NBFC: Making financing easier in India

Getting financial services in India has now become less stressful with the emergence of Non-Banking Financial Companies or NBFCs, which have been provided for under Companies Act 2013.  NBFCs basically work like banks as they can accept deposits, release loans, acquire bonds, etc.  Generally, an NBFC is an organization that engages in financial activity as its principal business.  Before they can start any transactions, however, NBFCs must obtain a Certificate of Registration from the Reserve Bank of India.

Documents

To register as an NBFC, an organization has to be a company incorporated under Companies Act 2013, and have a minimum net owned funds of INR 2 crores. An NBFC also needs to prepare the following documents:

• A certified copy of Certificate of Incorporation from the registrar of companies
• profit & loss account with directors & auditors report for the entire period the company has existed, or for the last three years, whichever is shorter
• A copy of director’s experience certificate in the Financial Services Sector (including the banking sector)
• A bankers’ report with details of deposits and loans balances as of the date of the application and the conduct of the account

Process

• An online application can be downloaded from the Reserve Bank of India’s website.

• The NBFC should complete the application form, attach the required documents, and submit it to the Reserve Bank of India office.
• The Reserve Bank of India will review the application and documents.  When everything is in order, it will grant the license to the NBFC.

Types of NBFC Registration

NBFC registration is based on three categories, namely: nature of activity, deposits, and size or minimum capital requirement.  Under the latter, NBFCs are either systematically important or non-deposit holding. Under deposits, NBFCs can be deposit-accepting or non-deposit accepting.  Finally, on the basis of the kind of activity they will undertake, NBFCs are categorized into:

• Asset Financing
• Investment
• Loan
• Infrastructure Finance
• Core Investment
• Micro Finance
• Mortgage Guarantee
• Housing Finance

Deposits Taking NBFC Registration

The RBI will issue a license to accept deposits to NBFCs based on the company’s credit rating, net owned funds and the type of company it is.  Only Asset Financing and Loan/Investment companies can accept deposits. Deposits Taking NBFCs are also required to maintain a certain portion of deposits as liquid assets to make repayment easy at the time of maturity.

Net Owned Funds (NOF)

Net Owned Funds is one of the requirements for a company to be an NBFC. The NOF is the addition of paid up equity share capital and free reserves as per the latest balance sheet of the company less the accumulated loss balance and book value of intangible assets, if any.  

NBFC registration and Banks

NBFCs are different from Banks because they cater to the unorganized sector of the society.  While high credit scores are important for Banks, NBFCs look at low or no credit rating scores.