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What is an NBFC?
A Non-Banking Financial Company (NBFC) provides banking and other lending services without meeting the legal definition of a bank. It is Incorporated under Companies Act, 2013 or Companies Act, 1956 (Old). Every NBFC has to obtain Commencement of business certificate from RBI as defined under Section 45 I(a) of the RBI Act. NBFC shall not commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration issued by the Reserve Bank of India. NBFC registration or NBFC License can be obtained in 90-120 days.
The principal business of NBFC is providing loans and advances, acquisition of shares, debentures and other stocks issued by Government or other local authorities, insurance business, leasing, hire-purchase, etc. Moreover, any other non-banking institution, incorporated as a company under the Companies Act and having the principal business of receiving deposits under any scheme or arrangement in one lump sum or installment, is also a non-banking financial company (NBFC).
In general, NBFC is filling up the gap of financial needs for the organized and unorganized section of the population. In the recent times, banks have targeted big commercial houses and individuals with excellent credit rating as their prime customers; This provided NBFCs with an opportunity to enlarge its presence in the financial market.
What are the Types of NBFC in India?
By nature of the activity, they undertake, NBFCs can be categorized into the following:
- Asset Finance Company.
- Investment Company.
- Loan Company.
- Infrastructure Finance Company.
- Core Investment Company.
- Micro Finance Company.
- Mortgage Guarantee Company.
- Housing Finance Company.
By deposits they hold, NBFCs can be further classified into two categories:
- Deposit accepting NBFCs.
- Non-Deposit accepting NBFCs.
By size or minimum capital requirement, NBFCs can be further classified into following two categories:
- Systematically Important NBFCs.
- Non Deposit Holding NBFCs.
Procedure for NBFC Registration
Any entity desirous of commencing the business of and being registered as NBFCs shall apply to RBI for the license (CoR) and must also fulfill the following two norms:
- It should be a company incorporated under Companies Act, 2013.
- It should be a company having minimum net owned funds of INR 2 crores.
- The online application is available on RBI's website (COSMOS).
- Submission of hard copy of the application along with attached documents shall be submitted RBI Office.
- The license will be granted only after vigilant inspection of the application and documents attached with it.
Documents Required for NBFC Registration
- Certified copy of Certificate of Incorporation issued by the registrar of companies.
- Extract of the main object clause in the MOA clearly depicting the financial business.
- The Audited balance sheet and Profit & Loss account along with directors & auditors report for the entire period of company's existence, or for last three years, whichever is less.
- Copy of the certificate of Director's highest educational and professional qualification.
- Copy of Director's experience certificate in the Financial Services Sector (including Banking Sector).
- Bankers report depicting details of deposits and loans balances as on the date of application and the conduct of the account.
- Any NBFC activity.
- Accepting any public deposit.
What is Deposits Taking NBFC?
Only the NBFCs which have been issued a license to accept a deposit in its certificate of Registration from RBI are allowed to accept public deposits. To ensure, NBFCs don't misuse the License issued by Government, there have been certain limits imposed and conditions specified, for accepting deposits by the NBFCs, which varies depending upon various factors.
The limits for deposits vary on the basis of following factors
- Whether it is an Asset finance Company or Loan/Investment Company.
- Based upon the Net Owned Funds of the Company.
- Based upon the prudential norms as prescribed by the RBI.
- Credit Rating.
Based on the combination of factors mentioned above, NBFCs are allowed to accept public deposits as a multiple of Net Owned Funds. There is also the requirement to maintain a certain portion of deposits as liquid assets helpful in making repayment at the time of maturity.
Why is NBFC good choice for Fintech Startups?
- NBFC can be registered with a Net owned fund Rs. 2 Cr only and even for small bank Net owned fund should be Rs. 100 Cr
- NBFCs are primarily focused in meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.
- The processing of loans from NBFCs is much faster as compared to the Banks. Also, there is less paper work and less stringent compliances in the case of availing loans from NBFCs.
- Banks accept deposits, however only those NBFCs are entitled to accept deposits from public who have been granted license from RBI to accept such deposits.
- Banks can issue cheques drawn on itself while NBFCs cannot as they do not form part of Payment and Settlement system.
- NBFC Registration can be completed in 90 to 120 days where as even for small bank registration it takes 12 to 24 Months.
- The costs in establishing NBFC is usually low making it a more lucrative option as compared to banks.
- Less compliance in NBFCs in comparison to the bank.
- Credit growth of NBFCs is noted at 24.3% per year as against 21.4% for banks
Frequently Asked Questions on NBFC Registration
Is registered NBFC a financial Institution?
Yes. NBFCs are the companies registered under the Companies Act, 2013 or earlier Companies Act, 1956 having principal business of providing loans and advances, acquisition of shares, debentures and other stocks issued by Government or other local authorities, insurance business, chit fund business, leasing, hire-purchase, etc. They are engaged in providing financial services to the unorganized sector of the population falling outside the coverage area of the banks.
