NBFC : Non Banking Financial Corporation

Personal Loan

A non banking financial company is a company registered under the companies act , 1956 of India, engaged in the business of the loan 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, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. However, they are restricted from taking any form of deposits from the general public. These organizations play a crucial role in the economy, offering their services in urban as well as rural areas, mostly granting loans allowing for the growth of new ventures.

List of NBFCs who do not require registration under RBI

The following NBFC’s are not required to obtain any registration with the Reserve Bank Of India

  • Core investment companies (assets are less than 100crore or public funds not taken)
  • Merchant Banking Companies.
  • Housing Finance Companies.
  • Companies engaged in the business of venture capital.
  • Companies which are engaged in the business of stock broking.
  • Insurance companies holding a certificate of registration issued by IRDA.
  • Chit Fund Companies as defined in the Sec 2 clause (b) of the Chit Fund Act, 1982
  • Nidhi Companies

We can divide NBFC into two types, one is Nature of Activity and the other one is Deposits. Now Nature of Activity has eight types Asset Finance Company, Investment Company, Loans Company, Infra-Structure Company, Core Investment Company, Micro Finance Company, Housing Finance Company, and Mortgage Guarantee Company. The deposits have two segments one is Deposit accepting NBFC’s and the other is Non-Deposit Accepting Companies.

Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on the business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crores since April 1999). However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stockbroking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.

What is the difference between Banks & NBFC?

  • NBFC can’t accept demand deposits.
  • NBFCs do not form part of the payment and settlement system and can’t issue cheque drawn on itself.
  • Deposit insurance facility of deposit insurance and credit guarantee corporation is not available to depositors of NBFC’S unlike case of banks.

Documents that are to be furnished for incorporation of an NBFC:

The following documents have to submit in order to apply and obtain an NBFC license:

  • Details about the company’s management.
  • Certified copy of Certificate of Incorporation
  • Certified copy of Certificate of Commencement of Business
  • Certified copy of updated Memorandum of Association (MoA) of the organization
  • Certified copy of updated Articles of Association (AoA) of the organization
  • Copy of the PAN or CIN that has been issued to the organization
  • Directors’ profile which has to be duly filled and signed by each director separately
  • Certificate of experience from the non-banking financial companies at which each director had worked and obtained experience
  • The CIBIL Data applicable to the Directors of the company
  • The last 2 years’ financial statements of the relevant unincorporated bodies, if any.
  • A Board Resolution to approve the contents of the application and its submission process, and the authorizing signatory
  • A Board Resolution to announce that –
    • No public deposit has been accepted by the organization previously (mention the time period)
    • No public deposits are held by the organization till date and no deposits will be accepted thereafter without prior permission from the Reserve Bank of India in writing
  • A Board resolution specifying that –
    • No NBFC activities are being carried on by the organization
    • The organization has stopped all kinds of NBFC operations and will not perform the same without receiving registration from the Reserve Bank of India.
  • In order to formulate the ‘Fair Practices Code’, a Certified copy of Board resolution is required.
  • A Statutory Auditors Certificate certifying –
    • that the organization is not holding any Public Deposit
    • that the organization does not hold any Public Deposit
  • A Statutory Auditors Certificate which certifies that the organization is not involved in any NBFC operation
  • A Statutory Auditors Certificate which certifies the net owned fund as on the application date
  • Authorized Share Capital details
  • Details of the recent patterns of the shareholding of the company along with its percentages.
  • Copies of Fixed Deposit receipt & bankers certificate of no loans/debts with account balances supporting Net Owned Funds
  • The branch or bank’s full postal address, credit or loan facilities, bank account and balance details, and so on taken by the company.
  • For existing companies, the last 3 years’ Profit & Loss account, audited balance sheet, auditors and directors’ reports, etc. are to be submitted.
  • The next 3 years’ business plan of the organization with details such as:
    • the specific direction of the business
    • market segment
    • income/asset pattern statement sans public deposits, cash flow statement, and projected balance sheets
  • Documentary evidence of the company’s startup capital source
  • IT Returns or bank statements to be submitted post-self-attestation

Other than these, the applicant might also have to submit other additional documents as required.

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