NBFC

Banking license for NBFC

NBFC is a financial company that does not need to have a banking license like traditional banks; an NBFC banking license has to be obtained from the RBI as certification of registration to operate the business that provides services similar to the other traditional banks yet does not hold a banking license. However, after obtaining an NBFC banking license, a non-banking financial company can operate its services, like providing credit and other financial services to customers for whom traditional banks have denied the required services.

It was during the early 1960s when there was a financial crisis among the people whose requirements could not be fulfilled by traditional banks. An NBFC bank came into the picture by meeting the various financial services, thus helping the nations promote extensive economic growth. NBFC banking license has provided various sections of society with access to loans that were not possible to obtain from another banking sector. Multiple sectors could get loans after NBFC banking licenses came into the picture in the financial industry, such as high-risk industries, low-income individuals, farmers, MSMEs, and infrastructure companies for financing projects with materials like machinery, equipment, power plants, etc.

The NBFC banking license conditions and procedures are mentioned in the Reserve Bank of India and its regulations. There are various types of NBFCs in India that constantly keep on changing based on RBI regulations. The category of NBFC banks, whether they can accept deposits or not, the activity they conduct, and their systematic importance are decided by the Reserve Bank of India (RBI). Some of the types of non-banking financial companies in India are asset finance companies (AFC), Investment Companies (IC), Loan Companies (LC), and Infrastructure Finance Companies (IFC). A minimum net-owned fund of Rs.2 core is a must to obtain an NBFC Banking Licence. A net-owned fund is the difference between the net worth of what it owns and what it owes. This NOF signifies the respective NBFC bank’s financial strength and stability to absorb losses and fulfil its various financial obligations.

What is the NBFC Financial Institution

NBFC acronym is Non-Banking Financial Company. It is a banking institution registered under the Companies Act of 1956 engaged in the business of loans, advances, acquisition of shares, stocks bonds, debentures, securities issued by the government, local authority, or other marketable securities like leasing, hire purchase, insurance business, chit business, etc. However, NBFC banks do not engage in the primary business of agriculture, industry, purchase and sale of goods, services, purchase, and sale or construction of immovable property.

NBFC cannot accept demand deposits like any other traditional bank.  NBFC banking license in India has to obtain a certificate of registration from the Reserve Bank of India (RBI). For an NBFC banking license, a minimum net owned fund of Rs.2 core is a must to operate a non-banking financial Company in India. NBFCs are generally divided according to the types of liabilities into deposit and non-deposit-accepting NBFCs.

NBFC banking license comes under the authority of the Reserve Bank of India (RBI). RBI is the concerned authority to make policy, issue directions, inspect, directions, inspect, regulate, and supervise the working and functions of NBFC (Non-Banking Financial company).

What are the Requirements for NBFC Banking Licence

For NBFC banking licence registration, the below-mentioned conditions need to be fulfilled under the Reserve Bank of India regulations.

1. According to Section 45-IA of the Reserve Bank of India, an applicant seeking for NBFC banking license must comply with such regulation to obtain a certificate of registration.
2. An applicant company needs to register the company under the Companies Act 2013.
3. The applicant company must make sure that 1/3 of the proposed directors for the said NBFC bank have the requisite experience working in a non-banking financial company or any banking sector to apply for the NBFC banking license.
4. An applicant company needs to have a draft of a business plan for the next five years.
5. The applicant company for the NBFC banking license must have a minimum net owned fund of Rs. 2 crores along with the tax.
6. The Reserve Bank of India undertakes a quality check on the NBFC capital test to see if they are complying with the respective prescribed laws and regulations.
7. The applicant company for an NBFC banking license in India shall make sure that the company credit score, its directors, and shareholders are aligned, and they must not have defaulted in repayment of loans deliberately to banks or NBFCs.
8. For obtaining an NBFC banking license, FEMA compliance is necessary, in case the applicant company is engaged in a foreign investment. FDI is allowed from FATF member countries.

Differences between NBFCs and Traditional Bank

1. NBFC is a financial institution that provides financial services without obtaining a banking license, whereas banks are government-approved banking services that meet the people’s financial requirements.
2. In NBFC, demand deposits are not accepted, whereas in banks, demand deposits of customers are accepted.
3. In NBFC, foreign investment is fully permitted, whereas in private sector banks, 74% of foreign investment is.
4. NBFC banks do not make a credit, whereas banks make a credit.
5. NBFC banks do not have to maintain a reserve ratio whereas banks have to maintain a reserve ratio.
6.  Transaction services are not applicable in NBFC, whereas transaction services are available in a traditional bank.

Application Process for NBFC Banking Licence

Following steps to be taken for NBFC banking license

1. An applicant bank needs to be registered as a company, either a private limited or a public company, under the Companies Act 2013.
2. The applicant for an NBFC banking license must ensure that the proposed name of the company has either finance, Fiserv, Fin, Investment, Capital, Fintech leasing, etc., along with the name they desire.
3. A minimum net-owned fund of Rs.2 core must be possessed by the applicant for an NBFC banking license.
4. A bank account has to be opened in the name of the applicant company, where the NOF of Rs 2 core needs to be deposited by the applicant for an NBFC banking license.
5. An online application for registration of an NBFC banking license has to be filled out before the RBI official website.
6. The applicant company for the NBFC banking license has to submit the required documents in the online registration before the RBI website; accordingly, a reference number will be provided to the applicant for future reference.
7. After the due online procedure is completed for the NBFC banking license, the applicant company must physically submit the said application copies to the concerned regional office of the Reserve Bank of India.
8. It is the responsibility of the regional office to check and verify the accuracy of the submitted document.
9. After the due verification of the submitted document accuracy of the applicant bank for the NBFC baking license by the regional office, he shall send the said application to the central authority for further steps.
10. Thus, the central authority, the Reserve Bank of India, after due verification of the application for an NBFC banking license under section 45-IA, shall grant the NBFC banking license or registration.
11.  It is at the discretion of the RBI to seek from the applicant company if any further clarification or information is required as deemed fit.