What are the sources of funds for a NBFC?
NBFCs raise their funds from different sources such as financial institutions like banks, insurance companies, public deposits (only for NBFCs holding license to accept deposits from RBI), through issue of debentures, commercial papers and other inter-corporate loans. There is a gradual increase in the percentage of investment of the insurance companies in the NBFCs.
What is meant by principal business in context of a registered NBFC?
The term 'principal business' is not well-defined by the Reserve Bank of India Act, 1934. Financial activity conducted by any entity shall be considered as its principal business in case the company's financial assets comprises of more than 50 per cent of the total assets and revenue from fiscal assets comprises of more than 50 per cent of the gross income. A company fulfilling both these conditions will be eligible to be registered as NBFC by RBI. Companies primarily involved in financial activity are regulated and supervised by the Reserve Bank.
How NBFCs are different from Banks?
NBFCs provide financial services similar to banks but they are more concentrated on unorganized sector of the society having low or no credit rating score.
The other differences are:
- NBFCs are barred to accept demand deposits, however, they can accept public deposits after getting license from the RBI.
- NBFCs are not entitled to issue cheques drawn on itself as they do not form part of payment and settlement system.
- Credit guarantee and insurance facility is not available to depositors in case of NBFC.
Can NBFCs accept deposits?
Only those NBFCs which have been granted a license depicting their eligibility to accept deposits from the public shall proceed for the same. However, such deposits are not demand deposits.
What is the maximum limit to accept deposits from public?
An unrated NBFC complying with all the prudential norms and maintaining capital adequacy ratio of at least 15% and having NOF of 25 Lakhs is allowed to accept or renew public deposits not exceeding 1.5 times of its NOF or up INR 10 crores, whichever is lower.
On the other hand, a rated NBFC complying with all the prudential requirements are allowed to accept deposits up to 4 times of their NOF.
Does every NBFC required to be registered with RBI?
The Reserve Bank of India (RBI) controls the working of all NBFCs under the framework of RBI Act, 1934 and directions issued by it from time to time. Therefore, every NBFC, to carry out its operations, is required to obtain license from Reserve Bank of India to commence its business.
What are the requirements for the registration of the NBFCs with RBI?
Any establishment desirous of starting the business of NBFCs shall apply to RBI for obtaining license to operate as NBFCs. But before applying for such license, following conditions must be satisfied:
- Company should be registered under Companies Act, 2013 or previous Companies Act, 1956.
- It should have minimum NOF of INR 2 crore.
What are the basic requirements for the takeover of NBFC?
Prior approval of RBI is required to initiate any takeover of NBFC. An application is submitted on the letterhead of the company to the Regional office of the RBI for getting the approval. Once the approval is granted, a public notice in the leading newspaper shall be published. Thereafter, the Share-Purchase agreement is signed and takeover is affected. It shall further be kept in mind that only a NBFC can take over another NBFC.
What is the definition of Net Owned Funds (NOF) of NBFC?
The addition of paid up equity share capital and free reserves as per the latest balance sheet of the company and deducting the following items from it:
- Accumulated losses;
- Deferred Revenue expenditures;
- Other intangible assets;
The consequential amount is further condensed by following items:
- Investment of such NBFCs in its subsidiaries, same group companies and other NBFCs;
- the book value exceeding 10% of the amount calculated in (1) above, of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with its subsidiaries or companies within the same group
After April 1999, the prescribed limit of NOF has been increased to 200 lakhs from 25 lakhs as earlier. The set NOF requirement shall be attained as per the following timeline:
- Rs. 100 lakh by the end of March 2016
- Rs. 200 lakh by the end of March 2017
What is Net Owned Funds (NOF) of NBFCs at the time of takeover?
The management is handed over to the Acquirer and the remaining consideration, if any, shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed by all the parties. As a result of the takeover, all assets of the target company as presented in the balance sheet is liquidated, and liabilities paid off. Therefore, the Acquirer receives a clean bank balance in the Company's name calculated by net worth as on the date of the takeover.
What shall be considered as Change in management in an NBFC?
For any change in the shareholding resulting in 26 per cent acquisition/ transfer of the paid up equity capital, or any takeover or acquisition of control of NBFC, or change in the management as a consequence of more than 30 % change in the Board excluding independent directors, prior approval from the Reserve Bank shall be taken. The application shall be made to the RBI for the approval, on the letterhead of the company along with all the necessary documents. The approval usually takes 1-3 months of processing time. After getting approval from RBI, a public notice shall be given in one leading national and one leading local newspaper. Then, the Share Purchase Agreement is prepared and signed, the management is handed over and the consideration remaining, if any, is paid off within the stipulated time of 31 days from public notice or such other time-period as mutually agreed upon by the acquirer and transferee.
What is the maximum limit to accept deposits from public?
W.e.f from 31-03-2016, NBFC can accept maximum 1.1 times of Net owned fund
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