NBFC

Criteria for NBFC Companies in India

NBFC banks have increased rapidly in India in the last ten years. However, NBFC banks are different from traditional banks, primarily focusing on businesses that deal with loans, advances, share acquisition, finance leasing, chit funds, etc. NBFC registration criteria differ from the traditional bank as it does not deal with opening savings accounts and current accounts, etc, unlike traditional banks. One of the important NBFC registration criteria is that they need to be registered under the Companies Act 1956/2013 and the Reserve Bank of India Act 1934.

NBFC, i.e., a non-banking financial Company, is a company registered under the Companies Act of 1956/2013 and other compulsory registrations that are needed to be obtained from the Reserve Bank of India under section 45-1A of the RBI Act of 1934 to start with their operations. Some of the major NBFC registration criteria are companies not related to any agriculture activities, Industrial activity, purchase and sale of any goods or raw materials from the market unless securities from the capital market and any immovable services related to the sale, purchase or construction. Unlike a traditional bank, NBFC registration criteria are not subjected to stringent regulations.

With the growing market in India, the demand for loans has increased among the Indian public. Thus, NBFC, in recent years, has played a very significant role in boosting the Indian economy by providing dozens of funds to the Indian population, whom the traditional banks find difficult due to complex eligibility criteria.

NBFC registration criteria are indeed flexible, customer-oriented, and faster and quick approaching, unlike traditional banks.

Meaning of NBFC as Per RBI

A Non-Banking Financial Company is a financial institution, unlike a traditional bank, that provides loans and advances and buys bonds, shares, debentures, stock securities, etc., either issued by the government or a local authority. NBFCs are registered under the Companies Act and followed by the Reserve Bank of India. The NBFC has features similar to a traditional bank but doesn’t have a banking license. They are not eligible to receive a demand deposit or savings account like any other traditional bank.

Generally, NBFCs are not subject to any regulations on banking adhered to by traditional banks. Since the recession, non-banking financial institutions (NBFC) have increased in number and type, playing a significant role in meeting the public’s credit requirement demands, which traditional banks are unable to fulfil.

Some of the types of NBFCs are casinos, card clubs, Securities and commodities firms, businesses on money services, Insurance companies, loan or finance companies, credit card systems operators, etc. In India, NBFCs (Non-Banking financial institutions) have to be registered under the Reserve Bank of India, and nearly about 10,000 NBFCs are registered; some of the famous NBFC banks in India are Aditya Birla Capital, Bajaj Finserv, L&T Finance Holdings Limited, Cholamandalam Investment and Finance Company Limited etc.

One of the major NBFC registration criteria under the Reserve Bank of India is Rs.10 crores as a net-owned fund to commence its business in the financial market. The business after complying with the requirements of NBFC registration criteria, they can start their businesses in NBFC-ICC (Investment and credit company), NBFC-MFI (Microfinance Institutions), and NBFC-factor (Non-banking financial company).

Types of NBFC Licenses

 Some of the common types of non-banking financial company licenses are Asset Finance Companies, Investment firms, Loan Corporations, Infrastructure Financing Firms, systematically important Core Investment Companies, Infrastructure Loans Funds, etc.   

Requirements of Documents for NBFC Registration Criteria

1. Company Incorporation Certificate.
2. The respective Company must have a Bank Account with a minimum paid-up equity share capital of Rs.2 crore.
3. The Memorandum of Association (MoA) and Article of Association (AoA) of the respective firm.
4. Registered address of the Company.
5. Information related to the Directors and shareholders.
6. Detailed documents related to companies’ administration and management.
7. Audited the Company’s financial statements for the last three consecutive years.
8. Companies Board Resolution on NBFC registration.
9. Pan card and any other requirements if requested.
10. A documentary brief on company works and activities for the last three years.

