NBFC

How to start an NBFC business?

The nomenclature of the NBFC can itself suggest the whereabouts of the company as an NBFC (Non-banking Financial Company) is a company incorporated under the provisions of the Company Act, 2013 and has to get the Certification of Registration from the Reserve Bank of India under Section-45 1A of the RBI Act, 1934 to initiate its business transaction and financial activities. To start an NBFC business in India, one must be careful about the NBFC roles and responsibilities.

The NBFC’s main business is to perform the activities of the receiving department under the scheme in the form of instalments or lump sum amounts. The NBFC can always be engaged in the business of procuring loans and advances, bonds, shock, debenture, etc, that the government of India issues. The MNFC sometimes has to go through the test of 50-50 where the financial asset of the company is more than 50% of its total assets so counted, and also, the income from those financial assets must be more than 50% of the gross total income as to be declared by the NBFC business in India. The companies that start an NBFC business in India have been operating with efficiency and also complementing the traditional banks.

Difference between the process to start an NBFC business in India and traditional banking business in India

Before proceeding to start an NBFC business in India, it is kept that there are key differences between the functions of the NBFC and traditional banking. It is informative for those who want to start an NBFC business plan in India.

These are the following key differences in terms of their functions to start an NBFC business in India and also for the traditional banks for a better understanding to overcome the confusion:

1. The Non-banking Financial Companies (NBFC) are incorporated under the Companies Act of 1956. They are also usually regulated under the Reserve Bank of India (RBI). In contrast, the traditional banks are licensed under the government regulations of the Reserve Bank of India (RBI) and also under the Banking Regulation Act, 1949.
2. The NBFC are the service providers of savings and investment plans, Stocks, mutual funds, and insurance facilities, whereas the traditional banks facilitate various services that are customer-oriented, such as loans, credit card facilities, chequefunds, and many other facilities.
3. The NBFC, unlike the banks. Get the deposits through the process of securitization, whereas traditional banking’s primary role is to accept deposits and offer loans to their customers.
4. The NBFCs do not fulfil the eligibility criteria to enter into the business of accepting deposits, whereas traditional banks accept those deposits which are payable on demand.
5. The NBFC can be permitted for 100% of FDI (Foreign Direct Investment), whereas the traditional banks are allowed only up to 74%.
6. The NBFCs do not allow the part payment and settlement cycle, whereas the traditional bank’s primary function is involved and also allows part payment and settlement cycle.
7. The NBFC is not required to maintain as it does not fall in their scope, whereas it has been mandatory for traditional banks to maintain these ratios.
8. The NBFC has no such criteria to follow the prescribed guidelines of the Deposit Insurance Corporation, where the traditional banks abided by the rules laid down under it.
9. The NBFC cannot imagine creating credits, whereas the traditional banks can avail of these credit facilities.
10.  The NBFC cannot offer transactional services like deposits, cash withdrawals, debit cards, cheques, etc., whereas traditional banks can offer these services easily.

Categorization of the company to start NBFC business in India

To start the NBFC business in India, it has been classified into various cadres according to the holding capacity of its monetary funds. Each one of them has to fulfil the need for different financial subsets and services. They are classified in the following ways such as:

1.  Whenever it is aligning in terms of their liabilities into non-deposit accepting NBFCs by their quantum into systematically important and other non-deposit subsidiaries companies i.e. NBFC-NDSI and NBFC-ND
2. Whenever it is aligning in terms of their liabilities into Deposit and Non-deposit-taking NBFCs
3. Whenever it is aligned with their types of activities in the broad category of the different types of the NBFC registration process.

 They are as follows:

NBFC-IFC (Infrastructural Finance Companies)

These companies deal with registration in supporting infrastructural development such as roads, over-bridges for interconnectivity, etc. 

NBFC-FC (Loan Company)

These companies deal in facilitating loans and advances to customers for ease of doing business.

 NBFC-AFC (Asset Finance Companies)

These companies deal with the registration and facilitation of advances and loans to their customers and also for businesses to increase their credit limits.

