People who have not had a long career in the financial market tend to wonder why is it necessary to get an NBFC registration before starting a private lending institution. The story goes back to the post-colonial era when the only lenders who were well regulated were scheduled banks. The private lenders were not accountable to anyone and that led to several irregularities in the small loan lending process. It was the people from the poor or very low-income groups that suffered the most due to this unregularized network of small lenders. There were many small business owners and farmers who were caught in the perennial debt trap of these lenders. Over the years, the administration and government realised that getting a large part of the Indian population included in the financial market is necessary to induce financial growth. This led to the government think of regularising the lending market.

Herald of NBFC Regularisation Process

The economic liberalisation of 1992 in India was also responsible for government moving swiftly towards regularising the lending sector. the fast-paced growth of the economy required monetary supply into the Indian population. All of this led to the government partnering with the RBI to start the regularisation process of the small lenders. The framework included companies that have medium level o0f capitals to be registered as Non-Banking Financial Company and other relatively low-income companies as Microfinancing Institutions.

The framework of the Regularisation Process of NBFC

The framework of regularisation was well planned and clear. The companies were first required to be registered with the Registrar of Companies (RoC) as a private institution. This ensured the control of the government over these small lenders as RoC works under the Ministry of Corporate Affairs. However, the RoC did not have the necessary manpower of infrastructure to keep an eye on the operations of these institutions and audit their yearly activities. This is where RBI came into play. The regularisation process, licensing, and registration of NBFC and analysis of yearly financial report and accounts were given to RBI.

The RBI is responsible for conducting the process of NBFC registration by verifying whether the company meets the norms set for qualification or not. It has set a lower level of capital requirement limit that every company must have if they are willing to apply for an NBFC license. The documentation required is quite thorough in its approach and includes analysis of the records of the company or its promoters (in case of a completely new entity) to ensure that the new institution will be capable of handling the business fairly. The limit is also set on the minimum infrastructural requirement for companies looking to obtain an NBFC license. Overall, the RBI is quite watchful in granting NBFC to the companies and is wary of finding irregularities in the application. This has led to many institutions look for assistance from financial and legal advisory firms before applying for NBFC registration

What Is the Procedure for NBFC Licensing?

  • A company should first be registered under the Companies Act 2013 of the Companies Act 1956.
  • The minimum Net Owned Funds of the Company should be at least Rs. 2 Crores.
  • There should be a minimum of 1 Director from the same background or a Senior Banker as a full-time director in the Company.
  • The CIBIL (Credit Information Bureau (India) Limited) records of the Company should be clean.
  • After all the conditions mentioned above are satisfied, the online application on the website of RBI should be filled and submitted along with the documents.
  • A CARN (Console Agent Registration Number) will be generated.
  • A hard copy of the same application must be sent to the regional branch of the Reserve Bank of India.
  • After the proper scrutiny of the application, the Licensing process will be completed, and the License will be given to the Company.

Checklist of Documents for Licensing:

  • Complete information about the administration of the company.
  • Copies of the Certificate of Incorporation (CoI) and Certificate of Commencement (CoC) of Business for public limited companies.
  • Memorandum of Association (MoA) and Articles of Association (AoA) copies from the company. The details of clauses relating to financial business should be present in the certified copy of the memorandum.
  • Copy of PAN or CIN allotted to the company.
  • The profile of all the company directors to be filled up separately and signed by each director.
  • Certificate of experience belonging to the Directors of the company. It must include experience letter of working in the financial institution.
  • CIBIL (Credit Information Bureau (India) Limited) Data of Directors of the company.
  • The Financial Statements of the past 2 years of unincorporated bodies, if present, in the group where the directors may be holding directorship with or without substantial interest.
  • A Board Resolution that is specifically approving the submission of the application, its contents, and authorizing signatory.
  • A Board Resolution to the effect that the company has not yet accepted any public deposit at any specific point in time in the past or does not hold any public deposit as of on the date and will not accept the same in future without the prior approval of Reserve Bank of India in written form.
  • A Board Resolution stating that the company is not carrying on with any NBFC activities or have stopped all the NBFC activities and will not carry on or commence the same before getting the registration from RBI.
  • A Certified copy of the Board Resolution for the formulation of the “Fair Practices Code”.
  • The Statutory Auditors Certificate certifying that the company is or is not holding or does not accept any Public Deposits.
  • The Statutory Auditors Certificate certifying that the company is not continuing or carrying on with any NBFC activities.
  • The Statutory Auditors Certificate certifying clearly the Net Owned Funds as on the date of the application.
  • The details of Authorized Share Capital and the latest pattern of the company’s shareholding including the percentages.
  • A copy of Fixed Deposit receipt & banker’s certificate of no lien, indicating the balances in support of Net Owned Funds.
  • The details of the bank balances or the bank account with a complete postal address of the branch, loan or credit services, etc. that was availed by the company.
  • Last three years of Audited balance sheet and Profit & Loss account along with the director’s & auditor’s report or for any shorter period if available. This is only for the companies which are already in existence.
  • The Business plan of the company for the next three years.
  • The source of the capital at the start-up of the company along with all the documentary evidence.
  • A Self-attested copy of the Bank Statement, IT returns, etc.

All the above documents will be required for the licensing, but it might be possible that more documents may be required as per the RBI’s requirement for the NBFC Licensing procedure.

Is Legal Help Necessary?

Many promoters of companies looking to enter the business of NBFC hire a legal advisory firm to ensure that their NBFC application is cleared by RBI for licensing. The process from RBI is stringent and they go through every document carefully to ensure authenticity. The background check for the company and promoters is also rigorous. A legal firm is hired to streamline all this process on behalf of the company. The experts of the firm take responsibility of filing the right set of documents, verifying every document carefully before submission, and following up with RBI for any additional documentation required. The promoters can meanwhile focus on the other aspects of starting the business like coming up with a business and growth plan for the company.

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