NBFC Regulatory Framework

1. NBFC regulatory framework is one of the major NBFC registration criteria, where the NBFC bank shall be divided into four layers depending on their size, activity, and perceived riskiness. These four layers of NBFC are the base layer NBFC (NBFC-BL), middle layer NBFC (NBFC-ML), upper layer (NBFC-UL), and NBFC top layer (NBFC-TL).
2. The base layer NBFC consists of assets below Rs.1000/- Crore, a peer-to-peer NBFC lending platform, an Account Aggregator-NBFC, a Non-operative financial holding company, and NBFC not providing the service on sanctioning public funds and not having any interface customer.
3. The middle layer of NBFC consists of any asset size NBFC deposits, NBFC non-deposits with asset size of Rs 1000/- core and above, and NBFC dealing with Standalone Primary Dealers, Infrastructure Debt Funds, Core Investment Companies, Housing Finance Companies, Infrastructure Finance Companies.
4. NBFC registration criteria for the Upper layer NBFC is that NBFC banks are identified on a set of parameters and methodology as per the Reserve Bank of India; any top ten NBFC based on the size of the asset will be considered as an upper layer regardless of any factor.
5. If the upper layer NBFC is at potential risk, as per the Reserve Bank of India, these NBFC banks will be shifted to the NBFC top layer, which is generally empty.

Minimum Net Owned Fund Requirement

Recently, the Reserve Bank of India has passed a master circular on NBFC banks and its NBFC registration criteria. These NBFC registration criteria have been upgraded due to the increased number of non-banking financial institutions bank in India and its increasing demand among the public. These NBFC registration criteria have been changed based on the size of assets, activity scale, and risk. According to this recent circular, NBFC banks have been divided into various levels, such as the NBFC Base layer, NBFC Middle Layer, NBFC upper layer, etc. However, such NBFC registration criteria depend upon the size and function of the Non-Banking Financial Company.

That, when the NBFC consolidated asset size with a group is Rs.1000 core or more then each Company lying within the group shall be classified in the group of Middle layers NBFC, and accordingly, the NBFC regulations will apply to them. One of the key elements in NBFC registration criteria within this middle layer of NBFC is that all the companies lying within this group shall also be governed under NBFC acceptance of public deposit direction, 2016.

Once the NBFC bank reaches the NBFC registration criteria on NBFC-ML (Middle layer) and reaches the asset size of Rs.1000/- core (one thousand) or above without not meeting the asset amount requirement on the last balance sheet, they shall immediately become subject to the NBFC regulatory requirements. Another important NBFC registration criteria regarding the NBFC-ML (Middle layer) is that whenever the NBFC bank falls below the asset size of Rs.1000/- crore in a given month due to fluctuations in the market and not due to actual downsizing, in such a scenario, NBFC banks shall follow the reporting requirements and NBFC-ML directions until the submission of next audited balance sheet before the Reserve bank of India (RBI).