NBFC-IC (Investment Company)

The company’s NBFC registration is more likely to invest in stocks, shares, and other financial instruments.

NBFC-MI (Microfinance Institutions)

The companies will help facilitate loans to entities dealing with microfinance activities. These companies work for the well-being of individuals with no income, who are jobless, etc., to extend credit to support them.

NBFC-NOFHC (Non-operative Financial Holding Company)

The companies make sure to keep up with the RBI regulatory requirements to set up these companies, which are financial conglomerates, to function in a healthy environment.

We see above the broad category of the types to start an NBFC business in India that can be further classified into the Systematically Important and Non-systematically Important. But later on, the RBI, as an apex regulatory body, came up with the Master Direction that can be stated as the Master Direction (NNBFC- Scale Based Regulations) in the year 2023. It has been later stated by the RBI that the master circular will be applicable for October 2022. This will amount to the more clarified version of the NBFC based on the layers, i.e., base, middle, top, and upper layers. Moreover, the SBR framework has introduced a different set of eligibility criteria for the NBFC incorporation process, in which the NBFC with net assets of less than 1000 cores INR has been categorized as the base layer entity. At the same time, the other NBFCs with more than 1000 cores INR are categorized as middle-layer entities.

The SBR master direction issued by the RBI has segregated the regulation passed on the different layers separately, which makes sure that to start an NBFC business in India, one must comply with this statutory master direction of the RBI consistently and transparently. So, the SBR master direction is segregated into different categories as follows-

Benefits to start an NBFC business in India

The NBFC registration process is very beneficial when compared with the traditional banking system in India. The incorporation process of the NBFC is not much lengthier when compared with the traditional banking registration in India.

There are the following benefits below to start an NBFC business in India:

Innovative in terms of financial products

The NBFC is very active in launching new services about finances and products in the financial arena for the underprivileged section of society. To fulfil the demands of the customers, the NBFC always comes up with new products to satisfy their needs.

Liberal approach in terms of interest rates

The NBFC has been very liberal in terms of lowering its interest rate. However, the interest rate should never cross the limitations set by the Reserve Bank of India.

Diversified in offering financial services

The NBFC has played a very flexible role in offering financial services to their customers, like advances, loans, shares, stocks, bonds, debenture, etc. The NBFc has also played a very decent role in dealing with the rural population of the country with its diversified nature. The NBFC, while compared with the traditional banks, is way more flexible.

Less risky

Whenever it comes to the operational side of the NBFC, it has played a very significant role. The company has always offered a properly planned structure, especially in the lending procedure for their customers. The NBFC mostly follows the effective mechanism for the identification of bad loans to mitigate the NPA (Non-performing assets).

Adding the credit

The NBFC can also extend credit support to the various other sectors of the economy, which feeds and facilitates the other fragments that are usually not able to be served by traditional banks.

Documentary compliance to start NBFC business in India

1. There should be certified copies with the signatures of the directors on the AOA (Articles of the Association) and MOA (Memorandum of Association) to be submitted to start an NBFC business in India about the financial business.
2. A certified copy of the certificate of incorporation of the company has to be submitted under the Companies Act 2013 to start an NBFC business in India.
3. There should be a board of the resolution, which is mandatory, stating that the company should not carry on any business activity that is carrying out business activity of the other NBFC activity. The NBFC company is not eligible to accept any form of public deposits prior to and in the future without the permission or guidelines prescribed by the Reserve Bank of India (RBI) to start an NBFC business in India.
4. The receipt of the fixed deposits in the name of the company also has to be submitted.
5. They also have to submit the Audited balance sheet report for the entire period of the company’s existence to start an NBFC business in India.
6. A certified copy of the educational qualification certificate of all the directors of the NBFC to start an NBFC business in India.
7. A certified copy of the experience certificate in terms of the experience in proving the financial services to start an NBFC business in India.
8. Along with the reports of the bank regarding the other subsidiary parties of the NBFC about the deposits and borrowing entities only to start an NBFC business in India.
9. The KYC details PAN number and Address proof of the applicant company.
10. The CIBIL Score or Credit reports of the applicant company of each director.
11. Those Documents are associated with the bank accounts, balances, loans, credits, etc.
12. A copy of the audited balance sheet and reports for the past 3 years about the company’s losses and profits.
13. Self-certified copy of the company bank statements and income tax returns filings (ITR).

