBFC-Factors

NBFC Factors has the principal business of factoring. Factoring is a financial transaction and a type of debtor finance to provide the financial assistance now to cover the invoice amount to be collected at a later date.

5. Gold Loan NBFCs in India

Gold Loan NBFC carry out financing by keeping Gold as security from the customers. In recent years, gold loan NBFCs witnessed an upsurge in the Indian financial market, owing mainly to the appreciation in the gold price and consequent increase in the demand for the gold loan by all sections of society, especially the poor and middle-class society. Growth of gold loan NBFCs is seen both in terms of the size of their balance sheet and their physical presence which in turn compelled to increase their dependence on public funds including bank finance and non-convertible debentures. Aggressive structuring of gold loans resulting from the uncomplicated, undemanding, and fast process of documentation along with the higher Loan to Value (LTV) ratio includes some of the major factors that caused the growth of Gold loan NBFCs.

6. Micro-FInance NBFC (MFI)

Micro Finance Institution (MFI) is a kind of NBFC which offers financial services to the low-income segment of the population. MFIs give loans and offer insurance, deposit, and other services to its members. These companies, MFI also offer credits and other financial services to the representatives of the poor population except for extremely poor which are Below the Poverty Line (BPL).

7. Non-Operative Financial Holding Company (NOFHC)

It is a financial institution through which promoter/promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC as referred to in the 'Guidelines for the Licensing of New Banks in the Private Sector'1 issued by Reserve Bank, which holds the shares of a banking company and the shares of all other financial services companies in its group, whether regulated by Reserve Bank or any other financial regulator, to the extent permissible.

8. Mortgage Guarantee Companies (MGC)

MGC is a financial institution for which at least 90 percent of the business turnover is a mortgage guarantee business or at least 90 percent of the gross revenue is from a mortgage guarantee business and a net owned fund of about 100 crores.

9. Systemically Important Core Investment Company (CIC-ND-SI)

CIC-ND-SI is an NBFC undertaking the acquisition of shares and securities which fulfills the following conditions:-

(A) Holds not less than 90 percent of its Total Assets in the form of equity investments, preferential shares, debts or loans in group companies;

(B) Its equity investments (including instruments that are compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitute not less than 60% of its total assets;

(C) Except through block sales for dilution or disinvestment purposes, it does not trade in its investments in shares, debts or loans in group companies;

 

 

Earlier Classification of NBFC's

Investment activities

Lending or related activities

Other activities

➲  Investment Company

➲  Core Investment Company

➲  Non-Operative Financial Holding Company

 

➲  Loan Company

➲  Asset Finance Company

➲  Micro Finance Institution

➲  Infrastructure Finance Company

➲  Infrastructure Debt Fund

➲  NBFC - Factor

➲  Mortgage Guarantee Company

➲  Peer-to-Peer Lending Company

➲  Account Aggregator

 

Minimum Mandatory requirements for registration of a NBFC

➲ Applicant should be registered company as per the Rules, Regulations and Provisions of the Companies act, 2013 or the earlier Companies Act 1956.

➲ If a company engaged in the business of any of the above-mentioned fields, produces finance flow from that particular business, which is more than 50% of the total capital asset of the company for any year, the NBFC certificate is mandatory.

➲ The applicant company should have a minimum Net Owned Fund of INR- 2 Crores.

➲ The credit profile of the COmpany, its promoters and directors should not be in a default state.

➲ At least one of the members of the board is expected to have considerable prior experience in Banking or Credit operations.


Note: The Net Owned Fund mentioned above shall be available in Company’s bank account in the form of Fixed Deposit at the time of filing of Application for registration of NBFC.

Documents required for NBFC Registraton

➲ Self-attested documents of Directors, & Shareholders:

  • PAN of the Directors
  • Aadhar of the directors
  • Copy of ITR of the past 3 years
  • Net worth statement & Credit report
  • Proof of Highest Educational Qualification

➲ If the Company is already incorporated then we would need:

  • Certificate of Incorporation of the Company applying for registration
  • A copy of the latest Memorandum and Articles of Association of the Company attested by the directors.

➲ Net owned funds of INR 2-3 Crores (Fixed Deposit)(minimum being INR 2 Crores)

➲ Bankers report in a sealed envelope which shall be undisclosed.

➲ Business plan for 3 to 5 years 

➲ Auditors report about the receipt of a minimum net owned fund.

