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What is an NBFC?

A Non-Banking Financial Company (NBFC) provides banking and other lending services without meeting the legal definition of a bank. It is Incorporated under Companies Act, 2013 or Companies Act, 1956 (Old). Every NBFC has to obtain Commencement of business certificate from RBI as defined under Section 45 I(a) of the RBI Act. NBFC shall not commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration issued by the Reserve Bank of India. NBFC registration or NBFC License can be obtained in 90-120 days.

The principal business of NBFC is providing loans and advances, acquisition of shares, debentures and other stocks issued by Government or other local authorities, insurance business, leasing, hire-purchase, etc. Moreover, any other non-banking institution, incorporated as a company under the Companies Act and having the principal business of receiving deposits under any scheme or arrangement in one lump sum or installment, is also a non-banking financial company (NBFC).

In general, NBFC is filling up the gap of financial needs for the organized and unorganized section of the population. In the recent times, banks have targeted big commercial houses and individuals with excellent credit rating as their prime customers; This provided NBFCs with an opportunity to enlarge its presence in the financial market.

What are the Types of NBFC in India?

By nature of the activity, they undertake, NBFCs can be categorized into the following:

Asset Finance Company.
Investment Company.
Loan Company.
Infrastructure Finance Company.
Core Investment Company.
Micro Finance Company.
Mortgage Guarantee Company.
Housing Finance Company.
By deposits they hold, NBFCs can be further classified into two categories:
Deposit accepting NBFCs.
Non-Deposit accepting NBFCs.
By size or minimum capital requirement, NBFCs can be further classified into following two categories:
Systematically Important NBFCs.
Non Deposit Holding NBFCs.

Procedure for NBFC Registration

Any entity desirous of commencing the business of and being registered as NBFCs shall apply to RBI for the license (CoR) and must also fulfill the following two norms:

It should be a company incorporated under Companies Act, 2013.
It should be a company having minimum net owned funds of INR 2 crores.
The online application is available on RBI’s website (COSMOS).
Submission of hard copy of the application along with attached documents shall be submitted RBI Office.
The license will be granted only after vigilant inspection of the application and documents attached with it.

Documents Required for NBFC Registration

Before filing your application 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.
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).
Bankers report depicting details of deposits and loans balances as on the date of application and the conduct of the account.
Activities before getting registration from RBI
Any NBFC activity.
Accepting any public deposit.

What is Deposits Taking NBFC?

Only the NBFCs which have been issued a license to accept a deposit in its certificate of Registration from RBI are allowed to accept public deposits. To ensure, NBFCs don’t misuse the License issued by Government, there have been certain limits imposed and conditions specified, for accepting deposits by the NBFCs, which varies depending upon various factors.

The limits for deposits vary on the basis of following factors
Whether it is an Asset finance Company or Loan/Investment Company.
Based upon the Net Owned Funds of the Company.
Based upon the prudential norms as prescribed by the RBI.
Credit Rating.

Based on the combination of factors mentioned above, NBFCs are allowed to accept public deposits as a multiple of Net Owned Funds. There is also the requirement to maintain a certain portion of deposits as liquid assets helpful in making repayment at the time of maturity.

Why is NBFC good choice for Fintech Startups?

NBFC can be registered with a Net owned fund Rs. 2 Cr only and even for small bank Net owned fund should be Rs. 100 Cr
NBFCs are primarily focused in meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.
The processing of loans from NBFCs is much faster as compared to the Banks. Also, there is less paper work and less stringent compliances in the case of availing loans from NBFCs.
Banks accept deposits, however only those NBFCs are entitled to accept deposits from public who have been granted license from RBI to accept such deposits.
Banks can issue cheques drawn on itself while NBFCs cannot as they do not form part of Payment and Settlement system.
NBFC Registration can be completed in 90 to 120 days where as even for small bank registration it takes 12 to 24 Months.
The costs in establishing NBFC is usually low making it a more lucrative option as compared to banks.
Less compliance in NBFCs in comparison to the bank.
Credit growth of NBFCs is noted at 24.3% per year as against 21.4% for banks.

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