Non-Banking Financial Company

A Non-Banking Financial Company (NBFC) is a corporate entity doing business in the sector of Finance services. They could be a Private Limited Company or a Public Limited Company functioning similar to the banks but they are not banks. To operate any NBFC a license from RBI under section 45-I(c) to be obtain.

NBFC must be engaged in the business of Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local authority or other marketable securities. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement by any mode is also a non-banking financial company.

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Documents Required for NBFC Registration

  1. PAN Card and AADHAR Card of all the proposed Members and Directors. Passport in case Foreign Citizen.
  2. Bank Statement of Proposed Members and Directors not older than 2 months
  3. Latest Passport Size Photographs of Members and Directors
  4. Contact details of all the proposed Members and Directors
  5. Proposed Name for Company
  6. Business Object
  7. Education Qualification of Proposed Directors and Members
  8. Occupation of Proposed Directors and Members
  9. Shareholding Ratio
  10. Address details of registered place of business (Electricity Bill / Rent deed / Copy of registry / Consent and NOC of Owner)

Advantages of NBFC

  1. Can provide loans and credit facilities
  2. Can trade in money market instruments
  3. Can do wealth management such as managing portfolios of stocks and shares
  4. Can underwrite stock and shares and other obligations
  5. NBFCs are the last resorts of borrowing; NBFCs are there where banks are not there
  6. NBFCs are the largest propellants of ushering finance into the country
  7. Agility is very important for NBFCs as it sets the banks apart. Banks function slower as compared to the NBFCs
  8. The use of modern methods by NBFCs has overcome key challenges that had overwhelmed conventional lending. NBFCS have made great use of technological advancements like the use of mobile phones and the internet which has helped in making information easily accessible anytime anywhere. It has reduced the demand and reliance on bank branches

Procedure for Obtaining NBFC license

  1. A company should first be registered under the Companies Act 2013 or should already be registered under Companies Act 1956 as either a Private Limited or a Public Limited Company.
  2. The minimum net owned funds of the Company should be Rs. 2 Crore.
  3. 1/3rd of the Directors must possess finance experience.
  4. The CIBIL records of the Company should be clean.
  5. The company must have a detailed business plan for five years.
  6. The company must comply with the requirements for capital compliances and FEMA.
  7. After all of the above conditions have been satisfied the online application on the website of RBI should be filled and submitted along with the requisite documents.
  8. A CARN Number will be generated.
  9. A Hard copy of the application also has to be sent to the regional branch of the Reserve Bank of India.
  10. After the application is properly scrutinized, the License will be given to the Company.

Documents Required for NBFC License

  1. Certified copy of the Certificate of Incorporation, MOA & AOA
  2. KYC of directors & shareholders of the applicant company
  3. Highest qualification certificate of the directors of an applicant company
  4. Net worth certificate of the directors & shareholders of the company
  5. Bankers Report regarding the no lien remark on fixed report of Rs. 2 Crore
  6. Credit Report of directors & shareholders
  7. Detailed action plan of the proposed NBFC along with the organizational structure
  8. Financial statements of the applicant company along with the directors report & auditor’s report

Difference between Banks and NBFC

BasisBanksNBFC
MeaningBank is a government entitled financial intermediary which aims to provide banking services to customers.NBFC is a company which provides services similar to banking services to people without holding a bank license.
Registered underA bank is registered under banking regulation act, 1949.NBFC is registered under company’s act 1956.
DepositBanks accept and lend deposit.NBFC do not accept and lend deposit.
InvestmentIn banks a foreign investment is limited up to a certain fixed limit.In NBFC, Foreign investment is allowed up to 100 percent.
Payment systemPayment and settlement is the core activity of banks.In NBFC, the payment system is not a part of the activity.
Demand draftBank can issue self-demand draft on itself.NBFC cannot issue self-demand draft their own.
Cheque drawnBanks can draw a self-chequeby their own.NBFC cannot draw self-cheque their own.
Credit creatorBanks can create credit through multiplier financial activities.NBFC cannot do it.
Transaction servicesBank provides a variety of transaction services.NBFC does not facilitate transaction services.

Frequently Asked Questions

What are the types of NBFC companies in India?

NBFC’s are broadly classified in –
  1. Terms of liabilities in Deposit and Non- Deposit Accepting NBFCs
  2. Size and Systematically important and other Non-Depositing Holding  Companies
  3. Kind of activity of the company
Hence, there are ten different types of NBFCs companies that are discussed below –
  1. Asset Finance Company
It is a financial institution that facilitates the service of financing the various assets for individuals and the businesses which include machinery, heavy industrial equipment, production and farming equipment and large power generators.
  1. Investment Company
It is a financial institution whose principal business is the acquisition of securities. In a simple term, these companies take money from the public which invested in various securities and financial products.Thereafter, company deducts its operational cost from the earned profit and later distribute to shareholders.
  1. Loan Company
Loan Company as its name states is a financial institution which offers loan for various purposes other than of the AMC which also includes the Housing Finance Firms.
  1. Infrastructure Finance Company
It is a Non- Banking Finance Company –
  • That deploys three- fourth of its total assets in infrastructure loans
  • That has a minimum  Net Owned Fund of 300crores
  • That has minimum ‘A’ credit rating or equivalent
  • CRAR of 15%
  1. Systematically Important Core Investment Company
It is a Non- Banking Finance Company – That deploys 90% of its total assets in the form of investment in shares, stocks, debt or loan group company.Out of 90%, 60% should be invested in equity shares or those which compulsorily converted later in equity shares.Does not carry any activity referred in section 45(c) or 45(f) of RBI act 1934. That accepts public funds ​6. Infrastructure Debt Fund IDFs raise resources through bonds for long-term infrastructure projects. The bonds are issued in multiple currencies to ensure that have they had a five –year maturity for investors.
  1. Microfinance Company
People in the urban, semi-urban or rural area of India need financial help to start their business and fulfill other requirements but they are hesitant to seek the help from banks because of the formalities which need to fulfill to get the required money.Now, here the microfinance company come out, they provide financial help to these underprivileged people.
  1. NBFC (Factor)
These types of NBFCs in India are low. These companies usually buy loans at a much discounted rate from lenders and after that, they adjust repayment table of the debtor to ensure facile settlement adding small profit.
  1. Mortgage Company
It is a financial institution where –
  • At least 90% of the business turnover is of mortgage guarantee or
  • At least 90% of the gross income is from mortgage guarantee business or
  • Net owned Fund is 100 crores
  1. Non- operative Financial Holding Company
It is a separate category of NBFCs which is wholly owned Non-operative financial holding company permitted to set up or hold the bank as well as another financial service with the permission of RBI under applicable regulatory prescription.
No, The following NBFCs are not required to obtain any registration with the Reserve Bank of India under the idea that they are regulated by other regulators:
  1. Core Investment Companies – (assets are less than 100 crore or public funds not taken)
  2. Merchant Banking Companies
  3. Companies which are engaged in the business of stock-broking
  4. Housing Finance Companies
  5. Companies engaged in the business of Venture Capital.
  6. Insurance companies holding a certificate of registration issued by IRDA.
  7. Chit Fund Companies as defined in the Sec 2 clause (b) of the Chit Fund Act, 1982
  8. Nidhi Companies as notified under Section 620(A) of the Companies Act 1956
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