➲ A certificate of Chartered Accountant regarding details of group/ associate/ subsidiary/ holding companies along with details of investments in other NBFCs as shown in the Proforma Balance Sheet

➲ Business/ Career profiles of all the directors

➲ Self-declaration by the directors for not being charged with any penal action

Process of Registration of NBFC

➲ An online application is to be made in the prescribed format with information regarding the demanded documents and enclosures, which generates a Company Application Reference Number.

➲ A hard copy of the above-mentioned application along with demanded documents and enclosures to the concerned Regional Office of the RBI.

➲ After the verification and approval of the submitted application and documents, the regional office sends the application to the Central office of RBI, which goes through crucial examination in order to grant the Certificate.

➲ If the terms and conditions under section 45-I A of the RBI Act, 1934 are fully satisfied the Certificate will be granted.

What is Net Owned Funds (NOF)?

Net Owned Funds (NOF) Net owned Fund consists of paid-up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but excludes reserves created by revaluation of assets. From the aggregate of items, accumulated loss balance and the book value of intangible assets should be deducted, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Fund. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF

Difference between NBFC & Bank

Usually NBFC operations are similar to that of a Bank with following differences between a Bank and a NBFC, however there are some differences between them:

➲ NBFC may provide Banking services to People without holding a Bank license,

➲ NBFC cannot accept Demand Deposits.

➲ NBFC is not a part of payment and settlement system.

➲ NBFC cannot issue cheques drawn on itself.

➲ NBFC cannot provide with Deposit Insurance and Credit Guarantee to the depositor while Banks provide these facilities as per regulation.

➲ An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)

➲ An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-Purchase, Construction of Immovable Property

➲ Foreign Investment allowed up to 100 %

➲ An NBFC companies working in Financial Body and Money handling

Relationship Between Net Owned fund and public deposit to be maintained by NBFC

Type of Company

Limit of public Deposits

NBFC with NOF less than
Rs.25 lakhs

No access to public deposits

Equipment Leasing/Hire
Purchase (EL/HP) company
without credit rating

1.5 times NOF or Rs.10 crore
whichever is lower. (higher
CRAR of 15%).

EL/HP company with
investment grade credit
rating or above

4 times NOF

Loan/Investment companies
with investment grade
credit rating or above.

1.5 times NOF (higher CRAR of 15%)

Benefits of an NBFC

➲ NBFCs recently gained a lot of popularity in between institutional investors, because NBFCs provides semi-rural and rural India with the access to credit, as the traditional banks have been traditionally poor in reaching them. Some advantages are as follows:

➲ Provides loans and credit facilities- Growing number of businesses and startups are willing to take a business loan from NBFCs other than Banks due to quicker processing, competitive interest rates, and availability of loans for those with poor credit history.

➲ A hard copy of the above-mentioned application along with demanded documents and enclosures to the concerned Regional Office of the RBI.

➲ Supporting investments in property- Investing in property with NBFCs is advantageous due to flexible rates, easy repayment, acceptable property collaterals with quick and easy processing

➲ Trading money market instruments- Interest rates on money market instruments such as commercial paper id soft with NBFCs, though the base rate of banks stayed unchanged.

➲ Funding private education- Flexible rates and easy return make it convenient.

➲ Facilitates retirement planning

➲ Advise companies in merger and acquisition

➲ Wealth management such as managing portfolios of stocks and shares

➲ Prepare feasibility, market or industry studies for companies

FAQs

Q. Requirement for registration as NBFC?

A. For geting registered as NBFC the organisation must:

i. Be incorporated as company form which is registere under company act 2013

ii. have a minimum net owned fund of INR 200 lakh

 

Q. Different categories of NBFC registered with RBI?

A. There are two Types of NBFC get regustered under RBI:

i. Deposit Taking

ii. Non deposit Taking

1. Investment & Credit Company (NBFC - ICC): (New Category) 

In order to provide operational flexibility per the principle of activity-based classification, the RBI has, in a recent update,  consolidated or harmonized 3 categories of NBFC’s Namely Loan Companies (LC), Asset Finance Companies (AFC) and Investment Companies, into a single Category named Investment and Credit Company (NBFC-ICC).

➲. Loan Company (LC)

Loan Company means a financial institution that is carrying out Loan disbursal to earn Interest income as its principal business, but it does not include an Asset Finance Company, an equipment leasing company, or a hire-purchase Company. A loan company can undertake the activities performed by a hire-purchase or leasing company. The nature of the business of a loan company, a hire-purchase company, a leasing company is similar, but the funding requirements for these companies are pretty different from each other.

. Investment Company (IC)

Investment Companies are those which carry out trading of securities on listed exchanges as a primary business and are also involved in NBFC operations.

