NBFC

What are the Regulatory Requirements of Non-Banking Financial Company in India?

A non-Banking Financial Company (NBFC) refers to a financial institution. It is a type of company engaged in the business of receiving loans and advances, acquisition of stocks or shares, leasing, hire-purchase, insurance business, and chit business under the Companies Act 2013. In this article, we will discuss the Regulatory Requirements of NBFC in India;

In India, The Reserve Bank of India regulates the registration of NBFC. NBFC regulations provide a variety of banking and non-banking services to the concerned people. They do not hold banking license but they have to follow the rules and regulations laid down by RBI.

The main business activity of the NBFCs is to raise capital funds from public depositors and investors and then lend to borrowers as per the rules and regulations prescribed by the Reserve Bank of India. NBFCs are becoming an alternative to the banking and financial sector. In NBFC, there is a requirement of a minimum net owned fund of Rs.10 Crore (Previously, it was Rs.2 Crore). While NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF shall continue to be INR 2 crore. 

The Regulatory Requirements of NBFC in India

NBFCs can commence their operations only after obtaining a “Certificate of Registration” from the RBI^[1].

NBFC Registration Requirements

• The company must be registered as a public limited company or private limited company in India.
• The company must have a minimum net-owned fund of Rs.10 Crore.

*Provided that net owned funds should be calculated according to the last audited balance sheet of the company.

• For a minimum period of 12 months and a maximum period of 60 months, NBFCs are allowed to accept/renew public deposits.
• NBFCs cannot accept deposits repayable on demand.
• NBFCs can offer interest rates not higher than the ceiling rate prescribed by RBI from time to time.
• Offering gifts/incentives or any other additional benefit to the depositors is not allowed.
• There is a requirement for a minimum investment-grade credit rating.
• RBI does not guarantee the repayment of deposits by NBFCs.
• Furnishing hard copies of the list of documents with the regional office of the RBI.

What are the types of NBFCs on the basis of liabilities and activities?

Based on Liabilities:

• Deposit Accepting NBFCs (NBFCs-D) [Deposit Taking]
• Non-Deposit NBFCs (NBFCs-ND) [Non-Deposit Taking]
• Systematically Important NBFCs-ND (NBFCs-ND-SI)
• Others NBFCs-ND

Based on Activities:

• NBFC – Investment and Credit Company – (NBFC-ICC)

NBFC-ICC is a financial institution carrying on as its principal business- asset finance, the providing of finance, whether by making loans or advances or otherwise, for any activity other than its own and the acquisition of securities;

Suggested Read: RBI Merges Three Categories of NBFCs Into NBFC – Investment and Credit Company (NBFC-ICC) to Ease Operational Flexibility

• Equipment Leasing Company

Equipment Leasing Company is a financial institution carrying on its principal business of the activity of leasing equipment.

• Hire Purchase Finance Company

Hire Purchase Finance Company is a financial institution carrying on as its principal business the activity of hire purchase transactions.

• Infrastructure Finance Company (IFC)

An infrastructure Finance Company is a type of NBFC with a Net Owned Fund of Rs.300 Crore, Credit rating ‘A’ or equivalent credit rating, CRAR of 15% and 75% in infrastructure loans.

• Systemically Important Core Investment Company (CIC-ND-SI)

A Systematically Important Core Investment Company (assets Rs. 100 crore and above) is a company that has deployed at least 90% of its assets in the form of investment in shares or debt instruments or loans in group companies. 60% should be invested in equity shares or those instruments which can be compulsorily converted into equity shares out of 90%. Such type of companies accepts public funds.

• Infrastructure Debt Fund (IDF-NBFC)

Infrastructure Debt Funds can be set up either as a trust or as a company, and they are meant to infuse funds into the infrastructure sector.

In case Infrastructure Debt Funds are set up as a trust, it would be a mutual fund called IDF-MF regulated by SEBI. The mutual fund would issue rupee-denominated units of five years of maturity to raise funds for infrastructure projects.

In case Infrastructure Debt Funds set up as a company, it would be NBFC regulations will be regulated by the RBI. Such companies would be called IDF-NBFC. IDF-NBFC is a non-deposit-taking NBFC that has a Net Owned Fund of Rs 300 crores or more and which invests only in Public-Private Partnerships (PPP) and post-commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.

• Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit NBFC having it’s 85% of its assets in the form of microfinance. Microfinance should be in the form of loans given to those who have an annual income of Rs. 60,000 in rural areas and Rs. 120,000 in urban areas. Loans should not exceed Rs. 50000, and their tenure should not be less than 24 months.

• Non-Banking Financial Company – Factors (NBFC-Factors)

There is an acquisition of receivables by way of assignment of such receivables or financing, there against either by way of loans or advances or by the creation of security interest over such receivables but does not include normal lending by a bank against the security of receivables, etc.

NBFC-Factoring company should have a minimum Net Owned Fund of Rs.10 Crore, and its financial assets in the factoring business should constitute at least 75 per cent of its total assets, and its income derived from the factoring business should not be less than 75 per cent of its gross income.

• Housing Finance Company

Housing Finance Company is a type of company which is engaged in the principal business of financing of acquisition or construction of houses which includes the development of plots of land for the construction of new houses.

• Chit Fund Company

They collect deposits from members on a periodic basis and distribute these funds among them as prizes. Members who enter into an agreement with Chit Company subscribe for a definite period. The Chit Fund Act 1982 governs the operations of the Chit Fund Company administered by the State Governments. While the Reserve Bank of India regulates deposit-taking activities.

• Mutual Benefit Finance Company

Mutual Benefit Finance Companies, also called “Nidhis”, are non-banking finance companies that enable their members to pool their money with a predetermined investment objective. The main sources of funds are share capital, member deposits, and public deposits.

• Residuary Non-Banking Company

A Residuary Non-Banking Company is a type of NBFC having a principal business of receiving deposits under any scheme or arrangement or in any other manner and not being an investment, asset financing, and loan company. These types of companies are required to maintain investments as per directions of RBI, in addition to liquid assets.

What are the Documents Required for Registration as Type I – NBFC ND?

The following Documents are required to be submitted to RBI along with the prescribed application form for NBFC registration as Type I – NBFC for obtaining a certificate and Registration from RBI as NBFC:

• Certified copies of Certificate of Incorporation (COI) and Certificate of Commencement of Business in case of public limited companies.
• Certified copies of an extract of only the main object clause in the MOA relating to the financial business.
• A certified true copy of the 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.
• The UIBs in the group where the director holds a substantial interest or otherwise have not accepted any public deposit in the past /do not hold any public deposit as of the date and will not accept the same in future
• The company has formulated the “Fair Practices Code” as prescribed by the RBI Guidelines.
• The company has not accepted public funds in the past/does not hold any public funds as of this date, and will not accept the same in the future without the approval of the Reserve Bank of India.
• The company does not have any customer interface as of date and will not have any customer interface in the future without the approval of the Reserve Bank of India
• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Fund.
• Audited financial statements along with directors’ & auditors’ reports from the date of incorporation of the company, or for the last three years, whichever is less, in the case of existing companies.
• Banker’s report in respect of the applicant company, its group/subsidiary/ associate/ holding company / related parties, and directors of the applicant company having a substantial interest in other companies. The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

What are the Documents Required for Registration as Type II – NBFC-ND?

The following Documents are required to be submitted to RBI along with the prescribed application form for NBFC registration as Type II – NBFC for obtaining a certificate and Registration from RBI as NBFC:

• Certified copies of Certificate of Incorporation (COI) and Certificate of Commencement of Business in case of public limited companies.
• Certified copies of an extract of only the main object clause in the MOA relating to the financial business.
• A certified true copy of the 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 NBFC registration from RBI.
• The company has not accepted any public deposit in the past (specify period)/does not hold any public deposit as of this date, and will not accept the same in future without the prior approval of the Reserve Bank of India.
• The UIBs in the group where the director holds a substantial interest or otherwise has not accepted any public deposit in the past do not hold any public deposit as of the date and will not accept the same in the future.
• The company has formulated a “Fair Practices Code” as per RBI Guidelines.
• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Fund
• For companies already in existence, the Audited balance sheet and Profit & Loss account, along with the directors & auditors report or for the entire period the company is in existence, or for the last three years, whichever is less, should be submitted.
• Copy of the certificate of the highest educational and professional qualification in respect of all the directors.
• Copy of experience certificate, if any, in the Financial Services Sector (including the Banking Sector) in respect of all the directors.
• Banker’s report in respect of the applicant company, its group/subsidiary/ associate / holding company / related parties, and directors of the applicant company having a substantial interest in other companies. The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

NBFC-Registration-documents-required

In Addition following documents are required to be submitted by the NBFC-MFI applicant

• Certified True Copy of the Board resolution stating that:

(a) The company will be a member of all the Credit Information Companies and will be a member of at least one self-regulatory organization.

