7 Key Factors to Consider When Applying for an NBFC License in India

The NBFCs are the financial companies and they are required to obtain a license. In India, applying for a license is a multi-layered process, that requires you to follow regulatory regulations. However, seven key factors need your focus, like choosing the right business structure, capital requirements, RBI guidelines, and the privacy of the consumer. Let’s explore these factors in detail.

Introduction to NBFC

The NBFC stands for Non-Banking Financial Company (NBFC). It is a company registered under the Companies Act, 1956. They are engaged in the business of loans and advances, the acquisition of shares, stocks, bonds, debentures, and securities. These can be issued by the Government or local authority. In other words, an NBFC works by receiving deposits under any scheme or arrangement in one lump sum or instalments.

Important Factors to Choose for NBFC Licensing

[1] Principal Business Model

The NBFC must have financial activity as their principal business. There are two criteria to become an NBFC, 1) a company’s financial assets constitute more than 50% of the total assets, and 2) income from financial assets constitutes more than 50% of the gross income. 

If the company fulfils both these criteria will be registered as NBFC by RBI. Presently, RBI does not define the term principal business. It is only defined that companies that are predominantly engaged in financial activity get registered as NBFC. 

However, the companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, will not be regulated by the Reserve Bank.

[2] Comply with RBI Guidelines

The NBFC compliances set by RBI, must followed by the NBFC. Many guidelines cover the rules and regulations for NBFC in the financial sector. So, knowing the guidelines and adhering to them helps in preventing penalties. These compliances are related to capital adequacy, liquidity, risk management, and other financial aspects.

The financial operations of NBFC must be fair, and transparent. Also, include the grievance redressal mechanism. The company must disclose the terms and conditions of fee structure and transparency about using the customer's data. They must prevent data from customers that can involve data encryption, and incident reporting protocols, and maintain an IT security system.

[3] Capital Requirement

As per the terms of Section 45-IA of the RBI Act, 1934, no NBFC can set up or carry a business without obtaining a certificate of registration. Also, have Net Owned Funds of Rs. 25 lakhs (₹ Two crore since April 1999). The minimum net owned fund of Rs. 200 lakh. This is required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, and CICs.

However, the banks have the power to obviate dual regulation. Some of the  NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI. For instance, Venture Capital Funds, Merchant Banking companies, Stock broking companies registered with SEBI, Insurance Companies, Nidhi companies, Chit companies, Housing Finance Companies, Stock Exchange or a Mutual Benefit Company.

[4] Legal Structure

The NBFCs have multiple categories, so among this broad categorization the different types of NBFCs are as follows:

1. Asset Finance Company (AFC) carries its principal business in the financing of physical assets.
2. An Investment Company (IC) is included in the acquisition of securities.
3. A Loan Company (LC) provides finance whether by making loans or advances.
4. Infrastructure Finance Company (IFC) deploys at least 75% of its total assets in infrastructure loans. Has a minimum NOF of ₹ 300 crores, a minimum credit rating of ‘A ‘or equivalent and a CRAR of 15%.
5. Systemically Important Core Investment Companies carry a business of acquisition of shares and securities.
6. Infrastructure Debt Fund facilitates the flow of long-term debt into infrastructure projects. Raise resources through the issue of Rupee or dollar-denominated bonds of minimum 5-year maturity.
7. Micro Finance Institutions should not have less than 85% of their assets like qualifying assets. 
8. Non-Banking Financial Company – Factors are engaged in the principal business of factoring. The financial assets should constitute at least 50% of its total assets and its income.
9. Mortgage Guarantee Companies (MGC) must have at least 90% of the business turnover or at least 90% of the gross income. Have a net owned fund is ₹ 100 crore.
10. NBFC- Non-Operative Financial Holding Company (NOFHC) is a financial institution through which promoter or promoter groups will be permitted to set up a new bank.

[5] Data Privacy and Security Law

The NBFC provide loans against the collateral of multiple securities. In the agreement of the loan, it is mentioned that the primary security would be something other than shares/ units of mutual funds, Loan-to-Value (LTV). These would not be applicable.

[6] Dispute Resolution and Legal Framework

The consumers can file a complaint with the NBFC Ombudsman. You can reach out to the Ombudsman through an online portal or send your complaint by writing on plain paper to the concerned office of the NBFC Ombudsman. It can be sent offline by post, fax, or hand delivery. The complaint form is available on the website of RBI, it is not mandatory to use this format. 

Similarly, the Investigating Officer deal only with the complaints that are examined by the NBFC but have been partly or wholly rejected. They handle the complaints of customers or members of the public.

[7] Regulatory Supervision and Reporting

The Department of Non-Banking Supervision (DNBS) checks the regulation and supervision of NBFCs as per the Reserve Bank of India Act, 1934. However, the Regulatory and Supervisory Framework of the RBI provides the following points:

• Registration of NBFCs
• Prudential regulation of various categories of NBFC
• Issue directions on acceptance of deposits by NBFCs and 
• Do the surveillance of the sector through off-site and on-site supervision.
• Deposit-taking NBFCs and Systemically Important Non-Deposit Accepting Companies must follow the regulation and supervision.

However, the focus of regulation and supervision is on a) depositor protection, b) consumer protection and c) financial stability. The RBI can take punitive action according to the RBI Act 1934. This includes cancellation of Certificate of Registration, issue of prohibitory orders from accepting deposits, filing criminal cases or winding up petitions under provisions of the Companies Act in extreme cases.

Conclusion

In India, when it comes to obtaining an NBFC license, you have to evaluate a variety of legal, financial, and operational factors. However, if the company is involved in the business of lending, investment or deposit acceptance as their principal business. If they don’t have a NBFC license, then it can impose a penalty or fine on them or even prosecute them in a court of law. 

So, if you are looking to obtain an NBFC license, then reach out to Registrationwala. We assist you in the complete registration process and complying with the rules and regulations.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.