All about Non Banking Financial Company (NBFCs) | Bhavya Sharma & Associates

Non-Banking Finance Companies (NBFCs) have a significant role in the Indian financial system by supplementing and competing with banks, and by bringing productivity, efficiency and diversity into financial intermediation. NBFCs have evolved considerably in terms of operations, heterogeneity, asset quality and profitability, and regulatory architecture. Through this article, I will drive you through the basics of NBFC and the detailed process for obtaining an NBFC license. 

NON-BANKING FINANCIAL COMPANY (NBFC)

NBFC  is a company registered under the Companies Act, 2013 that is engaged in the business of granting loans and advances, receiving deposits (some NBFCs only), acquisition of stocks or shares, leasing, hire-purchase, insurance business, chit business. 

Therefore, NBFCs are somewhat similar to banks in lending and taking deposits however there are a few differences. 

DIFFERENCES BETWEEN BANKS AND NBFCS: 

a) They can’t accept demand deposits, 

b) They can’t issue cheques drawn on themselves, and 

c) NBFC depositors are not covered by the Deposit Insurance and Credit Guarantee Corporation. 

REQUIREMENT OF NBFC LICENSE WITH RBI 

The RBI  is the regulatory authority for NBFCs which are in the principal business of

• lending or acquisition of shares, stocks, bonds, etc., or 
• financial leasing or 
• hire purchase or 
• accepting deposits. 

PRINCIPAL BUSINESS OF FINANCIAL ACTIVITY 

• The company’s financial assets (cash and cash equivalents, debtors, securities, cash in bank etc.) constitute more than 50% of the total assets.

                                                          (AND) +

• Income from financial assets constitutes more than 50% of the gross income.

A company fulfilling both these criteria should take NBFC registration from RBI u/s 45-IA of the RBI Act of 1934. 

Therefore, companies engaged in agricultural, industrial activities, trading of goods, provisions of services or real estate activities as their principal business and are doing some financial activity incidentally will not require NBFC registration.

FINANCIAL COMPANIES EXEMPTED FROM OBTAINING NBFC LICENSE

The entities carrying the following principal business activities are exempted from taking NBFC License from RBI: 

ENTITY TYPE	REGULATORY AUTHORITIES
Housing Finance Companies	National Housing Bank;
Insurance Companies	Insurance Regulatory and Development Authority of India (IRDAI)
Stock Broking	Securities and Exchange Board of India;
Merchant Banking Companies	Securities and Exchange Board of India
Venture Capital Companies	Securities and Exchange Board of India
Collective Investment Schemes	Securities and Exchange Board of India
Mutual Funds	Securities and Exchange Board of India
Nidhi Companies	Ministry of Corporate Affairs (MCA)
Chit Fund Companies	respective State Governments

                                                                             

                              

DIFFERENT TYPES OF NBFCs ARE AS FOLLOWS: 

SR.NO	NBFC TYPE	DESCRIPTION
	Asset Finance Company (AFC)	An AFC is a financial institution engaged in the principal business of financing physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earthmoving and material handling equipment, moving on own power and general-purpose industrial machines.
	Investment Company (IC)	IC means any company which is a financial institution carrying the principal business of acquisition of securities.
	Loan Company (LC)	LC is a financial institution whose principal business is providing finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
	Infrastructure Finance Company (IFC)	IFC is an NBFC -  (a) which deploys at least 75 per cent of its total assets in infrastructure loans,  (b) has a minimum Net Owned Funds of ₹ 300 crores,  (c) has a minimum credit rating of ‘A’ or equivalent; and  (d) a CRAR of 15% with Tier I capital at 10%.
	Systemically Important Core Investment Company (CIC-ND-SI):	CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities.
	Infrastructure Debt Fund	IDFs are investment vehicles that can be sponsored by commercial banks and NBFCs in India in which domestic/offshore institutional investors, especially insurance and pension funds can invest through units and bonds issued by the IDFs. IDFs would essentially act as vehicles for refinancing existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure projects.
	NBFC - Micro Finance Institution (NBFC-MFI)	“(NBFC-MFI)” means a non-deposit taking NBFC (other than a company formed and registered under Section 8 of the Companies Act, 2013) that fulfils the following conditions:  (a) Minimum Net Owned Funds of ₹ 5 crores. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at ₹ 2 crores).  (b) Not less than 85% of its net assets are in the nature of “qualifying assets.”
	Non-Banking Financial Company – Factors (NBFC-Factors)	NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 per cent of its total assets and the income derived from the factoring business should not be less than 50 per cent of its gross income.
	Mortgage Guarantee Companies (MGC)	MGCs are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and the net owned fund is ₹100 crore.
	NBFC- Non-Operative Financial Holding Company (NOFHC)	NOFHC 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.
	Systemically important non-deposit taking the non-banking financial company	NBFC not accepting/holding public deposits and has total assets of ₹ 500 crores and above as shown in the last audited balance sheet;