NBFC registration criteria for Registration

1. A Net Owned fund (NOF) of Rs.10 crore is mandatory to fulfil for NBFC banks like NBFC-ICC, NBFC-MFI, and NBFC-factor to start and carry their business and NBFC not benefit from public funds and not having any customer interface asset Size Criteria, the Net Owned Fund (NOF) should be Rs.2 crore for NBFC-P2P, NBFC-AA. Meanwhile, the Net Owned Fund (NOF) for NBFC-IFC and IDF-NBFC should be Rs.300 crore.
2. It is important to note that according to the master direction issued by the Reserve Bank of India in November 2023 has provided a circular for NBFC banks like NBFC-ICC, NBFC-MFI, and NBFC-factor to achieve a Rs. 10 crore Net Owned Fund (NOF) by March 31^st, 2027.
3. NBFC’s failure to achieve this Net Owned Fund (NOF) of Rs.10 crore within a given time frame will not be eligible to hold the NBFC CoR (Certificate of Registration).
4. Any investment through Alternative Investment Funds made by the NBFC banks, either directly or indirectly in the organization of the same group, should be considered similar, with the condition that the fund has come directly from the NBFC to the extent of 50 per cent or more and in the case when the Alternative Investment fund in the trust form is the NBFC, where the 50 per cent of the trust fund has been given by the NBFC banks.
5. NBFC registration criteria on the leverage ratio says that the NBFC leverage ratio should be more than Seven at any point in time unless the NBFC comes under the category of NBFC-MFIs, NBFCs-ML, and above.
6. One of the major NBFC registration criteria is that any NBFC bank whose primary business is lending loans against the gold ornaments, which are 50 per cent more than their financial assets, should maintain a minimum Tier 1 capital aggregate of 12 per cent of risk-weighted assets in their on-balance sheet and risk-adjusted value by such NBFC bank in their off-balance sheet items.
7. In India, NBFC bank has to meet the required standard of accounting as per the Companies Rules,2015, and thus comply with the regulatory requirements or guidance.
8. In India, all the NBFC bank has to prepare their respective balance sheet and account for loss and profit at the end of the financial year in India, i.e. March 31st of every year. However, if the NBFC banks want to extend their date for the balance sheet according to the Companies Act, they should obtain prior approval from the Reserve Bank of India before approaching the Registrar of Companies.
9. NBFC registration criteria also precisely mentioned that, in case the Reserve Bank of India extends the period for submitting the balance sheet of the respective NBFC bank before March 31^st, they need to submit an unaudited proforma balance sheet as of March 31^st march, and every NBFC bank in India should finalize their audited balance sheet within a stipulated period of 3 months from the date which it pertains. 

NBFC registration criteria On Regulatory Restrictions

1. NBFC banks that are controlled by the NOFHC (Non-Operative Financial Holding Company) should not be dealing with any promoter groups or NOFHC or make debt investments or equity in any entities that are controlled by the NOFHC.
2. That the NBFC shall maintain a net ratio of NPA of less than six per cent in each of the last three years at the closing of the financial year.
3. NBFCs (non-banking financial institutions) should not be engaged in lending their shares.
4. Every NBFC bank should maintain an LTV(Loan-to-Value) ratio not exceeding 75 per cent on loans granted against the gold ornament collateral.
5. NBFC registration criteria for opening an NBFC branch are more than a thousand in the number who are involved in lending business related to gold jewellery collateral

Should obtain prior approval from the RBI (Reserve Bank of India).

NBFC registration criteria For the NBFC Directors

1. One major NBFC registration criterion is that the directors of an NBFC should at least have one director with relevant professional experience working in traditional banks or NBFC banks.
2. NBFC bank should form a risk management committee either at a board level or executive level. This Risk Management committee is hence responsible for evaluating risk for the respective NBFC bank and accordingly reports to the concerned authority.
3. NBFC banks should have approval from the board if a loan is granted to its Directors, Senior Officers, and relatives of directors and any entities where such directors and their relatives have a major shareholding.

Application Format for prior NBFC registration criteria

1. Whoever wants to open an NBFC company or bank has to fill out an application on their Company’s letterhead to get approval from the RBI (Reserve Bank of India).
2. The said NBFC application shall consist of information about the proposed directors and shareholders of the respective NBFC bank.
3. Another NBFC registration criterion is that the said application should fill up the fund’s sources of the proposed shareholders who are going to acquire the shares in the said NBFC.
4. Both shareholders and proposed directors shall declare that they are not connected or associated with any unincorporated body accepting public deposits.
5. Declaration by both directors and shareholders proposed in the said application before the RBI that they are not associated with any company, and if available, a CoR (Certificate of Registration) rejected by the RBI shall be attached.
6. It is also indeed important under the NBFC registration criteria that the proposed directors and shareholders are not connected to any criminal case, including an offence under section 138 of the Negotiable Instrument Act.
7. The application should also be attached with the banker’s report on the shareholders’ and directors’ proposals.
8. Lastly, the said application for the establishment of an NBFC bank should be submitted before the regional office of the department under the supervision of RBI (Reserve Bank of India), in whose jurisdiction the NBFC bank’s registered office is located.

