Introduction: Non-Banking Financial Company

CAPTION 1: Market Entry Strategy

It is a company registered under the Companies Act, 2013 having objects in the business of loans, advances, acquisition of shares, stocks, bonds, debenture, hire purchase, leasing, and so on. The NBFC business is a subset of the Indian Banking System with intent and target to meet credit demands unmet by the universal bank in India. Despite the pertinent effort from regulators to maintain the inclusion of the financial services to all people, across the country. Somewhere even we have seen a tremendous gap in regular credit finance to the needy person across the country. There the NBFC segment has helped quite a lot to provide organized systematic finance to needy people, collectively serving the public at large.

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Anyone in-country or abroad, planning to start finance business, needs to be aware of the procedure, complexities, and requirements of the regulator, technology, and compliance built in with this business model. Therefore any entry player in this segment should plan the market entry strategy as far as licensing, category, product development, addressable market, and uniqueness, market research and board composition of the company, and so on.

Primarily being finance business, the person going to enter into this market should be financially literate with regular academic qualification to substantiate the interest of Board of a company to pursue this segment business. Besides that, Board and shareholders need to be clean of any irregularity and conviction from the law of land. 

Further, the investment should be from the own fund in the proposed finance business. The minimum required Net Owned Fund required to start a finance business is Rs. 2 Crore, collected from Shareholders in the form of equity interest in the proposed company. Such investors need to prove themselves financially the amount of investment in their own source of funds. Accordingly understanding and maintaining principal business criteria, is prime requirement of the Reserve Bank of India, to be a finance company. Principal Business criteria refer to being finance assets and finance income to be at least 50% or more of total assets and total income respectively.

In the case of foreign investment in a proposed finance company, such an amount of investment should be approved by the Foreign Exchange Department of the Reserve Bank of India. Generally, foreign investment is under the automatic and approval route subject to the source of fund country. When there is the automatic route being Greenfield sector, the filing is required to done Foreign Exchange Department of the Reserve Bank of India at the regional level. However in the case of the approval route, the corporate is required to obtain the approval from the Foreign Investment Promotion Board under the Ministry of Finance.

By this on vet of Board, Shareholders, Foreign Investment and corporate proposed to do finance business, can go for Reserve Bank of India for approval of License, to commence the business of finance.

The entire process to start the finance business from scratch to live is our support service under the Market Entry Strategy from the various regulatory viewpoint, investment strategies, and even exit if needed in due time. 

CAPTION 2: Market Scenario

The finance business has tremendous opportunity and scope to excel, more precisely in India as the many people are still out of reach of organized regular finance. Technology has been involved in the finance business as an inevitable stake and movement business is connected through technology, and the scalability and prospects are unbeatable. And the finance sector is getting it like hot cake in the market, and now digitalization with more user-friendly enhancing user experience is the solo target of every finance business organization.

Sticking to market, the thorough knowledge of a variety of finance business verticals and available market peer understanding is most to conquer to make more viable plan and feasibility in the market.

Going through the records of the Reserve Bank of India, there were around 13k plus NBFCs registered with the Bank, of which 178 were NBFCs-D and 220 were NBFCs-ND-SI. The share of NBFCs in terms of assets in the total financial sector is beyond 21% or more as of date. And the numbers are increasing day by day due to the digital influence and digitalization of NBFC business operations. 

NBFCs are primarily deposit-taking and non-deposit-taking, as the name suggests it’s about acceptance of public deposits. Now with stringent regulation of deposit-taking, NBFC approval is not entertained by banks and the remaining are highly regulated and closely monitored by Bank. Besides that, even on Non-Deposit taking there is a categories I and II on the basic difference of having a customer interface or not. And category I am now just been legacy perspectives, nothing more than that. 