Necessary Paperworks for the NBFC banking Licence?

1. Certified copy of COI (Certificate of Incorporation) MOI/ AOA (Memorandum of Association)/ Article of Association.
2.  Applicant company directors, shareholders, and company must submit their net Worth certificate.
3. Latest audited annual accounts of the applicant company for NBFC banking license.
4. Certificate of the statutory auditor.
5. Applicant company, proposed directors, shareholders net worth certificate for NBFC banking license.
6. The applicant company proposed directors’ qualification certificates.
7. Details of KYC, PAN card of the applicant company, and address proof document of the applicant company.
8. The applicant’s bank account details where the net owned fund of Rs.2 crore has to be deposited in the said account for the NBFC banking license.
9. The audited balance sheet of the applicant company for the last three years from the date of incorporation has to be submitted.
10. Income Tax Returns.
11. An applicant company business structure.
12. The banker’s report confirmed there is no lien on the fixed deposit.

Different Types of NBFC Banks in India

The different types of NBFC banks in India are

1. Asset Finance company
2. Loan and Investment Company
3. Infrastructure Finance Company
4. Core Investment company
5. Infrastructure Debt fund non-banking financial Company
6. Microfinance non-banking financial company
7. Mortgage Guarantee Companies
8. Non-Operative Financial Holding Company-NBFC

Regulatory Framework for NBFC Banking Licence

According to the Reserve Bank of India, a company to become a non-banking financial company has to fulfil the criteria that the principal business of the company has financial assets of more than 50 per cent of the total assets and income from financial assets constitutes more than 50 per cent of the gross income.

The applicant company’s CIBIL record has to align with the RBI requirement for an NBFC banking license in India. The RBI will cross-check the status of the applicant NBFC company directors and shareholders details if they are fit to operate the NBFC bank in India. It should be a company registered under the Companies Act, either a private or public entity.

The company must have a net-owned fund of Rs. 2 crores as a fixed deposit for the applicant company for NBFC. The NBFC has to comply with section 45-IA of the Reserve Bank of India to obtain an NBFC license in India, along with the norms and regulations under capital compliances and FEMA laws.

The application form and required documents for a checklist to be submitted along with the NBFC banking license in India are available at the official RBI website for better authenticity. Any financial company that is misleading the public to deposit money in the name of a non-banking financial company without due registration under the Reserve Bank of India is liable under the Indian Penal Code, penalty, or fine under RBI. The list of registered NBFC banks will be available on the official website of the Reserve Bank of Time, and various instructions and circulars on NBFC will be updated from time to time.

Insights For NBFC Banking Licence in India

1. Net owned funds for NBFC-ICC, NBFC-MFI, and NBFC-Factor shall be 10 crores to operate and carry on the function of the financial business of non-banking financial companies.
2. According to the master directions updated as of November 10, 2023, by the Reserve Bank of India, it has stated that the net owned fund requirement for the existing NBFCs, NBFC-ICC, NBFC-MFI, and NBFC-factor to achieve NOF of Rs.10 crore by March 31^st, 2027.
3. By March 31^st 2025, the net owned fund of NBFC-ICC shall be 5 crores, NBFC-MFI shall be 7 crores and % crore in the Northeast region, and NBFC-factor shall reach & crore.
4. Any NBFC failing to achieve such NOF according to the master direction within a stipulated time shall not be eligible to hold the certificate of registration as a non-banking financial company.
5. The leverage ratio of non-banking financial companies shall not be more than seven at any point in time except for NBFC-MFIs, NBFCs-ML, and others.
6. NBFC banks should maintain the accounting standards according to the requirements of the notifications from time to time.
7. The NPA (non-performing asset) norms have changed to the overdue period of more than 90 days for applicable respective NBFCs. A timeline has been provided under the master directions that by March 31, 2024, the NPA norms for NBFC banks shall be more than 150 days; by March 31, 2025, more than 120 days; and by March 31^st, 2026, shall be 90 days.

Challenges and Conditions on NBFC Banking Licence

NBFC Bank plays a pivotal role in boosting India’s economy. NBFC banking license is regulated under the Reserve Bank of India. Given below are the various challenges faced by the applicant bank seeking an NBFC banking license.

1. Stringent laws and regulations are needed to comply with the local laws, if available, according to the local jurisdictions before applying for the NBFC banking license.
2. Minimum capital requirements are to be fulfilled by the applicant bank to enter into a non-banking financial company. This is to ensure that the respective bank can meet and absorb the customer requirements and any potential losses.
3.  Proposing directors and shareholders of the applicant company for NBFC have to meet certain eligible requirements to be enabled as part of NBFC institutions.
4. A business plan has to be estimated and planned by the applicant NBFC bank before applying for an NBFC banking license before the RBI. However, this plan requires extensive research and hard work to target the audience, market, geographical location, etc.
5. Various other prudential norms, such as Income recognition and asset classification, have to be satisfied before applying for an NBFC banking license.

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