A Non-Banking Financial Company (NBFC) is a financial institution that provides services such as loans, asset financing, investment advisory, and credit facilities but does not hold a banking license. Unlike banks, NBFCs do not accept demand deposits, yet they play a vital role in financial inclusion by offering credit to businesses, individuals, and sectors underserved by traditional banks.
To operate legally in India, an NBFC must be registered with the Reserve Bank of India (RBI) under the RBI Act, 1934. The registration process requires meeting eligibility criteria, following compliance norms, and submitting necessary documents. This article outlines the step-by-step process for NBFC registration, along with key considerations for applicants.
Types of NBFCs in India
NBFCs in India are classified based on their business model and financial activity. Some common types include:
- Asset Finance Companies (AFCs): Provide loans for vehicles, machinery, and equipment.
- Loan Companies (LCs): Offer personal and business loans but do not engage in asset financing.
- Investment Companies (ICs): Primarily deal in securities and investment instruments.
- Infrastructure Finance Companies (IFCs): Focus on financing infrastructure projects.
- Microfinance Institutions (MFIs): Provide small loans to individuals, particularly in rural areas.
- Housing Finance Companies (HFCs): Specialize in providing housing loans.
The registration process is largely the same for all NBFCs, with slight variations depending on the type of business activity.
Eligibility Criteria for NBFC Registration
Before applying for an NBFC license, the company must meet specific eligibility conditions set by the Reserve Bank of India (RBI):
- Company Incorporation: The entity must be registered as a Private Limited or Public Limited Company under the Companies Act, 2013.
- Minimum Net Owned Fund (NOF): A minimum ₹2 crore is required as NOF for general NBFCs. (₹5 crore for deposit-taking NBFCs).
- Financial Experience: At least one director must have experience in finance or banking.
- Business Plan: A well-structured business plan covering at least five years of operations is required.
- Clean Credit History: Promoters, directors, and key stakeholders should have no history of financial fraud or default.
Only companies fulfilling these conditions can proceed with the NBFC registration application.
Step-by-Step Registration Process for NBFC in India
Step 1: Incorporate a Company under the Companies Act, 2013
- Register the business as a Private Limited Company or Public Limited Company with the Ministry of Corporate Affairs (MCA).
- The company’s Memorandum of Association (MoA) and Articles of Association (AoA) should specify that the primary business activity is financial services.
Step 2: Meet the Net Owned Fund (NOF) Requirement
- The company must maintain a minimum NOF of ₹2 crore, deposited in a scheduled bank.
- Obtain a certificate from the bank verifying the balance of ₹2 crore as NOF.
Step 3: Prepare the Required Documents
The applicant must gather the necessary documents for submission, including:
- Company Incorporation Certificate
- Memorandum and Articles of Association
- Details of Directors and Shareholders (KYC Documents)
- Net Owned Fund Certificate from a Bank
- Auditor’s Report Confirming NOF Compliance
- Board Resolution for NBFC Registration
- Business Plan Detailing Financial Projections
- Income Tax Returns (ITR) of Directors and Promoters
Proper documentation is essential to avoid delays in approval.
Step 4: Online Application via the RBI COSMOS Portal
- The applicant must submit an online application through the RBI’s COSMOS Portal.
- Fill out the RBI Form – Application for NBFC Registration with details about the company’s structure, activities, and financial standing.
- Upload the required documents and submit the application for preliminary review.
Step 5: Submit a Hard Copy of the Application to RBI
- A physical copy of the online application, along with supporting documents, must be sent to the RBI Regional Office under whose jurisdiction the company is registered.
- The submission must be made within 30 days of filing the online application.
Step 6: RBI’s Due Diligence and Scrutiny
- The RBI conducts thorough background verification of directors, shareholders, and promoters.
- The company’s financial stability and business model are assessed.
- Any discrepancy in documents may lead to a request for additional information.
Step 7: Grant of NBFC Registration Certificate
- If the application meets all RBI guidelines, a Certificate of Registration (CoR) is issued.
- The company can now commence NBFC operations, subject to RBI regulations.
The entire process typically takes 3 to 6 months, depending on document accuracy and compliance adherence.
Post-Registration Compliance for NBFCs
After obtaining the NBFC registration, companies must comply with ongoing regulatory requirements:
- Periodic Filing of Returns:
- Submit quarterly, half-yearly, and annual financial statements to the RBI.
- File returns such as NBS-1, NBS-2, and NBS-7 for reporting financial status.
- Capital Adequacy Ratio (CAR) Compliance:
- Maintain a minimum 15% Capital Adequacy Ratio (CAR) to sustain financial stability.
- Fair Lending Practices:
- Follow RBI guidelines on loan disbursement, interest rates, and risk assessment.
- Statutory Audits and Inspections:
- Conduct annual audits by a registered Chartered Accountant and submit reports to RBI.
- Strict Adherence to KYC and AML Regulations:
- Maintain proper records of customers to prevent financial fraud and money laundering.
Challenges in NBFC Registration
While NBFCs play a significant role in the financial sector, obtaining registration comes with certain challenges:
- Meeting the High Net Owned Fund (NOF) Requirement
- Many small businesses struggle to secure ₹2 crore in initial capital.
- Lengthy Approval Process
- The scrutiny period can extend beyond six months if additional documents are requested.
- Ongoing Compliance Burden
- NBFCs must continuously meet regulatory guidelines, failure of which can result in penalties or cancellation of the license.
- Tightened RBI Regulations
- With the rise in financial fraud cases, RBI has increased scrutiny over NBFC operations.
Despite these challenges, many businesses opt for NBFC registration due to the lucrative opportunities in lending, investment, and credit facilitation.
Conclusion
NBFCs contribute significantly to India's financial sector by providing alternative lending solutions to businesses and individuals. However, registering an NBFC requires careful planning, adherence to RBI guidelines, and fulfillment of financial conditions. The process involves company incorporation, securing the required capital, and obtaining approval from the RBI after detailed scrutiny.
Once registered, NBFCs must comply with periodic filings, maintain liquidity ratios, and follow fair lending practices to operate successfully. While the process involves multiple steps, the benefits of running an NBFC outweigh the regulatory challenges, making it an attractive financial business model in India