In the market, being NBFC it’s your choice of applying for a license under the various categories, as listed in the regulation of NBFC at the choice of applicants from the Reserve Bank of India are:-

• NBFC-ICC: It is NBFC with the prime business of Investment and Credit. It is a widely popular and most common segment for entry applicants in this segment. 
• NBFC-IFC: It is NBFC with business to deploy at least 75% of its total assets in infrastructure loans. Unlike other NBFCs with a Net Owned Fund (NOF) of Rs. 2 Crore, it required NOF of at least Rs. 300 Crore. It is required to have a minimum credit rating of ‘A’ or equivalent and a CRAR of 15%.  
• NBFC-CIC: it is an NBFC with the business of acquisition of shares and securities. It holds no less than 90% of its total assets in the form of investment in equity shares, preference shares, debt, or loans in group companies. Investment in the equity shares or preference shares mandatorily convertible within 10 years period time in group companies constitutes not less than 60% of its total assets. It can’t trade in its investment except for block sale for the purpose of dilution or disinvestment. Its assets size is Rs. 100 Crore or above. It is not fresh registration, in fact, the classification of existing NBFC having assets size Rs. 100 Crore or more and the principal business is the acquisition of shares and securities.
• NBFC-IDF: it is an NBFC with the object to facilitate the flow of long-term debt into infrastructure projects. It raises resources through the issue of Rupee or Dollar denominated bonds of minimum 5-year maturity. Only Infrastructure Finance Companies can sponsor IDF-NBFCs.
• NBFC-MFI: it is an NBFC with a NOF of Rs. 5 Crore, however, it is Rs. 2 Crore in the case of North East State. Its business is based on qualifying assets and to be MFI, such an entity should maintain at least 85% of its assets in the nature of qualifying assets. Qualifying assets have the following criteria:-
  • Loan disbursed to a borrower with a rural household annual income not exceeding Rs. 125k or urban and semi-urban household income not exceeding Rs. 200k.
  • The loan amount does not exceed Rs. 75k in the first cycle and Rs. 125k in subsequent cycles.
  • Total indebtedness of the borrower does not exceed Rs. 125k.
  • Tenure of the loan was not less than 24 months for the amount in excess of Rs. 15k with prepayment without penalty.
  • Loans to be extended without collateral.
  • Aggregate amount of loans, given for income generation, is not less than 50% of the total loans by the MFIs
  • Loans is repayable on weekly, fortnightly, or monthly installment at the choice of the borrower.
• NBFC-FACTORS: it is NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50% of its total assets and the income derived from the factoring business should not be less than 50% of its gross income.
• NBFC-MGC: Mortgage Guarantee Companies are financial institutions for which at least 90% of business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and the net owned fund is Rs. 100 Crore.
• NBFC-NOFHC: Non-operative Financial Holding Company is NBFC through which the promoter/promoter group will be permitted to set up a new bank. It’s a wholly-owned non-operative financial holding company that will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

Out of all these categories, the most popular choice of a majority of people is NBFC-ICC, as it is the combination of AFC, IC, and LC. Earlier AFC, IC, and LC used to be a separate category, which is merged into ICC vide notification dated 22nd Feb 2019 as regulatory reforms to simplify the supervision of the Bank. This form of NBFC can be started with at least Rs. 2 Crore as NOF with a business nature of investment in the acquisition of share, stock of corporate either listed or unlisted, lending advances to individual and corporate and helping the productive sector on an acquisition of their assets for the conduct of such business. On a whole, provides one centric solution to the person who would like to enter the finance market. It might be the reason, this category is more popular and even widely registered across the country.

Secondly, MFI is also been preferable category public at large to obtain registration however the complication of catering the Qualifying Assets as per regulation and entry capital requirement, is in the second interest of the public. It can be observed the business of MFI has been somehow to an extent affected by the NBFC-ICC license.

Other than these two, the rest are been quite big-ticket to cater as per the bare minimum requirement of capital and operational complexities, only selected are in that business. Or else can say, the person with specific purpose with requisite Net Owned Fund arrangement, only selected individual/corporate go for such license.

Apart from this, NBFC business are been developing day by day more prudent to technology savvy and been successful to address the various new version of NBFC business evolved in the market from a regulator point of view like:-

• Peer to Peer Lending: It is an NBFC with the business of platform provider of Investor and Borrower termed as ‘Participant’. This is a marketplace creator with no interference in the lending business structure. Based on its robust technology and algorithm for credit assessment, onboard the borrower and on the other hand, Investor with intent to invest surplus fund for good returns in comparison to market then platform get investor and borrower to match each other. The operation modality serves each account to reduce the NPA and serve the investor and borrower, both better user experience.
• Account Aggregator: It is an NBFC with the business of providing financial information pertaining to its customer and consolidating, organizing, and presenting such information to the customer under the contract. It acts as a common pool for an easy and immediate supply of information to the customer.
• Both products are unique and time demanded, the public is slowly and gradually been involved in it and gradually, sooner or later will come to greater visibility and scope as the both the licensed agency are more technology-driven.

