Often we hear the term NBFC and wonder what it means. Why don’t we call this financial institution a bank when it also provides people with loans? Even If there are differences between them, then what are they? And last, if one wants to start an NBFC in India, then what does he need to do to get the permits and licenses required for it? Well, all these questions are not exclusive to you as hundreds of people face the same dilemma.

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Let’s start with ‘What is an NBFC?’ NBFC, which stands for Non-Banking Financial Corporation, is a financial institution that doesn’t have a banking license but is allowed to provide financial products and services, such as insurance and loans to its customers. Under the Companies Act of 2013, an NBFC is incorporated as a company, whose primary business activity is financing. Well, if we talk about the extent to which NBFCs contribute to the country’s economy, then you'd be surprised to know that the NBFC credit to the GDA ratio was a whopping 13.7 percent in 2021 and has been growing continuously since then. Today, several massive NBFC finance companies are present in the market, including Bajaj Finance Ltd, Shriram Transport Finance Company Ltd, Aditya Birla Capital Ltd, L&T Finance Holdings Ltd, etc.

Under the RBI Act of 1934, RBI acts as the regulatory authority for the NBFCs, therefore, compliance with the guidelines issued by it becomes necessary for them to run their business operations.

Read Our Blog: How to Get NBFC Registration in India

Functions of an NBFC 

• Hire Purchase and Leasing

NBFCs are the leading provider of hire-purchasing services in the country, which means they help businesses that seek to acquire assets without paying the full purchasing cost in the beginning. Here, the businesses are only required to pay a certain sum of money as an initial deposit and the rest can be paid with interest over some time to NBFCs. On completion of the terms, ownership of the asset gets transferred to them by NBFCs.

• Retail Financing

NBFCs provide businesses with short-term credit facilities against their shares, stocks, gold, properties, etc. 

• Trade finance

NBFCs are known for trade financing in which they help Indian companies get insured from the risks associated with importing or exporting their goods and services, promoting world trade to flow efficiently and securely.

• Infrastructural Funding

The share in the credit for the growth of the Infrastructure industry in the country also belongs to NBFCs as a major portion of their lending goes to it. NBFC finance companies provide services in several segments of infrastructure, including real estate, railways, flyovers, airports, etc.

At the same time, it becomes crucial for us to understand the activities in which NBFCs don’t engage. Let’s take a brief look at them:

• Any Agricultural activity.
• Any Industrial activity.
• Transactions in goods/raw materials (except buying/selling financial securities in the capital market).
• Any activity associated with the construction, selling, or purchasing of immovable properties.  

Read Our Blog: All About NBFC Registration Online Process and Cost in India

Difference Between NBFCs and Banks

• Banking License:- Even though NBFC financial companies offer a wide range of financial services to the public, they only hold a ‘Certificate of Registration’ from the Reserve Bank of India, not a banking license like banks. 
• Legislation:- NBFCs are incorporated under the Companies Act of 2013, whereas when it comes to the banks, the act that applies to them is the Banking Regulation act of 1949.
• Demand Deposits:- NBFCs are not allowed to accept demand deposits from the general public, whereas, banks are.
• Payment and Settlement System:- Unlike Banks, NBFC finance companies do not come under the payment and settlement system and aren’t allowed to issue cheques drawn on themselves. 
• FDI Limit:- The FDI limits for the private bank and the public banks are 74 % and 20% respectively. Whereas, it is 100% for the NBFCs.

Advantages of Non-Banking Finance Companies

• Easy Registration: As compared to banks, the registration process for opening an NBFC is not only easier but also takes less time.
• High Growth: Currently, the country is facing exponential growth in the fintech industry and why wouldn’t be such a case? Every other person is looking for ways to get a better source of funding. This is the reason these days we are witnessing entrepreneurs taking an enthusiastic approach toward Non-Banking Finance Companies in the search of high returns on their investments.
• More Stable: As NBFCs take a very systematic approach in their day-to-day operations and usually offer loans of less amount compared to banks, the chances of borrowers returning their money get higher, hence contributing to their stability.
• Flexible Interest Rate: Reserve Bank of India, the regulatory authority of NBFCs, prescribes a limit on the interest rate under which they can offer loans to their customers. This means NBFCs get the freedom to choose the interest rate, provided it doesn’t exceed the prescribed limit.
• Customer Centric: Most of the NBFCs run their operations keeping in mind the needs of their consumers, this is why we see them offering a wide range of services, including investment consultancy, trading in the capital market, financial support for education, and many more.

