The Non-Banking Finance Company is playing a vital role in building a nation through wealth creation, employment generation, Working capital arrangement, economic growth, etc. NBFC serves the Public at large to support financial management at an affordable credit rate. NBFC is majorly engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
To Register a Non-Banking Finance company, an application (Physical/online) is required to be submitted/filed with Reserve Bank of India, Mumbai Branch. As we discussed NBFC serves the public at large so RBI checks all aspects of the applicant before issuing License.
In this blog, we will try to highlight the challenges encountered to Register an NBFC.
The Reserve Bank of India has specified INR Ten Crore as Net Owned Fund (NOF) required for the following categories of non-banking financial companies to commence or carry on the business of non-banking financial institutions from October 01, 2022:
1. Non-banking financial company – Investment and Credit Company (NBFC-ICC)
2. Non-banking financial company – Micro Finance Institution (NBFC-MFI)
3. Non-banking financial company – Factor (NBFC-Factor)
*Note:
It is required to mention the sources of funds of the proposed shareholders acquiring the shares in the NBFC.
However, via a notification dated 22nd Oct 2021, the existing NBFCs of the above categories have a net own worth of less than INR 10 cr. shall have net owned fund by:
| Sr. No | Type of NBFC | Current NOF | By 31st March 2025 | By March 2027 |
| 1. | NBFC-ICC | 2 Cr. | 5 Cr. | 10 Cr. |
| 2. | NBFC-MFI | 5 Cr. | 7Cr. | 10 Cr. |
| 3. | NBFC-MFI (North-Eastern) | 2 Cr. | 5Cr. | 10 Cr. |
| 4. | NBFC- Factor | 5 Cr. | 7Cr. | 10 Cr. |
*Note:
However, for NBFC-Peer to Peer (P2P), NBFC- Account Aggregator (AA), and NBFCs with no public funds and no customer interface, the Net Owned Funds shall continue to be INR. 2 cr.
To calculate Net Owned Fund
Owned fund means paid-up equity capital, preference shares which are mandatorily convertible into equity, free reserves, balance in share premium account, and capital reserves signifying surplus arising out of sale proceeds.
Net Owned Funds The aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom
- accumulated balance of loss
- deferred revenue expenditure
- other intangible assets
- Investment of such company in shares of its subsidiaries, companies in the same group (NBFC)
- The book value of debentures, bonds, outstanding loans and advances (including hire purchase and lease finance) made to, and deposits with subsidiaries of such company; and companies in the same group
50-50 CRITERIA OF PRINCIPLE BUSINESS
A company having principle business as finance can constitute an NBFC. Financial activity as a principle business is when a company’s
Financial assets constitute more than 50 percent of the total assets, and
Income from financial assets constitutes more than 50 percent of the gross income.
A company that fulfils both these criteria will be registered as NBFC by RBI. The Reserve Bank has defined “principle business” so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. This test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.
The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition
FIT AND PROPER CRITERIA
RBI had issued a Directive to banks on undertaking due diligence on the persons before appointing them on the Boards of banks based on the ‘Report of the Consultative Group of Directors of Banks / Financial Institutions’. Specific ‘fit and proper’ criteria to be fulfilled by the directors is required. It is proposed to follow the same guidelines in case of NBFCs also
The importance of due diligence is to ascertain suitability for the post of director by way of qualifications, technical expertise, track record, integrity, etc. needs no emphasis for any financial institution. While the Reserve Bank does carry out due diligence on directors before issuing a Certificate of Registration to an NBFC, it is necessary that NBFCs put in place an internal supervisory
Qualification required for the post of directors under the Fit and Proper Criteria
a. Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
b. Declaration by the proposed directors/ shareholders that they are not associated with any company, the application of Certificate of Registration (CoR) of which has been rejected by the Reserve Bank
c. Declaration by the proposed directors/ shareholders that there is no criminal case, including for offense under section 138 of the Negotiable Instruments Act, against them; and
d. Bankers’ Report on the proposed directors/ shareholders.
e. If the director is a member of a professional association/body, details of disciplinary action, if any, pending or commenced or resulting in conviction in the past against him/her or whether he/she has been banned from entry into any profession/ occupation at any time
f. If the director attracts any of the disqualifications envisaged under Section 164 of the Companies Act 2013.
g. If the director been subject to any investigation at the instance of Government department or agency
h. If the director has at any time come to the adverse notice of a regulator such as SEBI, IRDA, MCA
i. Any other explanation/information considered relevant for judging fit and proper
COMPOSITION OF BOARD OF DIRECTORS
The Board of Directors (“the Board”) along with its Committees provides leadership and guidance to the Company’s management and directs, supervises and, controls the performance of the Company. The Board of the Company shall have an optimum combination of Executive and Non-Executive Directors in compliance with the Companies Act, 2013
Required number of Directors on Board
A private limited is eligible for NBFC, for a private limited a minimum of two directors is required but it’s advisable to have at least three or four directors. The directors should be in combination of three Sectors Banking, Finance, Information and Technology (IT). As all these sectors are involved in the functioning of NBFCs.
Banking sector: NBFC have some of its feature same as banks, it’s advisable to have a person who has good experience of bank workings, it is hard for a novice to operate NBFC without any experience, as the scope of working is vast.
Finance sector: NBFC is a financial institution and it is advisable to have an experienced person on the board. Financial experience helps them in organizing and maintaining the business plan and policy in a better way.
Information and Technology (IT) Sector: In the era of digitalization everything is done online, all the data is stored digitally and also transactions, it is preferable if the IT expert is in the directors, he will handle the issues comparatively in a better way.