CAPTION 3: Compliance

Idea stage to registration certificate in hand is a great and time taking journey with various ups and downs. The moment you are with a registration certificate from the Reserve Bank of India, the next scope is to set up the business infrastructure and inbuilt compliance measures for the same.

Being a company incorporated under the Companies Act, 2013 the compliance mandated by the Companies Act, 2013 is required to comply on or before the due date to avoid fines and penalties. However, if there is any clash inapplicable provision then, the Reserve Bank of India Act, 1934 and its regulation, direction, and circulars are to be preferred above the Companies Act, 2013.

Under the Companies Act, 2013 each company is required to conduct at least 4 board meetings with no gap beyond 120 days in between Two Board Meetings, issuance of share certificate, Appointment of Auditor, filing of a special resolution of the company, maintenance of the statutory register, minutes books and records, Director KYC, MSME Returns, DPT-3, AOC-4 and MGT-7, etc. are compliance under Companies Act, 2013 mandated to each register Company.

Now, it’s under the Reserve Bank of India again the company with license required to pass a resolution within 30 days of starting of the financial year on a recurring basis, then being NBFC, such company needs to take registration under Financial Intelligence Unit of India (FIU_IND) to submit the suspicious and cash transaction within the stipulated time frame. Similarly, it needs to take registration with the Credit Information Company (CIC) to report the financial data on monthly basis. Further Central KYC registration under CERSAI is mandated to NBFC to supply its customer KYC within 10 days of onboarding them into the system. Accordingly vide IBC Code, 2016 even NBFC are been mandated to supply the credit sanction data to IU under NesL. Moreover, NBS8/9 and SAC along with Audited Financial and Auditor Report are to be submitted to RBI. These are the bare minimum compliance under the RBI Act, 1934 for NBFC. However, NBFC with specific category has other compliance too, in addition, to mentioned above.

The discussed compliance is the bare minimum, however as per the category of NBFC the compliance list may be further extended accordingly.

The complete getting registration with another external agency mandated by RBI to its NBFC and its regular reporting service is again catered by us for our client.

CAPTION 4: Technology

Technology is inevitable in today's business, whether it's financial or anything other segments. From past experience, most businesses are now on digital presence as well as their business operation are in the process of automation. This has substantially experienced in Finance business. The finance business is now growing at large with better performance due to the involvement of technology in operation.

We support our esteemed client to go for better technology platform based on our experience and even core support for the development of the technology platform in-house required for NBFC business.

It is prudent to note that the NBFC business is prime facia activities of onboarding the client, managing the client, and recovering the dues, if any pending remain unsettled in addition to general business operation manual including Human Resource, Administration, Accounts, and Finance, Sales and Marketing, etc. Every organization wants to have all these functions to cater to single-page solutions of various functions on one platform. Basically, it is a prerequisite of Enterprise Resource Planning where all the basic to the extended version of activity get managed from a single platform.

The Loan Origination System (LOS), Loan Management System (LMS), and Loan Recovery System (LRS) are the basic three models in this business, where one client gets onboarded, assessed, and sanctioned with finance and the recovery model is implemented in a variation of products selected by the customer.

System implementation required good time involvement and even investment to build in-house, else it can be outsourced/rent software to operate the function of the company.

Sales Campaign and marketing have been supported by us to our client on agreed terms and client. Our main motto of us is to be solution-centric instead of a service provider. We thought from the eyes of businessman and provides service-oriented solutions at an affordable cost/budget.

CAPTION 5: Research

Our regular interest is to research this segment and provides the services, data, and information to our end users as well as client for recent innovation in the finance industry.

We being consultants support our clients to get trusted information from us to proceed with their business on a more authentic way forward.