What is NBFC?

NBFC or Non-Banking Financial Company is that kind of financial institution which provides various financial and non-financial services to individuals, business enterprises, entrepreneurs, etc. They are different from the Cooperative and Commercial Banks, They do not need to hold a banking license but must strictly follow the rules and regulations provided by RBI from time to time. NBFCs are indeed registered under the Companies Act 2013 A few of the services they provide include Asset Financing, Chit business, peer to peer lending and insurance business.

NBFC License must be taken from RBI u/s 45-IA of the RBI Act of 1934. The financial institution wishing to be registered as NBFC must, first, be duly registered under the Companies Act of 2013.

RBI strictly regulates and ensures that the NBFCs are complying with the provisions and regulations provided in Chapter III B of the RBI Act. The principal business activity of NBFCs is to raise capital from the public depositors & investors and lend these further to the borrowers.
NBFCs are the bridges that link the investors or depositors with the borrowers. They have become a better alternative to the banking and financial sector by providing financial solutions to the unbanked and unorganized segments of society.

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:
• Registration: The financial institution should be established as a company under Section 3 of the Companies Act 2013.
• Director’s Qualifications: At least 1/3rd of the Directors must hold minimum 10-year experience in finance. And he/she must be employed as a full-time Director.
• Unique Business Plan: A business plan must be detailed and ready for operations for the next 5-years.
• Net Owned Fund (NOF): The Company must have at least Rs. 2 Crore as its Net owned Funds. It must comprise of only equity paid-up share capital. Preference share capital is not to be included.
• lean Credit History: The CIBIL score of the company, its Directors and its members must be good. They must not have any write-offs or wilfully defaulted on the repayment of loans to NBFC/Bank.
• FDI Compliance: If any foreign investment is anticipated, the company should be in compliance with the FEMA Act.

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

• Provides loans and credit facilities based on the alternative credit scoring model to assess the loan application.
• Support investment in property.
• Helps in trading money market instruments.
• Funding of private education.
• Provides retirement planning.
• They give advice companies in merger and acquisition.
• Wealth management.
• Prepare a feasibility, market or industry studies for companies.
• They create a balance by addressing 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:
• Documents related to the administration, management of the company
• Certificate of Company incorporation
• The MoA and the AoA
• Documents describing the location of the company
• Detailed information about Directors or Partners of the Company
• Accounts of the company well-audited for last three consecutive years
• Board Resolution in favour of NBFC formation
• Bank Account with a minimum paid up equity share capital of INR-2 Crore
• Income tax PAN, etc
• Latest KYC
• Net worth certificate
• Clean banker report
• Education proof
• Other relevant documents on request

RBI Conditions for Granting NBFC License

• NBFC Should pay its present or future investors in full as and when their claims accrue.
• NBFC Should see that its operations are not likely to be carried in any manner detrimental to the interest of its existing or future investors.
• NBFC should assure that the general character of the management and the Board shall not be prejudicial to the interest of the public or depositors.
• NBFC Should assure that it has sufficient capital structure and earning potential.
• NBFC Should assure that public interest shall be served by licensing this company as an NBFC.
• NBFC Should assure that the grant of Registration shall not be unfavourable to the operation of the financial sector. And is consistent with monetary stability, economic growth and considering such other relevant policies of 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.