How to start your Non-Banking Finance Company?

NBFC: Non-Banking Financial Corporations

A Non – Banking Financial Corporation is a company incorporated under the Companies Act 2013 or 1956. Following Section 45-I (c) of the RBI Act^[1]‘ a Non – Banking Company carrying on the business of a financial institution will be an NBFC. It moreover’ states that the NBFC must be involved in the business of Credits and Loans’ Procurement of stocks’ equities’ debt’ etc declared by the government or any local authority. A non-banking institution which is a company and has a primary business of collecting deposits under any scheme or system by any method is also a non-banking financial company^[2].

The NBFC business does not involve business whose principal business is the following:

1. Horticultural Activity’
2. Metropolitan Activity’
3. Acquisition or sale of any goods excluding securities’
4. Sale/purchase/production of any fixed property’ and
5. Rendering of any services

Meaning of Principal Business

The Reserve Bank of India has determined financial activity as a primary business to carry transparency to the entities that will be observed and controlled as NBFC under the RBI Act. The standards are called the 50-50 test and it’s as follows:

1. The company’s monetary assets must constitute 50 percent of the total assets.
2. The income from monetary assets must aggregate 50 percent of the total income.
3. It is administered by the Ministry of Corporate Affairs as well as the Reserve Bank of India. The Permission for operation is concerned with the RBI and it is incorporated as a company under appropriate legislation of the land.

What are the different types of NBFCs?

There are numerous kinds of NBFCs; some of them are as follow;

1. Investment Company’
2.  Loan Company’
3.  Micro Finance Company’
4. Housing Finance Company’ etc

Are all NBFCs required to be registered with RBI?

Now the question arises’ whether these Companies need to be registered with RBI? Well’ the answer is no’  these are needed to get registered.  Some examples are as follow;

1. Core Investment Companies – (assets are less than 100 crores)’
2. Merchant Banking Companies’
3. Companies which are involved in the business of funds-broking’
4. Housing Finance Companies’
5. Companies involved in the business of Venture Capital’
6. Assurance companies containing a declaration of registration issued by IRDA’
7. Chit Fund Companies as described in the Sec 2 clause (b) of the Chit Fund Act’ 1982′ and
8. Nidhi Companies as mentioned under Section 620(A) of the Companies Act 1956.

How do you incorporate an NBFC?

Now we will understand the different procedure for the incorporation of NBFCs’ the process follows like;

1. A company should first be recorded under the Companies Act 2013^[3] or should previously be recorded under Companies Act 1956^[4] as both a Private Limited or a Public Limited Company’
2. The least net reserved capitals of the Company should be Rs. 2 Crore’
3. 1/3rd of the Directors must hold finance experience’
4. The CIBIL documents of the Company should be accurate’
5. The company must have a complete business plan for five years’
6. The company must comply with the conditions for capital agreements and FEMA’
7. Following all of the above requirements have been completed the online application on the website of RBI should be filled and proposed along with the requisite documents’
8.  A CARN Number will be generated’
9. A Hard copy of the applying also has to be sent to the provincial branch of the Reserve Bank of India’
10. After the applying is properly examined’ the Permit will be given to the Company.

What are the guidelines that an NBFC must follow?

Once the Company gets a valid license it has to adhere to the following guidelines:

1. They cannot accept deposits that are payable on demand’
2. The public Deposit which the company can take should be for the merest period of 12 months and the highest period of 60 months’
3. The interest imposed by the Company cannot be more than the ceiling directed by the Reserve Bank of India from time to time’
4. The repayment of any amount so taken by the Company will not be secured by the Reserve Bank of India’
5. All the knowledge about the company as well as any change in the structure of the Company has to be decorated to the Reserve Bank of India’
6. The deposits taken by the Public will be unprotected’
7. The Company has to perform its audited balance sheet every year’
8.  A legal return on the deposits taken by the company has to be provided in the form of NBS – 1 every year’
9. A Periodically Return on the liquid assets of the company has to be provided.
10. A document from the auditors had to be taken declaring that the company is in a state to pay back all the securities or money taken from the Public’
11. A half-annually Asset Liability Management^[5] (ALM) return has to be provided by the company which has a Public Deposit of Rs. 20 Crore and higher or has assets worth Rs. 100 Crore and higher’
12. The credit evaluation has to be taken every 6 months and offered to the RBI’
13. The tiniest level of 15% of the Public Deposit has to be managed by the Company in Liquid Assets
14. If the NBFC defaults in the payment of any sum taken’ the consumer can go to the National Company Law Tribunal^[6] or the Consumer Forum to register a suit against the Company.

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^[2]  (Residuary Non-banking Company).
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