Non-Banking Financial Companies are financial institutions that undertake banking activities. The two major financial activities an NBFC undertakes are lending money and accepting deposits. The first step in the establishment of a Non-Banking Financial Company is following the NBFC Registration Process and registering the company before starting its business activities.
Non-Banking Financial Companies are financial institutions that undertake banking activities. The two major financial activities an NBFC undertakes are lending money and accepting deposits. The first step in the establishment of a Non-Banking Financial Company is following the NBFC Registration Process and registering the company before starting its business activities. Without proper registration, the company will not be considered a legal company that can start operating.
Registered under the Companies Act, 1956, some of its other major business activities are the acquisition of shares, stocks, bonds, debentures and offering loans and advances.
The Reserve Bank of India (RBI) has the power and the right to control the operations of the non-banking financial companies, as per the Reserve Bank of India (RBI) Act, 1934.
Non-Banking Financial Company Registration Process
A Non-Banking Financial Company must be registered as per the guidelines mentioned in the Companies Act. Some necessary steps that must be followed are as mentioned below–
- Hiring NBFC Registration Consultants
An NBFC Consultant firm must be contacted and a team of members of at least 100 to 150 must be hired that contains professionals like CA, CS, Lawyers, and Senior Level Bankers.
- Creation a detailed business plan
The business plan must include the following important elements-
- Founders and Executive Summary
- Loan Product
- SWOT Analysis
- Credit & Risk Model
- Competitors Analysis
- Lending Model
- Financial Forecast
- File an application for Certificate of Registration(COR)
Before filing an application for a Certificate of Incorporation, certain important factors must be fulfilled. The first one is including a middle name in the company name, the name of the company must have any one of the words: Finance, Final, Investment, Capital, Fintech, and Leasing, etc. A fixed deposit of Rs 2 Crores must be made in a commercial bank. Lastly, the application form must be submitted to the regional department with RBI.
Documents Required for NBFC Registration in India
- A certified copy of Memorandum of Association(MOA) and Articles of Association(AOA)
- Certified Copy of Registration Certificate
- A copy of the company’s Certificate of Incorporation
- Recent and updated KYC of all the directors and shareholders
- Financial Statements of the company
- Clean banker’s report with no lien remark on the Fixed Deposit of Rs 2 crores
- Qualification proof of all the Directors and Shareholders
- Credit report of Directors and Shareholders
- Proof of previous experience in the Financial Sector
- Underwriting Model
- Organization Matrix
- System and IT Policy
Acquiring NBFC License in India
Obtaining an NBFC License in India is mandatory, right after the company’s registration. The below-mentioned steps are ways to obtain the license.
Steps to follow to obtain NBFC License
- The applicant must submit an online application through the RBI website.
- Then, the applicant selects the “Company Registration” option on the website.
- Then, the applicant must download the application form available.
- The appropriate name of the regional office must be filled.
- The applicant then receives a Company Application Reference Number.
- In this step, the applicant submits a hard copy of the form along with all the documents to the regional office.
Important factors to keep in mind at the time of NBFC incorporation
- The company must be registered under Section 3 of the Companies Act.
- It must acquire a minimum net owned fund of Rs.2 crores. Also, the funds should not be borrowed.
- At least 1/3 of the Directors must have prior experience in the Finance Field.
- An inclusive plan for the five years must be created.
Factors to consider for NBFC Registration
- The applicant must engage in the financial activities as per the provisions mentioned in the Act. If the financial flow of the registered company increases to more than 50% of the total capital assets that the company owns, the company then receives NBFC Registration.
- The applicant company at the time of making an application for NBFC registration must hold a minimum of a Paid-up capital fund of Rs 2 Crores. Furthermore, the Foreign Company and the Foreign Investors who are planning to set-up an NBFC must maintain a paid-up equity capital of Rs 5 Crores.
Categories of Non-Banking Financial Companies
- NBFC Investment and Credit Company (NBFC ICC)
The NBFC Investment and Credit Company is further divided into-
- Asset Finance Company
- Investment Company
- Loan Company
- · Asset Finance Company
- A Company that lends the burrowers any kind of asset on a temporary basis.
- Investment Company
The purpose of this type of company is the acquisition of securities.
- Loan Company
A Loan Company is a Non –Banking Financial Company that runs with the main objective of providing finance by providing loans and advances to the public.
- Infrastructure Finance Company (IFC)
An IFC is a company that contains net-owned funds of a minimum of 300 crores out of which at least 75 percent of its total assets is utilized in infrastructure loans.
- Systematically Important Core Investment Company
A company that owns assets of 100 crores and above out of which 90% of the assets are utilized and invested in the form of loans in different companies.
The one feature that separates a systematically important core investment company from the other types is that- out of 90%, 60% has to be invested in equity shares.
- Infrastructure Debt Fund
As the name suggests, IDF is meant to fulfill the requirements of the infrastructure industry. The funds invested in this company are utilized for construction purposes of different buildings, roads, bridges, dams, etc.
- Micro Finance Institution- NBFC
Also known as small finance banks, these institutions are created with the objective of offering banking services to the less privileged sections of society.
- Non-Banking Financial Company — Factors
This type of company is involved in the factoring business. It means that the financial assets in the business should be at least 50% of the total assets and the total income should be more than 50% of the gross income.
- Mortgage Guarantee Companies
A company in which a minimum of 90% of the revenue must be derived from the mortgage guarantee company and the net owned fund should be Rs. 100 Crores.
Effect of Union Budget 2020 on NBFCs
Non-banking finance companies (NBFCs) were in a dire need of funding in the previous years especially after a series of defaults that had occurred by Infrastructure Leasing and Financial Services in the year 2018. The shadow banking players have also requested to grant strong support to the NBFCs for accessing public deposits. This risk-averse approach of banks negatively affected the NBFC sector and created a liquidity crunch in the sector which further affected major sectors like Micro Small and Medium Enterprises (MSMEs) and the automobile industry.
It is necessary for NBFCs survival and growth to have various funding sources, which is one of the major steps taken for providing support to the NBFCs. A refinance will also be set up for them in order to branch out their funding sources.
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