Categories of Non-Banking Financial Company

• Investment and Credit Company (NBFC-ICC)
• Infrastructure Finance Company (NBFC-IFC)
• Infrastructure Debt Fund (IDF- NBFC)
• Mortgage Guarantee Company (MGC-NBFC)
• Non-Operative Financial Holding Company (NBFC-NOFHC)
• Micro Finance Institution (NBFC-MFI)
• NBFC-Factors
• Core Investment Company (NBFC-CIC)
• Peer to Peer Lending (NBFC-P2P)
• Account Aggregator(NBFC-AA)

Documents Must for NBFC License

• Certificate of Incorporation
• Memorandum of Association of the company and Articles of Association
• Board Resolution(s) indicating the following:-

1. The company commences that it is not doing any activities associated with NBFC or has not done the same in the past and will only do it after getting registration from RBI
2. The company has not taken acceptance of any deposit from the public and will not accept without getting approval from RBI
3. The unincorporated bodies in the group where the director holds a substantial interest or otherwise have not taken any deposits from the public yet and will not accept it in the future as well.
4. The “Fair Practices Code” has been formulated by the company as per the guidelines of the Reserve Bank of India.

• Statutory Auditors certificate certifying net owned fund of the company as of the date of the application.
• Information including a future plan of the company, usually for the next three years, alongside the projection of balance sheets, income statements, and cash flow statements. 
• Banker’s reports associated with the followings:

1. Directors of the company having substantial interest in any other companies.
2. Company with the directors of its group, subsidiary, associate, holding company, and associated parties.

Note: The Banker’s report should particularly contain the information related to deposits and loan balances as of the date on which the application is filed, alongside the conduct of the accounting. One more thing to be remembered here is that for each of these entities (group, subsidiary, holding company, etc.), a banker's report is required to be obtained from all the bankers.

Prerequisites for NBFC License

The followings are the conditions that a company must follow to apply for an NBFC license:

• The company must be registered as a public or a private company under the Companies Act, 2013.
• At least Rs. 10 crores as minimum net owned funds to get registered as an NBFC 
• One-third of all the directors of that company must have work experience in the field related to finance.
• Excellent CIBIL records.
• Fulfilment of the regulations and norms required under Capital compliances and FEMA (Foreign Exchange Management Act) laws.

The process to Get NBFC License in India

• First, make sure the applicant company must follow the prerequisites mentioned above for an NBFC license.
• Visit the website of RBI and fill out the relevant application form for an NBFC license under section 45-1A of the RBI Act, 1934 to run the applicant company as NBFC.
• Attach all the asked documents.
• Upon the successful submission of the application, RBI will issue the applicant company an application reference number (ARN) to confirm the application. 
• This ARN can also be used to check the application status on the website of RBI.
• Thereafter, the applicant company is required to submit a physical copy of the application along with the required documents to the Reserve Bank of India.
• Upon receiving the application, RBI will check the profiles of the applicant company, its promoter/director, and shareholders.
• If satisfied, the RBI will issue an NBFC license to the company.

Conclusion

After reading this article, you would also agree that the role of NBFCs in the Indian economy can't be underestimated at any cost. With a wide variety of financial services at hand, NBFCs are fulfilling the rising demands of funds from all across the industries and promoting support to the true spirit of entrepreneurship in the country. However, at the same time, some credit also goes to the RBI for keeping such a close watch on them to keep away any mishap that can harm the interests of Indian consumers. And this is why companies who want NBFC licenses must be well aware of all the prerequisites and the process prescribed by the RBI. 

Don’t want to go through the complicated process of obtaining an NBFC license for your company? Feel free to contact Corpseed, which is India’s top service provider for finance business and has served more than thousands of both domestic and international companies. Experts of Corpseed will help you at every stage and make the process of getting an NBFC license a piece of cake for you.