(b) The company will adhere to the regulations regarding the pricing of credit, Fair Practices in lending and non-coercive method of recovery as per RBI Guidelines.

(c) The company has fixed internal exposure limits to avoid any undesirable concentration in specific geographical locations.

(d) The company is not licensed under Section 8 of the Companies Act, 2013.

• Roadmap for achieving 85% qualifying assets.

In Addition following documents are required to be submitted by the NBFC-Factor applicant

Board Resolution enclosing roadmap regarding the company will have financial assets in the factoring business constituting at least 50% of its total assets, and its income derived from the factoring business will not be less than 50% of its gross income (Specify the time frame).

In Addition following documents are required to be submitted by the NBFC-IDF applicant:

• No objection Certificate was issued to NBFC-IFC for sponsoring the NBFC-IDF.
• Copy of Tripartite Agreement between the concessionaire, the Project Authority, and NBFC-IDF.
• Details of change in the management of the sponsor company during the last financial year to date, if any, and reasons thereof.
• Source of startup capital of the company with documentary evidence.
• NBFC-IDF would raise resources through the issue of either Rupee or Dollar denominated Bonds of minimum 5-year maturity.

What will be the NBFC Registration Procedure?

• Acquire DSC and Din for directors
• File Name approval application
• An affidavit from directors to fulfil RBI compliance
• Draft MOA & AOA
• File incorporation forms with necessary documents
• Obtain a certificate of registration from the Registrar of Companies
• Deposit Net Owned Funds in the bank account opened for the company
• Apply for registration with RBI under RBI Act 1934.
• The Applicant Company has to file an online application with the RBI on its official website.
• After this, an applicant will get a reference number to facilitate inquiry in the future.
• After this, it is required to submit the duplicate hard copies to the concerned regional office of RBI.
• The regional office shall check the accuracy of all submitted documents.
• The regional office will send the application for the NBFC license to the central office.
• The central office of RBI grants NBFC registration only when the applicant company fulfils prescribed requirements under section 45-IA.
• NBFC must commence its business within 6 months from the date of the Certificate of Registration

What are the Returns Required to be Submitted by Deposit-taking NBFC?

• NBS-1

Quarterly returns on deposit in the first schedule.

• NBS-2
  

Quarterly return on prudential norms.

• NBS-3
  

Quarterly return on liquid assets.

• NBS-4
  

The annual return of critical parameters by a rejected company holding public deposits.

• NBS-6
  

Monthly return on exposure to the capital market by deposit-taking NBFC with total assets of Rs. 100 crore or more.

• ALM return
  

Half-yearly by NBFC holding public deposits of more than Rs. 20 Crore or asset size of more than Rs. 100 Crore.

• Audited Balance Sheet and Auditor’s Report by NBFC accepting public deposits.
• Branch Info Return

What are the Returns Required to be Submitted by Non-Deposit NBFC (NBFCs-ND-SI)?

• NBS-7
  

A quarterly statement of capital funds, risk-weighted assets, risk assets ratio, etc.

• NBS-2
  

Monthly return on important financial parameters of NBFCs-ND-SI.

• ALM Returns
  

Monthly- statement of short-term dynamic liquidity in format NBS-ALM-1.

Half Yearly- Statement of structural liquidity in format NBS-ALM2

Half Yearly- Statement of interest rate sensitivity in format NBS-ALM-3

• Branch info return
  

Quarterly return on important financial parameters of non-deposit taking NBFCregulations in India having assets of more than ₹ 50 crores and above but less than ₹ 100 crores. Basic information like the name of the company, address, Net Owned Fund, and profit/loss during the last three years has to be submitted quarterly by non-deposit-taking NBFCs with asset sizes between ₹ 50 crores and ₹ 100 crores.

What are the Required Compliances for NBFC-ND with RBI?

