In this blog, the NBFC sector fundamentals are discussed with you being taken through what NBFCs are, how and why they are classified, the strict eligibility criteria, and step-by-step NBFC registration procedure on how to obtain that coveted NBFC license from RBI.
What Actually Constitutes an NBFC?
In essence, an NBFC is a company under the Companies Act, 2013, involved predominantly in financial business operations like lending, investing in shares, debentures, and other securities, leasing, or hire-purchase. Regardless of the parity established between them and banks, there exist major differences which make them unique from the rest within the NBFC universe:
- No Demand Deposits: NBFCs, unlike banks, are not necessarily obligated to accept demand deposits (e.g., savings or current accounts).
- Non-Payment System: They form no part of the payment and settlement system and are not allowed to issue cheques.
- No DICGC Cover: Deposits of NBFCs have no protection of deposit insurance by the DICGC.
A feature that brings a company into the line of NBFC registration is the "50-50 test": it must possess at least 50% of its total assets in financial assets, and at least 50% of its gross incomes must come from such financial assets. This rigorous test is done only to ensure that blue-blooded financial institutions are recognized and governed as NBFCs by the RBI, and hence become part of the larger NBFC industry.
Negotiating the Diverse Landscape: Types of NBFCs in India
RBI categorizes NBFCs into types on the basis of activities and acceptances of deposits. There are some regulatory guidelines with each class of type of NBFC, which affect your journey towards your NBFC license.
Based on Activity/Nature of Business:
- Investment and Credit Company (ICC): Most common in the NBFC segment, with business in asset finance, lending, and purchase of securities.
- Infrastructure Finance Company (IFC): Involved in infrastructure project finance with a minimum Net Owned Fund (NOF) of ₹300 Crore.
- Micro Finance Institution (NBFC-MFI): Provides small, usually collateral-free loans, mostly to the low-income segment.
- NBFC-Factors: Mainly involved in factoring business (purchase of accounts receivables).
- Core Investment Company (CIC): Essentially invests in the securities and shares of the group entities.
As per Deposit Acceptance
- NBFC-D: Directly instructed by RBI to accept public deposits, thereby heightened regulatory focus for their NBFC license.
- NBFC-ND: Not allowed to accept public deposits. Further divided based on asset size:
a) no NBFC-ND-SI (Systemically Important): Asset size of ₹500 Crore and above, with higher prudential norms.
b) no NBFC-ND (Non-Systemically Important): Asset size below ₹500 Crore.
This multi-tiered strategy to tackle NBFCs ensures proportionality of the regulatory regime, as RBI's Scale-Based Regulation (SBR) emphasizes.
Eligibility Criteria for NBFC Registration: Charting Your Course
The applicants qualified to traverse the journey of NBFC registration and receive an NBFC license by RBI need to meet stringent criteria:
- Company Incorporation: Such a company must be incorporated under the Companies Act, 2013, and its Memorandum of Association (MOA) must explicitly mention financial business as its primary purpose. That is the very foundation of your NBFC registration.
- Minimum Net Owned Fund (NOF): For the normal Investment and Credit Company (ICC) registration, minimum NOF will be needed to be ₹10 Crore. The paid-up equity capital and free reserves (excluding specified deductions) must be lien-free. Statutory auditor certificate attesting NOF is compulsory component of your NBFC application. Attaining this level of capital is quintessential for an NBFC license.
- "Fit and Proper" Requirements for Directors and Promoters: The individuals operating the company need to have strict "fit and proper" requirements. They are a good financial record, no criminal record, and some part-time background in finance and banking for some directors so that there are competent people in the leadership role in the NBFC industry.
- Sound Business Plan: There has to be a sound and practical business plan. Your submitted business plan along with NBFC application must outline your business plan, target market, financial projections, risk management policy, and technology infrastructure. It must reflect how your proposed NBFC would enhance the value to the NBFC industry as well as public interest.
- Clean Credit History: Directors of the company, the company, and the significant shareholders must maintain a clean credit history, as attested by credit information companies. A clean credit history is necessary in order to prevent any NBFC registration hassle.
Step-by-Step Process of NBFC Registration
Starting on the journey of availing your NBFC license is a well-defined step-by-step process:
- Incorporation of the Company: The very first thing to do in NBFC registration process is to incorporate your company legally in such a manner that its MOA clearly specifies financial business operations.
- Capital Infusion & Certification of NOF: Pay the minimum amount of NOF into your company's bank account. Get an auditor's certificate as proof of such NOF, which is one of the most important requisites of your NBFC application.
- Document Compilation: Collect all documents required – from Certificate of Incorporation and MOA/AOA to director KYC, credit reports, and your well-drafted business plan. Precision here is necessary for seamless NBFC registration.
- Online NBFC Application: Approach RBI's COSMOS portal (https://cosmos.rbi.org.in). Complete the detailed online NBFC application form and submit all the supporting documents. A Common Application Reference Number (CARN) shall be created.
- Dispatch of Physical Documents: After online submission, dispatch hard copies of your NBFC application (with reference to the CARN) and all the duly attested supporting documents to the concerned RBI Regional Office.
- RBI Investigation & Due Diligence: RBI conducts a complete check-up, including strict document verification, "fit and proper" director/promoter testing, and level-higher scrutiny of your business plan. This is the most important step and can take a couple of months. Your patience is the master here to come out successfully in NBFC registration process.
- Payment of Fees: The registration fee for NBFC is a non-refundable ₹3,00,000, which needs to be paid at the time of submission of online application for NBFC. This is part of the fee for obtaining your NBFC license.
- Certificate of Registration (CoR) issue: After all eligibility conditions have been fulfilled and RBI is satisfied, they will issue your formal NBFC certificate, i.e., the Certificate of Registration (COR). Your NBFC certificate is your legally approved document to begin operations and clear proof of a successful NBFC registration.
Post-Registration NBFC License Maintenance
You get your NBFC certificate; it is a milestone but just the start of an ongoing process of adherence. To prevent cancellation of your NBFC license, adherence to RBI's periodic instructions is crucial:
- NOF maintenance: Sustained maintenance of the prescribed NOF at all times.
- Periodic Returns: Periodic filing of different financial and business returns with RBI.
- Prudential Norms: Adherence to directives on capital adequacy, asset classification, and provisioning.
- Know Your Customer and Anti-Money Laundering: Strong enforcement of Know Your Customer and Anti-Money Laundering rules.
- Fair Practices Code: Adherence to RBI-regulated Fair Practices Code in dealing with the customers fairly.
Conclusion
The NBFC industry is the economic backbone of India's future. The stringent NBFC registration process helps to ensure honest business practices by the companies and thus, financial inclusion and financial security. A well-regulated NBFC with an active running NBFC license stands a good chance to exploit huge opportunities in this vibrant NBFC sector.