Requirement for Obtaining NBFC License 

To apply and obtain NBFC License, the following are the basic requirements: 

• It shall be a company registered in India (Private Limited Company or Limited Company); 
• The company must have a minimum Net Owned Fund of Rs. 200 lakhs.

TYPES OF NBFC LICENSE 

Before applying for an NBFC License, the type and category of NBFC license must first be determined. 

SR.NO	BASIS OF CLASSIFICATION	TYPES OF NBFC
	Type of liabilities	(i) Deposit accepting NBFCs and  (ii) Non-Deposit accepting NBFCs
	Non-deposit taking NBFCs by their size into	(i) systemically important (NBFC-NDSI ) and  (ii) other non-deposit holding companies (NBFC-ND) and
	Activity type

PROCEDURE FOR APPLICATION OF NBFC LICENSE

The application for NBFC License must be submitted online and offline with the necessary documents to the Regional Office of the Reserve Bank of India. 

DOCUMENTS FOR NBFC LICENSE

The following are the documents that need to be submitted for NBFC License: 

• Management details. 
• CTC of Certificate of Incorporation. 
• CTC of Commencement of Business (In the case of public limited companies).  
• CTC of updated MOA and AOA of the company. Details of clauses in the memorandum relating to financial business. 
• PAN card copy.
• CIN allotted. 
• Directors’ profiles, are separately filled up and signed by each director. 
• Certificate from the respective NBFC/s where the Directors have gained NBFC experience. 
• CIBIL Data pertaining to Directors of the company. 
• Financial Statements of the last 2 years of unincorporated Bodies, if any, in the group where the directors may be holding directorship with/without substantial interest. 
• Board Resolution specifically approves the submission of the application and its contents and authorized signatory. 
• Board Resolution to the effect that the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of RBI in writing. 
• Board resolution stating that the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI. 
• Board resolution for the formulation of “Fair Practices Code”. 
• Statutory Auditors Certificate certifying that the company is/does not accept/is not holding public deposit. 
• Statutory Auditors Certificate certifying that the company is not carrying on any NBFC activity. 
• Statutory Auditors Certificate certifying net owned fund as on date of the application. 
• Details of Authorized Share Capital and latest shareholding pattern of the company including the percentages. 
• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Funds. 
• Details of the bank balances/bank accounts/complete postal address of the branch/bank, loan/credit facilities etc. availed. 
• Last three years Audited balance sheet and Profit & Loss account along with directors & auditors report or for such shorter periods as are available (for companies already in existence.)
• Business plan of the company for the next three years giving details of its (a) the thrust of business, (b) market segment and  (c) projected balance sheets, cash flow statement, asset/income pattern statement without any element of public deposits.
• The Source of the startup capital of the company substantiated with documentary evidence. 
• Self-attested Bank Statement/IT returns etc. 
• Other documents may be required by RBI.

 Article By: Ms Shivangi Dhanuka, Legal Associate at Bhavya Sharma and Associates located in Delhi. In case you need any assistance for  corporate law compliances or advisory related services,  contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com

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