List of the well-established NBFCs in India:

1. Bajaj Finance Limited
2. Aditya Birla Finance Ltd
3. L & T Finance Limited
4. Muthoot Finance Ltd
5. Mahindra and Mahindra Financial Services Limited
6. HBD Financial Services
7. Shriram Transport Finance Company Limited
8. Power Finance Corporation Limited
9. TATA Capital Financial Services Ltd.

The registration process involved starting an NBFC business in India.

As has already been mentioned, the steps involving the guiding principles laid down under the RBI Act of 1935 to start an NBFC business in India.

There is the following process below to start an NBFC business in India:

1. The NBFC applicant must click on the company registration page login page of the COSMOS application for the NBFC registration online and will get the NBFC registration form. The Excel form will be available for downloading the NBFC registration form. The applicant NBFC can then proceed to download the more suitable application form and fill it out with appropriate data and then will further proceed to upload the form to the website.
2. The applicant who wishes to apply for the NBFC incorporation process in India has to apply online as well as offline and has to submit a physical copy of the application filled along with a few other documents to the Regional Office of the RBI, to whose jurisdiction it lies.
3. The NBFC applicant has to mention the correct name of the regional office in the Excel Application form. Then, the NBFC would get the CARN (Company Application Reference Number) for the certificate of registration application.
4.  The NBFC applicant can check the status of the application form filled out from the above-mentioned safe and secure address by noting the acknowledgement number or the receipt number.
5. Later, the NBFC applicant has to submit the hard copy of the application form along with the supporting documents to the nearest regional office of the jurisdiction. 

Challenges to start an NBFC business in India

The NBFC has played a very crucial role in the financial market to maintain balance and stability. There are other players in the market, which gives very tough competition to these companies and also competition among the NBFC itself. The key enhancer is the customer experience, and it has to be aligned with a customer-oriented approach.

Also, various changes have happened in the NBFC sector, but the challenges are still coming up in their way. Here below are the list of challenges faced to start an NBFC business in India:

Absence of statutory tools to recover debts and bad Loans

This is a major challenge to start an NBFC business plan in India because there are no necessary tools for the recovery of the debts that will hamper the smooth functioning of the NBFC.

Require Funds for the NBFC to Refinance

The best origins of funds for the NBFC are the banks and the capital market industry. There is no other way for the NBFC to refinance its resources. As it can be analysed, refinancing the NBFC in its course of business and public dealing is also a very important aspect of any financial sector.

Tax Reduction Process

The NBFC has been permitted to make tax deductions for non-performing assets (NPAs). Another major problem with starting an NBFC business in India is that they do not have a structured taxation system, unlike traditional banks.

Lack of education among the individuals in the financial sector

To start, an NBFC business in India is coming up to educate people who are not well-educated in the financial sector and are unaware of the rules and regulations of the NBFC. It has been surveyed that people hesitate at first to take loans and advances from the NBFCs. The NBFC tries to come up with campaigns like awareness programs about these company’s rules and regulations.

Conclusion

To start an NBFC business in India, these companies have to reach greater heights in the upcoming years to attract more consumers for the betterment of the financial sector. It has wholly changed the dynamics of the banking system in India, making it take a turn from the traditional banking system to the non-traditional banking system. The elaborative procedure always makes sure that the NBFC registration process in India abides by strict operational and financial standards and also safeguards the interest of both the consumers of the service and the financial market. There will always be strict measures taken by the RBI to check the due diligence and eligibility criteria set by the NBFC that are contributing to maintaining financial stability in the market. The NBFC gets its legal recognition through its smooth registration process, accessing its funds, and also facilitating financial services, which will help the Indian economy grow to attain sustainable development goals.

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