NBFC Registration Criteria Application Procedure

If a company or a firm wants to register with an NBFC bank, they shall make an application before the Reserve Bank of India in the following ways:

1. One should either visit the RBI online page or physically go to the Regional Office of the Reserve Bank of India in their respective jurisdictions.
2. The NBFC bank applicant shall download the application form from the RBI website.
3. After collecting the said application form, the applicant shall fill out the required details and accordingly upload it to the said website.
4. After uploading the said form application, a generated reference number on such application will be sent to the respective applicant.
5. This said reference number shall be filled in the hard copy of the application form to be submitted to the authorized regional office of the RBI, attached with all the required documents.
6. To check the status of the submitted application, an acknowledgement number will be provided to the applicant company.

NBFC registration criteria into the Insurance Sector

NBFC banks that are registered under the Reserve Bank of India may enter into an insurance market on a fee basis without any further approval from the Reserve Bank of India except under the following conditions:

1. A requisite permission has to be indeed required for the NBFC bank to obtain from the Insurance Regulatory and Development Authority (IRDA) and thus comply with its rules and regulations.
2. This insurance company, by the NBFC, shall not use a restrictive method. By forcing customers to only take their service, customers shall be allowed to exercise their own choice. It shall be completely voluntary for customers to take up the insurance service.
3. The customer shall make sure that he is paying his insurance premium to the insurance company and not connecting to the NBFC banks.

NBFC registration criteria on Fair Practice code

1. It is the responsibility of the NBFC to maintain that the application of the loan to the customers is communicated in a vernacular language in the respective state so that a borrower has complete knowledge of various loan terms and conditions.
2. Such applications for the loans shall have all the necessary details so that a customer can compare the said NBFC loan terms and conditions with the other NBFC in India for meaningful comparisons on the NBFC.
3. An acknowledgement receipt has to be provided to the customers who applied for NBFC loans within the stipulated time of disposing of the loan.
4. As we are aware, NBFC banks are mostly located in small towns and cities in India, targeting the below-average Indian public, who are often not eligible to get loans under a traditional bank. However, the NBFC bank needs to provide the details in the vernacular languages of that particular state, such as sanction letters, terms and conditions, agreements, etc. With the increasing cases in NBFC, it has been found that they charge high rates of penalties; such conditions have to be bolded in the loan agreement.

Compliance and Reporting requirements

The NBFC banks need to comply with all the rules and regulations that are amended from time to time by the Reserve Bank of India. NBFC registration criteria have to meet the following compliances to stay relevant in the market and avoid any penalties or legal liabilities. Given below is the list of compliances that the NBFC banks have to follow:

1. The NBFC banks shall comply with the KYC (Know your customer) norms, policies, and directions as amended from time to time.
2. Comply with the Transfer of loan exposures under the Reserve Bank of India, amended from time to time.
3. NBFC banks also need to meet the requirements under securitization of standards assets under the Reserve Bank of India as amended from time to time.
4. Comply with the master direction on the Regulatory Framework for Microfinance Loans under the Reserve Bank of India as amended from time to time.
5. NBFC banks also need to meet the requirement of the master direction on credit card and debit cards under Issuance and Conduct Directions, 2022, as amended from time to time.
6. NBFC should comply with peer-to-peer lending platform directions under the Reserve Bank as amended from time to time.
7. NBFC should comply with the Account Aggregator Direction under the Reserve Bank of India, Standalone Primary Dealer’s directions as amended from time to time, Mortgage Guarantee Companies, and Housing Finance company Directions.