. Asset Finance Company (AFC)

An Asset Finance Company (AFC) is a non-deposit taking NBFC which is involved in the primary business of financing of physical assets supporting productive/economic, like automobiles, tractors, lathe machines, cranes, generator sets, earthmoving and material handling equipment, moving on own power and general-purpose industrial machines as its principal business. The principal business is defined as aggregate of financing real/physical assets supporting economic activity and income arising from there is more or equal than 60% of its total assets and total income respectively.

 

 

2. Infrastructure Finance Company (IFC)

Infrastructure finance companies carry out financing of a minimum of three-fourths of their total assets in infrastructure loans. The Net Owned Funds (NOF) are more than 3 billion and a minimum crediting rating of 'A' with Capital to Risk-Weighted Assets Ratio is 15%.

3. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)

IDF-NBFC are companies registered as NBFC to facilitate the flow of long-term debt into infrastructure projects. IDF-NBFC raises resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

4. NBFC-Factors

NBFC Factors has the principal business of factoring. Factoring is a financial transaction and a type of debtor finance to provide the financial assistance now to cover the invoice amount to be collected at a later date.

5. Gold Loan NBFCs in India

Gold Loan NBFC carry out financing by keeping Gold as security from the customers. In recent years, gold loan NBFCs witnessed an upsurge in the Indian financial market, owing mainly to the appreciation in the gold price and consequent increase in the demand for the gold loan by all sections of society, especially the poor and middle-class society. Growth of gold loan NBFCs is seen both in terms of the size of their balance sheet and their physical presence which in turn compelled to increase their dependence on public funds including bank finance and non-convertible debentures. Aggressive structuring of gold loans resulting from the uncomplicated, undemanding, and fast process of documentation along with the higher Loan to Value (LTV) ratio includes some of the major factors that caused the growth of Gold loan NBFCs.

6. Micro-Finance NBFC (MFI)

Micro Finance Institution (MFI) is a kind of NBFC which offers financial services to the low-income segment of the population. MFIs give loans and offer insurance, deposit, and other services to its members. These companies, MFI also offer credits and other financial services to the representatives of the poor population except for extremely poor which are Below the Poverty Line (BPL).

7. Non-Operative Financial Holding Company (NOFHC)

It is a financial institution through which promoter/promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC as referred to in the 'Guidelines for the Licensing of New Banks in the Private Sector'1 issued by Reserve Bank, which holds the shares of a banking company and the shares of all other financial services companies in its group, whether regulated by Reserve Bank or any other financial regulator, to the extent permissible.

 

8. Mortgage Guarantee Companies (MGC)

MGC is a financial institution for which at least 90 percent of the business turnover is a mortgage guarantee business or at least 90 percent of the gross revenue is from a mortgage guarantee business and a net owned fund of about 100 crores.

9. Systemically Important Core Investment Company (CIC-ND-SI)

CIC-ND-SI is an NBFC undertaking the acquisition of shares and securities which fulfills the following conditions:-

(A) Holds not less than 90 percent of its Total Assets in the form of equity investments, preferential shares, debts or loans in group companies;

(B) Its equity investments (including instruments that are compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitute not less than 60% of its total assets;

(C) Except through block sales for dilution or disinvestment purposes, it does not trade in its investments in shares, debts or loans in group companies;

 

Q.  What are the various prudential regulations applicable to NBFCs?

A. i. Company’s act 2013

ii. Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007

iii. Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

iv. Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

 

Q. what is owned or net owned funds?

A. Owned Fund 'means the sum of the paid-up equity capital, the preferred shares that are compulsorily convertible into equity, the free reserves, the balance in the share premium account and the capital reserves reflecting the surplus arising from the selling of asset proceeds, excluding the reserves produced by the revaluation of the asset after deduction from the accumulated balance of losses, the deferred revenue expenditure and other expenditure. The 'Net Owned Fund' is the sum as mentioned above, minus the sum of the company's investments in the stock of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances, including lease and lease financing and deposits made with subsidiaries and companies in the same group, to the extent that it exceeds 10%

 

 

Q. Non-Deposit taking NBFCs Compliances or returns?

A. NBS-7 A Quarterly statement for NBFC-ND-SI on capital funds, risk weighted assets, risk asset ratio, etc.

    Monthly return on NBFCs-ND-SI Essential Financial Parameters.

   Returns from ALM:

(I) Declaration of Dynamic Short Term Liquidity in ALM Format [NBS-ALM1] -Monthly,

(ii) Systemic Liquidity Statement in ALM Format [NBS-ALM2] Half yearly,

(iii) Sensitivity Interest Rate Comment in ALM format -[NBS-ALM3], Half Annual

 

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