Non-Banking Financial Companies, commonly known as NBFC, play an important role in India’s financial system by providing loans, investment services, asset finance and other financial products to individuals and businesses. Although NBFCs perform several activities similar to banks, they operate under a different regulatory structure and are primarily regulated by the Reserve Bank of India (RBI).
A company intending to carry on non-banking financial business as its principal activity generally needs to obtain a Certificate of Registration (CoR) from the RBI before commencing such business, unless it falls within a specific exempted category. RBI regulates NBFCs under Chapter III-B of the Reserve Bank of India Act, 1934, along with applicable Master Directions and activity-specific regulations.
What is an NBFC?
An NBFC is a company incorporated under the Companies Act that is principally engaged in financial activities such as lending, acquisition of shares, stocks, bonds or securities, leasing, hire-purchase, or other permitted financial businesses.
However, merely carrying out some financial transactions does not automatically make every company an NBFC. RBI applies what is commonly called the “50-50 Test” for determining whether financial activity constitutes the principal business of a company.
Under this test, financial assets should constitute more than 50% of the company’s total assets and income from financial assets should constitute more than 50% of its gross income. Both conditions generally need to be satisfied for the company to be regarded as carrying on financial activity as its principal business.
Why is NBFC Registration Required?
NBFC Registration provides regulatory recognition to a company that intends to undertake qualifying financial activities. Section 45-IA of the RBI Act restricts an NBFC from commencing or carrying on non-banking financial institution business without obtaining the required Certificate of Registration from RBI and meeting the applicable capital requirements.
Registration also places the company within RBI’s supervisory framework. After obtaining registration, an NBFC is expected to follow applicable prudential, governance, customer-protection, reporting and risk-management requirements.
Operating an NBFC business without the required registration can result in regulatory action. Therefore, promoters should determine whether their proposed business model requires RBI registration before launching lending or other regulated financial activities.
Types of NBFCs
NBFCs can be classified according to the nature of their financial activities. One of the most common categories is an Investment and Credit Company (NBFC-ICC), which may undertake permitted lending and investment activities.
Other regulated categories include NBFC-Micro Finance Institutions, NBFC-Factors, Infrastructure Finance Companies, Infrastructure Debt Fund NBFCs, Core Investment Companies, Housing Finance Companies, Peer-to-Peer Lending Platforms and Account Aggregators.
Each category may have different capital, governance and operational requirements. Therefore, promoters should first identify the correct NBFC classification instead of applying for registration without analysing the proposed business model.
Minimum Net Owned Fund Requirement
Capital is one of the most important requirements for NBFC Registration.
RBI has stated that companies intending to commence NBFC activities are generally required to have at least ₹10 crore in Net Owned Funds (NOF). RBI’s scale-based framework also prescribes category-specific capital requirements and transitional arrangements for certain existing NBFCs.
The applicable requirement can differ for specialised NBFC categories. For example, RBI’s framework prescribes separate NOF requirements for categories such as Housing Finance Companies, Infrastructure Finance Companies and Mortgage Guarantee Companies. Promoters should therefore determine the exact capital requirement based on the licence category being sought rather than assuming one amount applies universally.
Eligibility for NBFC Registration
The applicant should ordinarily be a company incorporated under the Companies Act, 2013 or the corresponding earlier company law. Its constitutional documents and proposed objects should appropriately support the financial activities that the company intends to undertake.
The promoters and directors are also important from RBI’s regulatory perspective. Their background, experience, financial standing and suitability may be examined during the registration process. Under the Scale Based Regulation framework, RBI has also prescribed that at least one director should have relevant experience of having worked in a bank or NBFC.
The company should additionally maintain the applicable Net Owned Fund and demonstrate that it has an appropriate governance structure, financial resources and business model to conduct the proposed NBFC activities responsibly.
Documents Required for NBFC Registration
The exact documentation depends upon the applicant and NBFC category, but an application generally requires detailed corporate, financial and promoter information.
