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Setting up NBFC

Concept

A Non-Banking Financial Company (NBFC) is a company that is registered under the Companies Act 1956/Companies Act 2013. These companies do not possess a banking license, yet are involved in various financial services. These services include:

  • Loan and credit facilities

  • Asset Financing

  • Acquisition of shares/stocks/bonds

  • Hire-purchase

  • Insurance business

  • Chit business

  • Currency exchange

  • Peer to peer lending

  • Hedge funds

But if a company is engaged in other activities, then it is not considered an NBFC. These activities are:

  • Agriculture activity

  • Industrial activity

  • Purchase/sale of any goods

  • Providing any services and sale/purchase/construction of the immovable property

Difference between NBFCs and banks

There are few differences between NBFCs and Banks, and these are:

NBFCs doesn’t have the authority to accept demand deposits Moreover, NBFCs are not a part of the payments & settlements systems and it cannot issue cheques drawn on itself The facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs

Classification of NBFC

There are different types of NBFCs currently operating in India. On the basis of authorization to take deposits:

 

Deposit-taking (Type-1)

Non-deposit taking (Type-2)

In the case of non-deposit taking NBFC, the ND is suffixed to its name, i.e. NBFC-ND.

If the total asset site of any NBFC is Rs.100 crore, then it is classified as Systematically Important NBFC. It is because; they bear the burden of the financial stability of the country.

Further classification of NBFCs on the basis of their activities is as follows:

Put the below in slide format Asset Finance Company (AFC).

The Primary Business of these companies is to finance the assets of a firm, such as Machines, Automobiles, Generators, Materials Equipment, Industrial Machines, etc.

  • Investment Company (IC).

The company deals primarily in securities

  • Loan  Companies (LC).

As the name suggests, the main business is to deal in loans and advances. These loans are not for assets, but for other purposes such as working capital finance, etc.

  • Infrastructure Finance Company (IFC).

Any company that owns at least Rs. 300 crore and has deployed 75% of its total assets in infrastructure loans are called an IFC. The only condition is that it should have a credit rating of a or above and has crar of 15%

  • Systematically Important Core Investment Company (CIS-ND-SI).

If a company has assets worth Rs. 100 corer or more and has deployed 90% of its assets in debt instruments or loans in group companies, then it comes under CIS-ND-SI. 90% of the amount invested, should be in equity shares or can be compulsorily converted into equity shares.

  • Infrastructure Debt Fund (IDF-NBFC)

The main investment of this company is in the infrastructure sector. These funds are important for the country, as these funds are difficult in comparison to other types of funds. This is because of its huge requirement, long gestation period, and long-term requirements.

  • Non-Banking Financial company

Micro Finance institution (NBFC-MFI): it is a non-deposit-taking NBFC, which has at least 85% of its assets in the form of microfinance.

Pre-requirements of NBFC

A company should be registered as per the rules, regulations, and provisions mentioned in the Companies Act 2013 or the previous Companies Act 1956:

  • Registered under section 3 of the Act

  • It should have a minimum net owned fund of Rs.2 crore and not be the borrowed fund. (This minimum owned fund is different in the case of other specialized NBFCs like NBFC-MFIs, NBFC Factors, CICs, as it is decided on the kind of NBFC.) A gift from the spouse is considered an owned fund.

  • At least 1/3 of the directors should have experience in Finance

  • There must be a detailed plan for the next 5 years

NBFCs as sponsors of IDF-MF

  • In this case, the minimum owned fund should be at least Rs.3 crore, CRAR of 15%, and NPA not more than 3% of net advances.

  • In addition to this, this company should have existed for the last 5 years and profitable in last 3 years.

Document Required

Significant documents required for NBFC Registration in India are as follows:

  • Documents related to the administration and management of the company

  • Company Incorporation Certificate

  • The MoA and the AoA of the applicant company or firm

  • Documents describing the location of the company

  • Detailed information about Directors or Partners of the Company

  • Accounts of the company well-audited for last three consecutive years

  • Board Resolution in favour of NBFC formation

  • Bank Account with a minimum paid-up equity share capital of INR-2 Crore

  • Income tax PAN, etc.

  • Other relevant documents on request

Anita Mishra,

Co-Fonder and Director

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