Despite numerous banks in the country, many parts of rural India are untouched by financial literacy and still depend on traditional methods of loaning and saving money.

NBFCs are considered a rapidly growing business vertical to bridge this gap. This helps in bringing the inclusion of the untouched part of the country into the mainstream economy.

This has resulted in increased demand for NBFC loans and increased NBFC Registrations. NBFC incorporation has increased dramatically in recent years and now plays a critical role in the financial sector's growth. The primary reasons for this are the availability of tailored loan products, customer-friendly loan policies, faster loan processing, advanced technology, and digital reach.

What are NBFCs?

NBFCs differ from commercial and cooperative banks. Unlike traditional banks, they don’t have a banking licence but are bound under the rules of the RBI.

A non-banking financial company (NBFC) as specified under Section 45-IA Of The RBI Act, 1934 & Companies Act, 2013 is a financial institution that does not have a banking licence but can provide customers with financial products and services.

These companies whose principal business revolves around loans and advances, share acquisition, hire-purchase, finance leasing, chit fund, and so on. An NBFC does not accept savings or current account deposits, nor does it issue cheques drawn on itself, and does not offer deposit insurance or credit guarantee coverage to its depositors.

Principal Business according to RBI means an NBFC must be involved in financial activity as their main business. That means the company’s financial business is 50% of total assets and the income from those financial assets must be at least 50% of the total income.

Any business having its principal business as agricultural, industrial activity, sale/purchase of goods or immovable property is excluded from having an NBFC license.

How NBFCs are different from traditional banks and Micro Finance Institutions (MFIs)

NBFCs lend and invest their money, which makes them very similar banks; however, there are a few differences. Unlike banks and NBFC is unable to accept demand deposits. NBFCs don’t make part of the payment and settlement system, and neither they can issue cheques drawn on themselves. NBFC depositors do not have access to the Deposit Insurance and Credit Guarantee Corporation's deposit insurance facility.

Microfinance institutions (MFIs) are non-deposit keeping NBFCs with Minimum net owned funds of 5 crores (2 crores for northeast states) and min. 85% of their assets are in qualifying assets (i.e. the assets or the amount given out as a loan). MFIs usually operate at smaller strata serving smaller amounts of loans to the underserved.

Advantages of incorporating an NBFC:

New entrepreneurs can easily enter the business of providing quick loans to Individuals and corporations without going through the hassles and long process of getting a banking license. The following are the advantages of obtaining an NBFC license:

1. Easier, cheaper, and quicker to register an NBFC

2. Profitable business opportunity for entrepreneurs/ fin-tech model start-ups as their digital presence can reduce operational costs.

3. It is an alternate digital banking that helps tap the underserved parts of the nation and easily provides loans with less paperwork.

Eligibility criteria for NBFC registration

Before applying for an NBFC license, the applicant must fulfil the following criteria:

1. Principal business should include financial activity of lending

2. financial assets should make up 50% of the total assets

3. income from financial assets should be 50% of the total income

What are the requisites for NBFC registrations?

1. The company must be registered under the Companies Act, 2013,

2. 1/3 of directors should have at least 10 years of experience in the finance field.

3.  Applicants need to prepare a detailed 5-year business plan.

4. Applicants must have a Net Owned Fund (NOF) of at least 2 to 20 crores

5. Shareholders must have not defaulted in payment of their loans

Documents needed for NBFC registration

The applicant should have the following documents while seeking NBFC registration:

1. 1. MOA (Memorandum of Association), AOA (Articles of Association), COI (Certificate of Incorporation)

   2. Certificate of Net Worth of Shareholders, Directors, and Company; Directors' and shareholders' business profiles.

   3. Income Tax Returns; Educational qualification certificates of the proposed directors; KYC details such as the company's PAN, GST number, and address proof.

   4. Certificate of highest experience; Company's bank account information.

   5. Board Resolution Format for NBFC Registration; IT Policy; Loan and Business Structure.

   6. Directors' and shareholders' credit reports.

   7. Audited balance sheet for the previous 3 years.

   8. Detailed action plan for the next five years, including a risk assessment policy and a code of conduct.

How to apply for NBFC registration?

1. The applicant must first incorporate a company by the provisions of the Companies Act of 2013.

2. The applicant should ensure that the company's minimum NOF (Net Owned Fund) is maintained by the type of NBFC.

3. Complete the application form on the RBI's official website.

4. Submit all necessary documents for NBFC registration with the Application.

5. A CARN Number is generated to track the application status.

6. The applicants then need to submit the application form to the RBI's regional office; hence completing the process, Registration will be granted if the Application is accepted.

Conclusion

Non-banking financial companies serve as intermediaries between depositors and borrowers. By providing financial solutions to unorganised segments of society, they have become a better or better alternative to the financial & banking sector.

We at Best legal services (www.bestlegalservices.in) provide end-to-end solutions to all your needs regarding consulting, compliance, and registration of an NBFC. Our services include drafting documents, preparation of the business plan, submitting applications and cooperating with RBI till the issuance of the certificate.  Client confidentiality and 24/7 customer support are the backbones of our firm. We are committed to helping entrepreneurs manage and grow their businesses.