Annual Compliances

S.No.	Particulars	Time Limit
1	Unaudited March Monthly return/NBS7	on or before 30th June
2	Audited March Monthly return/NBS7	Upon completion
3	Statutory Auditors certificate on Income & Assets	on or before 30th June
4	Information about Cos having FDI/Foreign Funds	on or before 30th June
5	Resolution of Non-acceptance of Public Deposit	before the commencement of the new Financial year
6	File Audited Annual Balance Sheet and P&L Account	One month from the date of signoff
7	Declaration of Auditors to Act as Auditors of the Company	annual basis

Monthly Compliances

S.No.	Particulars	Time Limit
1	Monthly Return	by 7th of every month
2	Upload monthly	by 7th of every month

Periodical Compliances

S.No.	Particulars	Time Limit
1	Appointment of Director(Annexure-III)	within 30 days of appointment
2	Upload monthly return	within 30 days of the resignation
3	Resignation of Director	–

What are the Required Compliances for NBFC-ND With NSE?

S.No.	Particulars	Time limit
1	Filing of Listing Agreement of Issued Series	Within 30 days of Issuance
2	File Half-yearly Audited Results with NSE via mail	Within 30 days from the end of Half-year
3	File Quarterly Results (Balance Sheet and P&L) via mail	Within 30 days from the end of Half-year
4	File Quarterly Results (Balance Sheet and P&L) via mail	Within 90 days from the end of Quarter
5	Filing Umbrella Information Memorandum/Shelf Offer Document + below letters:  1. Letter from CRISIL for filing UIM 2. Letter from AXIS Bank (Debenture Trustee) for filing UIM 3. A certified true copy of the resolution authorizing the filing of UIM 4. A certified true copy of the blanket resolution covering Debt issuances for filing UIM 5. Certify compliance as per Chapter VI of SEBI (DIP) Guidelines 2000 &Sch-II of Companies Act,1956 6. Obtain In-principle approval letter from NSE post-filing	At the end of the Financial Year

What is the Difference between Banks & NBFCs?

Here are the following differences between NBFC and Banks:

• Banks are government-authorized financial intermediary that aims at providing banking services to the general people. Whereas NBFC provides banking services to people without carrying a bank license.
• NBFC is incorporated under the Companies Act, whereas a bank is registered under the Banking Regulation Act 1949.
• NBFCs are not allowed to accept deposits that are repayable on demand, whereas banks accept demand deposits.
• In NBFC, Foreign Investments up to 100% are allowed. Whereas in the case of private sector banks, they are eligible for foreign investment, but which would be no more than 74%.
• Banks are an integral part of the payment and settlement cycle, while NBFC is not a part of this system.
• It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of NBFC, it is not required to maintain reserve ratios.
• A deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit Guarantee Corporation (DICGC)[2]. In the case of NBFC, this type of facility shall not be available.
• Banks can create credit, whereas, in the case of NBFC, they are not involved in the creation of credit.
• Banks can provide transaction services to their customers, such as providing overdraft facilities, issue of traveller’s cheque, transfer of funds, etc. Whereas these types of services cannot be provided by NBFC.

Read our article:Picking between Banks and NBFCs While Shopping for Loans

Comparison Chart

Basis	NBFC	Bank
Meaning	They provide banking services to people without holding Bank licenses.	It is a government-authorized financial intermediary which aims at providing banking services to the public.
Regulated under	Companies Act 2013	Banking Regulation Act 1949
Demand Deposit	It cannot be accepted	Can be accepted
Foreign Investment	Allowed up to 100%	Allowed up to 74% for private sector banks
Payment and Settlement system	Not a part of the system.	An integral part of the system.
Maintenance of Reserve Ratios	Not required	Mandatory
Deposit insurance facility	Not available	Available
Credit creation	NBFC does not create credit	Banks create credit.
Transaction services	Cannot be provided by NBFC	Provided by Banks

NBFC Post Incorporation Compliances

Sr. No.	Compliances
1.	Registration to become a member of all CICs
2.	FIU-IND Registration
3.	Central KYC Registration
4.	CERSAI
5.	Submission of Financial Information to Information Utilities
6.	Adoption of Fair Practice Code
7.	Adoption of Anti Money Laundering Policy & IT Policy
8.	Filing of timely return with RBI
9.	Convene Statutory Meetings
10.	Maintenance of Accounts
11.	Income Tax Return Filing
12.	GST Return Filing
13.	MCA Compliances

Suggested Read: All About NBFC Prudential Norms & NBFC Compliances

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