COMPANIES DUE DILIGENCE
Due diligence is an examination process of the company or business prior to any initiative.
There is no set criteria for the exercise of due diligence in the case of NBFC. It depends upon the type and industry of NBFC. Broadly four types of due diligence are considered for NBFC.
1. Legal due diligence: is the scrutiny of a director or company done on a legal basis. Such scrutiny takes into account contracts entered into by the director or company, property, loans taken, pending litigation, legal structure, and the employment compliances of the organization.
2. Finance due diligence: is the financial scrutiny of the director and company such as information pertaining to the liabilities and assets of the company such as debts, cash flow, and, other financial aspects of the company relating to its capital, management, etc.
3. Commercial due diligence: under commercial diligence business plan is scrutinized what will be the working process, pitch deck for the company etc.
4. Policy due diligence: anything left by the above heads will fall under this such as taxation, IT system setup, management, communication channels, data protection, data privacy, etc.
TIME FOR SCRUTINY
NBFC registration process is one of the lengthiest processes as it takes an average of six months to register an NBFC, only if all the norms are followed.
It takes so long as the profile of individual directors is verified by the RBI. As a professional, we suggest keeping the minimum number of directors with a clean profile required by the RBI norms. And also from all the three sectors finance, banking and IT.
BUSINESS PLAN
A business plan is the roadmap of any institution. It will maintain short or long-term goals and helps in achieving them. It defines the vision, mission, and financial goals.
While drafting NBFC’s business plan one must consider the following sections.
Service Offered: first we need to outline the service provided to the customer. Services are selected on the basis of market requirements.
Executive summary: It contains the objective and aim of the NBFC, it will help the reader to understand the business. An executive summary should be clear, concise, and precise.
Business structure: It is mandatory to provide a brief business structure. This will include the type of business and legal formalities. However, for NBFC the most common business structure is company as defined under the Companies Act 2013
Sales and Marketing: Brief the sales and marketing strategy that is used by NBFC. The marketing model used by your NBFC to reach out to potential customers and investors should be mentioned in this section.
Digitization/Fintech Collaboration: If NBFC is proposing to offer digitized financial products in the near future, then it is essential to mention it in the NBFC Business plan. This would possibly attract more investors to your NBFC.
Budget: During the phase of starting, every financial institution should have an estimate of the budgetary requirement for running the day-to-day activities and long-term financial planning. An NBFC’s main business is related to finance. Apart from this, a specific portion of the amount has to be kept aside for registration and other formalities with the Reserve Bank of India. Therefore, an NBFC business plan needs to provide information regarding the budget.
Financial Structure: Apart from the Budget, there is a requirement of having a proper financial structure. This will helps in understanding the spending requirements of NBFC.
POLICY FRAMING
RBI has mandated NBFC to formulate various policies such as KYC Policy, IT Policy, Fair Practice Code Policy, etc., and must be governed by these policies while operating the business. These policies must be approved by the board of NBFC.
Fair Practice Code Policy
Fair Practices Code (which should preferably be in the vernacular language or a language as understood by the borrower) based on the guidelines of RBI should be put in place by all NBFCs with the approval of their Boards. NBFCs will have the freedom of drafting the Fair Practices Code, enhancing the scope of the guidelines but in no way sacrificing the spirit underlying the above guidelines. The same should be put up on their website, if any, for the information of various stakeholders. Fair Practice Code contains general principles on adequate disclosure of the terms and conditions of loans and also adopts a non-coercive recovery method. Fair Practice Code policy must be reviewed every year by the board of NBFC and also ensure to follow in consonance with the Fair Practice Code of NBFC.
Information Technology Policy
IT Policy formulates in line with the objectives of their organisation comprising the following:
1. An IT organizational structure commensurate with the size, scale, and nature of business activities carried out by the NBFC
2. NBFCs may designate a senior executive as the Chief Information Officer (CIO) or In-Charge of IT operations whose responsibility is to ensure implementation of IT Policy to the operational level involving IT strategy, value delivery, risk management and IT resource management.
3. To ensure technical competence at senior/middle level management of NBFC, periodic assessment of the IT training requirements should be formulated to ensure that sufficient, competent, and capable human resources are available.
Know Your Customer (KYC) Policy
KYC Policy is formulated to know the basic details of the customer for authentication. KYC Policy includes customer acceptance policy, customer identification procedures, etc.
The NBFC must comply with the KYC policy and ensure that the collected data of customers must be kept secure and confidential.
Grievance and Redressal Policy: to handle customer grievances, there must be a mechanism where customers register their issues and get a quick response. In Case of dispute, there must be a settlement mechanism. Make sure that all disputes arising between customers and third parties are heard and disposed of at a high level
Recovery Policy: Recovery Policy’s objective is to facilitate recovery of the dues in the event of non-payment of debt through a non-coercive recovery method. It aims to serve customer interests and adhere to Reserve Bank’s notification, Master data, and circulation.
NBFC is a financial institution that comes under the Reserve Bank of India and there is no clear provision or act at present. NBFC is governed through master notifications issued by RBI from time to time and it’s difficult to go through each notification every time, in the above blog we try to sum up all challenges and factors that one faces while registering NBFC. If you are trying to register NBFC then keep these above-mentioned points in mind. In case of Query and suggestions, please feel free to contact us at csmonikamalhotra26@gmail.com or 9958089808.
DISCLAIMER: The entire contents of this article have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, the author assumes no responsibility therefore. Users of this information agree that the information is not professional advice and is subject to change without notice. The author assumes no responsibility for the consequences of use of this information. IN NO EVENT THE AUTHOR SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM OR ARISING OUT OF OR IN CONNECTION WITH THE USE OF THIS INFORMATION
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