Applicants should be prepared with incorporation documents such as the Certificate of Incorporation, Memorandum and Articles of Association, details of directors and shareholders, audited or available financial statements, capital and NOF evidence, banking information, organisational structure and details of group or associate entities.
RBI may also require information regarding the promoters’ experience, source of funds, business projections, proposed financial products, management structure and operating model.
A clear and commercially realistic business plan is particularly important because RBI needs to understand what type of financial activities the company proposes to conduct and whether its proposed structure is consistent with the licence being requested.
NBFC Registration Process
Step 1: Incorporate the Company
The applicant must first establish the appropriate company structure under the Companies Act. The company’s object clause should be drafted keeping the proposed financial activities in mind.
Step 2: Arrange the Required Capital
The promoters should bring in the required capital and ensure compliance with the applicable Net Owned Fund requirement. The source and ownership of funds should be properly documented because capital quality is an important regulatory consideration.
Step 3: Prepare the RBI Application
The company should prepare the prescribed NBFC registration application together with supporting documents, declarations, financial information and business details.
RBI currently provides the NBFC registration form through its regulatory application system and directs applicants to submit online registration applications through the PRAVAAH portal.
Step 4: RBI Examination
After submission, RBI may examine the applicant’s ownership, management, capital position, business model, governance framework and overall regulatory readiness.
If additional information, clarification or documentation is required, the applicant may be asked to provide it during the examination process.
Step 5: Certificate of Registration
Where RBI is satisfied that the applicable requirements have been fulfilled, it may issue the Certificate of Registration. The company can then conduct the authorised NBFC activity in accordance with the conditions of registration and applicable RBI directions.
Obtaining the CoR should therefore be treated as the beginning of the regulatory relationship with RBI rather than the end of the compliance process.
RBI’s Scale-Based Regulatory Framework
RBI regulates NBFCs through a Scale Based Regulation (SBR) framework consisting broadly of Base, Middle, Upper and Top Layers. The level of regulation increases depending on factors such as the size, activity and systemic importance of the NBFC.
Smaller and less complex NBFCs may generally fall within the Base Layer, whereas larger or specified categories can fall within the Middle Layer. Certain large NBFCs identified by RBI are placed in the Upper Layer and become subject to enhanced prudential and governance requirements.
The Top Layer is intended to remain empty unless RBI determines that an Upper Layer NBFC presents significantly increased systemic risk.
Post-Registration Compliance
NBFC Registration creates ongoing responsibilities. Depending on its category and regulatory layer, an NBFC may need to comply with capital adequacy requirements, asset classification and provisioning rules, governance standards, periodic RBI returns and statutory audits.
It may also need appropriate KYC and AML controls, Fair Practices Code, grievance-redressal arrangements, credit-risk policies and digital-lending controls where applicable.
NBFCs should remember that obtaining RBI registration does not automatically allow every financial activity. For example, accepting public deposits, operating P2P platforms, functioning as an Account Aggregator or undertaking specialised activities may require additional or category-specific regulatory permission.
NBFCs also differ from banks in important ways. They cannot accept demand deposits, do not form part of the payment and settlement system in the same manner as banks, and cannot issue cheques drawn on themselves.
Conclusion
NBFC Registration is a comprehensive regulatory process that requires much more than incorporating a finance company. Promoters must identify the correct NBFC category, maintain the applicable Net Owned Fund, establish a suitable management and governance structure, prepare a strong business plan and submit the prescribed application to RBI.
Once registered, the company must continuously follow the regulatory requirements applicable to its activities and scale. Proper planning before filing can help avoid inconsistencies in the business model, capital structure, documentation and promoter profile that may otherwise delay the registration process.
For businesses planning to enter lending, investment or other regulated financial activities in India, understanding the RBI framework at the beginning is essential for establishing a compliant and sustainable NBFC business.
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