NBFC

NBFC

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 (or previous Acts) that engages in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, and chit fund business. NBFCs are regulated primarily by the Reserve Bank of India (RBI).

Key characteristics of NBFCs

• Company Registration: An NBFC must be registered under the Companies Act, 2013 (or 1956).
• No Banking License: Unlike banks, NBFCs cannot accept demand deposits (deposits withdrawable by cheque). They can accept deposits repayable after a specified period.
• Payment & Settlement System: NBFCs are not part of the payment and settlement system and cannot issue cheques drawn on themselves.
• Deposit Insurance: Deposit insurance facilities of the Deposit Insurance and Credit Guarantee Corporation (DICGC) are not available to depositors of NBFCs.
• Foreign Investment: Foreign investment in NBFCs is permitted through the Foreign Direct Investment (FDI) route, subject to various conditions.

Types of NBFCs

The RBI categorizes NBFCs based on their activities. Some prominent types include:

• Asset Finance Company (AFC): Primarily finances physical assets supporting productive economic activity (e.g., vehicles, machinery).
• Investment Company (IC): Primarily deals in securities.
• Loan Company (LC): Primarily provides finance, whether by making loans or advances, or otherwise for any activity other than its own.
• Infrastructure Finance Company (IFC): Provides infrastructure loans.
• Systemically Important Core Investment Company (CIC-ND-SI): Companies that hold investments in other companies but do not operate on their own.
• Micro Finance Institution (NBFC-MFI): Provides financial services to low-income individuals.
• Factor: Engages in the business of factoring.
• Housing Finance Company (HFC): Though similar in function, HFCs are regulated by the National Housing Bank (NHB) and are considered a specific type of NBFC.

Registration process for NBFC

To operate as an NBFC, a company must obtain a license (Certificate of Registration) from the RBI.

1. Company Incorporation: First, incorporate a public or private limited company under the Companies Act, 2013, with the Ministry of Corporate Affairs (MCA).
2. Net Owned Fund (NOF): Ensure the company has the minimum required Net Owned Fund (NOF) as specified by the RBI for the particular type of NBFC. This is typically ₹10 crore for most NBFCs, although it can vary (e.g., ₹2 crore for some categories in the North-East). The company must deposit this capital in a bank account and obtain a "No Lien" certificate.
3. Online Application to RBI:
   • Submit an online application for registration on the RBI website (RBI's COSMOS application).
   • Fill in all the required details and upload the necessary documents.
4. Submission of Physical Documents: After submitting the online application, send a hard copy of the application along with certified true copies of the supporting documents to the relevant Regional Office of the RBI.
5. Due Diligence by RBI: The RBI conducts thorough due diligence, which involves verifying the application details, the promoters' background, the company's financial standing, and the proposed business plan.
6. Grant of Certificate of Registration (CoR): If the RBI is satisfied that the conditions are met and the company's operations would not be detrimental to public interest, it grants the Certificate of Registration, allowing the company to commence NBFC activities.

Regulatory compliance

NBFCs are subject to various compliance requirements, including regular reporting to the RBI, adherence to prudential norms (such as capital adequacy, asset classification, provisioning), fair practices code, and know your customer (KYC) guidelines. Non-compliance can lead to penalties or even cancellation of the Certificate of Registration.