NBFC Registration in India – 8 Important Questions answered

Non-Banking financial Companies commonly known as NBFC in India are one of the prime and best ways to start the finance business in India. It offers a wide range of products to offer with an advantage of running a business with no geographical limitation.

However, NBFC registration is not an easy task as various conditions relating to NBFC registration has been laid down by the Reserve Bank of India (RBI). Further, people are not completely aware of the NBFC rules and regulations. Hence, to increase the awareness about the NBFC in India, we have tried to answer 8 most commonly asked questions about NBFC’s registration in India.

So here we go;

1. What is an NBFC – Non-Banking Financial Company?

Basically, only two types of entities are allowed to start finance business in India. One is the Banking Company and another is the Nonbanking Company.  In the eighties, NBFC were not regulated by the RBI and anybody with a local license was eligible to start the finance business. Due to no proper regulation, various scams emerge and company took away crores of rupees of innocent people.

Hence, in midst of various scams, RBI decided to regulate the Nonbanking sector by amending the RBI act. After the due process, RBI prohibits all companies across India to continue the finance business without the RBI approval and RBI officially launched the name “NBFC registration”.

2. When is a company treated as NBFC in India?

Financial activity as principal business is when a company’s financial assets constitute more than 50% of the total assets AND the income earned from those financial assets constitute more than 50% of the gross income.

Any company which fulfilled both the above criteria is regarded as NBFC by the RBI in India. Let us understand this by way of example;

ABC Limited is a three-year-old company which deals in manufacturing of footwear. The Company also pursues a business of NBFC which constitutes 30% of the total income of the company. This company shall not be regarded as NBFC Company and shall not be required to take RBI registration because its total income from NBFC business is not more than the 50% limit as explained above.

Hence, if you want to test the market, you can start a finance business in India without fulfilling the above criteria as laid down by the RBI.

3. Can we start loan business in India without the RBI approval?

If you solely want to start the finance business in India, then, unfortunately, you will not be able to start the finance business without RBI approval. As per section 45IA of the RBI act, 1934 NO NBFC can commence or carry on the business of an NBFC without obtaining a certificate of registration from the bank and without having the net owned funds of Rs.2 crore (Rs.5 crore for microfinance companies).

Loophole

You can start the microfinance business in your existing company with no additional capital and with no RBI approval if you do NOT fulfill both the following conditions;

• Financial activity as principal business is when a company’s financial assets constitute more than 50% of the total assets AND
   
• The income earned from those financial assets constitutes more than 50% of the gross income.

4. What are all companies exempted from the RBI registration?

As per se, all banking and Nonbanking companies are regulated by the RBI in India. However, there are some companies which are regulated by some other authorities as well as SEBI, MCA etc. Hence, for all those entities, RBI has issued an exemption notification to allow all those companies to work as per the respective regulator without RBI registration.

The brief list of those companies is as follows:

• 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.

Read: Important FAQ by RBI on NBFC Registration

5. What are the major requirements for registration with the RBI?

If any person wants to start an NBFC and seeks to apply the application for RBI approval, then he should fulfill the following criteria;

• It should be a company registered under companies act.
   
• It should have a minimum net owned fund of Rs.2 crore.
   
• The promoter should have a strong profile preferably one of them should be a professional like CA, CS etc.

6. What is the procedure for application to the Reserve bank for registration?

Once the company is formed with at least 2 crore capital, the applicant company should apply online on cosmos.rbi.org.in. Once the complete application is filled and submitted online, a physical copy along with all the required documents should also be submitted to the regional office of the Reserve Bank of India (RBI).

A proper follow up is required with the Reserve bank of India for NBFC application. For detailed procedure, please read the following link:

Read: Start a finance company in India

7. Can an NBFC accept deposits from the public?

No, an NBFC cannot accept deposit from the public even after RBI registration. To accept deposits from the public an NBFC must obtain additional permission from the RBI.

8. What are the different types of NBFC’s in India?

NBFC’s can be categorized on the basis of various parameters but it is mostly divided on the basis of their objectives. Here are the following types of NBFC’s;

• Asset Finance Company (AFC): An AFC is a company which deals with the financing of physical assets such as tractors, generator sets etc.
   
• Investment Company: Investment Company is the company which deals with the acquisition of securities.
   
• Loan Company: Loan Company is a company which operates to extend financial support by way of loan and advances other than asset finance company as explained in above step.
   
• Micro Finance Company: Microfinance company is the company that offers small loans to lady groups and or to a large number of populations. The loan size does not increase 40,000/-.
   
• Other: There are many other types of NBFC’s as well.

Conclusion

We have answered various questions on the very important matter of NBFC; however, the topic is so large that it can’t be answered in 8 questions. Further, in case you have any query relating to NBFC registration, please email us info@hubco.in.

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