Non-Banking Financial Company (NBFC) is the financial institution which is registered in Company Act, 2013. Activities performed by NBFC are loan and advance, acquisition of shares, debenture, bonds and securities which are issued by the government or by the local authorities. These banks provide activities such as loans against property, shares, various short term loans, personal loans to the people before providing these loans company has to be registered under RBI and should get a license before providing these services to the company who want to get a NBFC license should follow the guidelines provided by RBI.
Growth and Development of NBFC in India
NBFC came to India in 1960s for the investors whose financial requirements are not fulfilled by the existing banking sector in India. NBFC started by inviting the fixed deposits from investors and provide lease to big firms. At the initial stage, they operated in a limited area which has not made any significant impact on the financial system. In 80’s and 90’s NBFC got good ground which attracted more investors.
The NBFC sector has witnessed a drastic change in the financial system in the last few years. The development of the NBFC sector in the Indian economy, challenged the banking sector to improve, innovate and become flexible to the investors. And increase in completion with the banking sector NBFC has taken a significant place in the Indian economy.
Roles of NBFC in India
- Helps in the development of sectors like infrastructure.
- Leads to the generation of employment.
- Provides generation of finance to the weaker section of society.
- Leads to the development of the financial market in India.
- Help and increase wealth creation.
- Helps in the development of the economy.
Difference between NBFC and banks
- In NBFC there is no requirement for a banking license but can provide banking service whereas a bank is a financial institution that provides banking services to the general public.
- NBFC is registered under Company Act, 2013 whereas a bank is registered under the Banking Regulation Act, 1949.
- In NBFC demand deposits are not accepted whereas in banks demand deposits are accepted.
- In NBFC up to 100% foreign investment is allowed whereas in banks 74% of investment is allowed in private sector banks.
- In NBFC there is no need to maintain a reserve ratio whereas in banks it’s mandatory to maintain a reserve ratio.
- NBFC does not create any credit whereas banks create credits.
- Transaction services are not provided by NBFC whereas banks provide transaction services.
When NBFC License is required?
Non-Banking Financial Company is an institution that is regulated and supervised by RBI. When a financial asset of the company consists 50% of this total asset for the financial activity of the company and income from this financial asset consist more than 50% of the gross income of the company. The company which fulfills these criteria should get the license from RBI. This test is popularly known as the 50-50 test to get NBFC License.
Companies engaged in agriculture functioning, industrial activities, sales, purchase of goods and services or purchase, sale, construction of the immovable property as the principal business of the company and they are performing these financial activities in small scale and the net owned fund is less than 2crores such company don’t require NBFC License.
Various types of NBFC
Before getting a license, the company has to determine the type and category of the NBFC license. Following are the types of NBFC:
- Asset Finance Company
- Loan Company
- Investment Company
- Infrastructure Finance Company
- Infrastructure Debt Fund
- Micro Financial Institution(NBFC)
- Systematically Important Core Investment Company
- NBFC Factor
Requirement to get NBFC License
The company who wants to get a license should fulfill the requirement before getting a license:
- A company should be registered/ incorporated under The Companies Act, 2013.
- A company should have a net-owned fund of a minimum 2crore.
These requirements are provided under RBI guidelines. The fund of the company will be calculated from the companies audit report.
Documents Required for NBFC License
- Certificate of registration/ incorporation of the company who wants to take the license.
- Brochure of the company which has detailed information about the company and its management.
- Copy of PAN card and Corporate Identity Card of the company.
- Documents relating to the location/address of the company.
- Certified copy of Article of Association and Memorandum of Association of the company.
- Signature of all the directors which should be duly signed and details of each director.
- CIBIL/credit reports of the company are required.
- The company will provide a board resolution that will specify that company has not performed any activity related to NBFC till date and the company will not perform any activity until the registration process is completed by RBI.
- Resolution on ‘fair code practice’ is to be passed and a certified copy of the resolution is to be submitted.
- The statutory authority will issue the certificate that the company is not holding any public deposit and even they do not accept.
- The statutory authority will provide a certificate of the funds owed by the company on the date of application.
- Information relating to bank account, balances, loans, credits has to be given at the time of application.
- Self – certified copy of income tax return and bank statement is required.
- Further plan of the company for last 3 years with the estimate of the balance sheet, cash flow statement and income statement.
Procedure to get a license as NBFC
- The applicant company needs to be registered under The Company Act, 2013.
- The company should have a minimum paid-up capital of 2crore and if it is a foreign company then minimum paid-up capital of 5crore.
- The company needs to open a fixed deposit worth 2crore in any Nationalized Bank and if there is a foreign direct investment then the applicant company needs to follow the rules of the Foreign Exchange Management Act, 1999.
- Then the applicant company can file the online application with the required documents according to the guidelines of RBI.
- After applying, the CRAN number will be generated by RBI.
- The applicant company will send a hard copy of the application and documents related to registration to a branch office of RBI.
- After submission, the application and documents will be checked and verified by the RBI and if all are as per the requirement of the RBI guideline, the authority will issue a license to the applicant company.
After getting a license the applicant company will become eligible to accept all deposits from the public and can do all the activities relating to Non- Banking Financial Companies.
Various advantages of NBFC License
- It provides easy loans and credit options to individuals.
- For starting NBFC less investment is required so, it’s more profitable than other private or public sector banks.
- The registration process of these NBFC institutions is simple than other banks or lending institutions.
- In other banks loan process takes time but in these institutions, the loan process is less time-consuming.
- These institutions also manage the portfolio shares and stocks.
- CIBIL/ credit score does not become a hurdle in getting loans to any individual.
- If the company is licensed then both the parties i.e. NBFC and individuals who want the loan can be secured by the penal provisions provided by RBI.
Penalty for violation of RBI Provisions
- When NBFC business is carried without registration, RBI can impose a fine which is not less than 1lakh rupees and which may extend up to 5lakh rupees, imprisonment for not less than 1year.
- If the default is not rectified by the NBFC then a fine of 25000 per day will be imposed.
- If there is any other contravention, then a fine of a maximum of 5000 can be imposed by RBI.
- If there is any non- compliance with the order of the company law board then imprisonment up to 3years and rupees 50 per day from such non-compliance.
- If the auditor fails to obey the order of the RBI then a penalty up to 5000 rupees will be imposed.
NBFC is an institution that plays a vital role in the development of the Indian economy. It provides financial help in the form of loans, bonds, and securities to the weaker section of the society .so, its important to get license before starting these types of NBFCs so, that they can be regulated by RBI and can be protected by law, the individual or the investors can have faith on the company and invest on such NBFCs.