Insights NBFC registration criteria

1. NBFC banks to open subsidiaries and joint ventures, investments in foreign entities or respective offices abroad should take prior approval from the Reserve Bank of India
2. NBFC is not eligible to invest in any non-financial sector service. Whereas NBFC banks can invest only in the organization whore core business is related to financial services.
3. NBFC should make sure that their investment in aggregate overseas should not exceed 100 per cent of their Net Owned Fund, and any investment by NBFC in an overseas single entity, including its subsidiaries as equity or fund-based commitment, should be more than 15 per cent of Net Owned Fund (NOF) of the respective NBFC.
4. NBFC banks should meet the FEMA 1999 rules and regulations from time to time.
5. The infamous KYC (Know your customer) compliance requirements are to be fulfilled by the NBFC banks, like a traditional bank, to collect the details and identities of the respective customers.
6. NBFC banks are generally not allowed to set up a branch abroad unless they have already established a said NBFC branch complying with the directions circulated by the authorized organizations.
7. One of the major NBFC registration criteria is that NBFC banks in India are restricted to being partners in a partnership firm or making any kind of contribution to the capital partnership. However, an NBFC bank that has already made such contributions is necessary to obtain an early retirement from such partnership or LLP firms.
8. An asset size of Rs.100 crore and above NBFC bank shall be informed or furnished to the respective Regional Office of the Reserve Bank of India about the downgrading or upgrading within fifteen days of the assigned rating of any financial product issued by them.
9. A minimum capital ratio of not less than fifteen per cent of its aggregate weighted risk on the balance sheet shall be maintained by the NBFC bank, which consists of both Tier 1 and Tier 2 capital.
10. NBFCs with an asset size of Rs.5000/- crore and above but less than Rs.10,000/-of any non-deposit are required to maintain an LCR level that starts from December 1st 2020.
11. All the Core Investment Companies, such as Type I NBFCs, NOFHCs, and SPDs, are exempt from the applicability of the LCR norms.

Disclosure of NBFC registration criteria

 The NBFC banks need to inform based on regular intervals to the Board of Directors of the respective NBFC bank about the following:

1. Any development or progress that has occurred in the risk management program or policies to the Board of Directors of the respective NBFC bank at regular intervals.
2. NBFC banks need to meet the requirements and policies according to the corporate governance, such as committees’ composition, roles and functions, etc., to the Board of Directors of the respective NBFC bank at regular intervals
3. NBFC banks shall disclose the Registration, license, and authorization obtained from other financial sector regulations in their Annual Financial Statements
4. Details of penalties if levied by other regulators, any ratings by agencies of credit rating, and migration of ratings in a particular year before annual financial statements.
5. NBFC banks need to disclose CRAR (Capital to Risk Ratio), direct and indirect real estate sector exposure, and assets and liabilities maturity patterns.
6. NBFC shall disclose in the balance sheet regarding the permission granted to any NBFC to set up a subsidiary NBFC abroad, provided that the parent NBFC liability in the proposed abroad subsidiary entity is limited to either equity or fund-based commitment to the respective abroad subsidiary.
7. NBFC banks need to disclose their balance sheet according to the SEBI (Securities and Exchange Board of India) regulations regarding transactions that take place in the future market of currency.
8. NBFC shall make a public disclosure every quarterly on their official respective websites and in annual financial statements to showcase their market participation and their soundness of liquidity risk management.
9. Non-banking financial institutions (NBFC) have to disclose the LCR (Liquidity Coverage Ratio) quarterly.
10. NBFC shall disclose the NTA before the annual financial statements with respect to exposures where it has exceeded the prudential exposure limit during the year.

Conclusion

Non-banking financial companies (NBFC) have risen in India in the last decade; unlike traditional banks, NBFCs do not have a banking license; indeed, they provide services like loans, advances, and finance leasing. However, NBFC does not deal with savings or current accounts. According to NBFC registration criteria, the NBFC banks in India have to comply with the Companies Act 2013 and RBI Act 1934. However, the NBFC banks are not under strict regulations as compared to the traditional banks. Due to its flexibility and customer-centric approach, it has contributed significantly to India’s economy by meeting the growing demand for loans.

FAQs