Non-Banking Financial Company (NBFC) – An Overview
NBFC is a Non-Banking Financial Company, registered by the Reserve Bank of India. It’s a license issued by the RBI to the Company to enter into the Financial markets in India and to undertake the business of lending in various sectors. This Company works like a bank in terms of lending, however, it cannot accept the deposits.
NBFC primarily deals in Loans and Credit Facilities, Assets Financing, Acquisition of Shares, Stock, Bonds, Hire-Purchase, Insurance, Currency Exchange, Peer to Peer Lending, hedge funds etc.
In India, the economic development is at boom and the NBFCs are rapidly gaining prominence as intermediaries in the retail finance space. NBFCs finance more than 80 per cent of equipment leasing and hire purchase activities in India. The gross loans of India’s Non-Banking Finance Company Microfinance Institutions (NBFC-MFIs) increased 24 per cent year on-year in Q2 FY18 to Rs 38,288 crore (US$ 5.89 billion). NBFC’s market share in commercial loans increased to 2.8 per cent in 2016-17 from 2 per cent in 2015-16 and its constantly been increasing year by year.
NBFCs have served the unbanked customers by pioneering into retail asset-backed lending, lending against securities and microfinance. NBFCs aspire to emerge as a one-stop shop for all financial services. Non-Banking Financial Companies are expected to raise their share to 19-20 per cent by 2020 through recapitalization program for public sector. New RBI guidelines on NBFCs with regard to capital requirements, provisioning norms and enhanced disclosure requirements are expected to benefit the sector in the long run.
Types of NBFC’s
- Investment & Credit Company (ICC)
- Infrastructure Finance Company
- Housing Finance Company
- Core Investment Company
- Micro Finance Company
- Mortgage Guarantee Company
- Peer to Peer Lending - NBFC P2P
Business Activities in NBFC
-In India, major NBFCs are incorporated with the intent to finance the:
1) Personal loans,
2) Vehicle financing,
3) Asset Financing,
4) Micro Finance Company
-However, with the advent of technology, there are some new innovations in the Indian Financial Market such as:
1) Peer to Peer lending(P2P),
2) Payday Loans,
3) App based funding,
4) Gold Loan,
5) Loan Against Property (LAP)
India’s FDI Policy for NBFC
-NBFC is eligible for 100% Foreign Direct Investment under Automatic Route
-Minimum Capital Required is INR 20 Million
How to enter this Market?
-Register a New (NBFC) Company
-Takeover already registered Company and start the business
-Partnership, Collaboration or Co-Lending with existing NBFC
Benefits of Registering the NBFC
-The NBFC Registration Process is cheaper than that of a Bank
-The Investor have a limited personal liability and is protected from other legal and business risk
-The NBFC Attracts more borrowers as compared to bank due to their simplified procedure of lending
-It is always easy to Raise Investments in NBFC
-The NBFC has also access of CIBIL which provides credit rating to the Borrowers. The Borrowers being afraid of poor credit score, do not default in repayment and hence default risk is also lower in this case
-The NBFC is free to decide the rate of interest as well as the processing fees on loan from borrowers
-If any borrower defaults in repayment of loan, adequate protection has been provided by Law for recovery of loan
-The Banks easily provide the finance to the NBFCs in fulfilling their working capital requirement
-The RBI has allowed 100%, Foreign Direct Investment in this particular sector
-The NBFCs follows a Quick Loan disbursement procedure. Some companies even initiate the disbursal in real time
-The RBI gives a single license for undertaking Loan, Investments and Assets financing thereby one can continue diversified finance business
-According to a local survey, there has been record a Growth in retail Loan financing about 46% in the Financial Year 2018
-With one NBFC License a Company can operate all over India. There is no need to seek any further approval from the local authority of a particular area
-NBFCs can open up to 1000 Branches by just giving the intimation to the Reserve Bank of India
Requirement for Registering the NBFC
For getting the approval from RBI it is a prerequisite that at least one Director must have experience in Financing and lending business.
-Unique Business Plan:
A business plan is submitted with the RBI while submitting the documents for approval. It is one major constraint in the registration process. A company must have a detailed business plan for the next 5 years.
A NBFC can be registered with the initial capital of 20 Million. This capital must belong to the shareholder(investor) i.e. it should not be borrowed fund.
-Clean Credit History:
The Directors and Shareholders must have no write-offs or have not will fully defaulted the repayment of loans to NBFC/Bank.
-Experienced NBFC Advisor:
Registering an NBFC as well as meeting the Regulatory compliance requires expert knowledge. Hence you may need to hire an experience NBFC Consultants to take care of NBFC Registration and Compliance after COR.
NBFC Registration Procedure
-Register a Private Limited Company
-Raise the capital up to INR 20 Million
-Opening of Bank Account with a Bank and deposit INR 20 Million in the bank account of the Company
-A detailed application including the business profile of the Investor and a detailed business plan is prepared and submitted to RBI
-The RBI carries out the due diligence and scrutinize the application submitted and may ask for any additional document at this stage
-We have to take a follow-up with the RBI officials regarding the approval
-If RBI founds everything in order, it approves the CoR and vice versa reject the application
Documents Required for NBFC Registration
-Certified copy of Certificate of Incorporation issued by the registrar of companies.
-Extract of the main object clause in the MOA clearly depicting the financial business.
-The Audited balance sheet and Profit & Loss account along with directors & auditors report for the entire period of company's existence, or for last three years, whichever is less.
-In case of fresh company Statutory auditor certificate. Copy of the certificate of Director's highest educational and professional qualification.
-Copy of Director's experience certificate in the Financial Services Sector (including Banking Sector).