Eligibility and compliance for nbfc registration in india

Non-Banking Financial Companies (NBFCs) play a critical role in India’s financial ecosystem by bridging gaps left by traditional banks. With their ability to offer diverse financial services, NBFC is strumental in driving economic growth. However, registering and operating an NBFC in India requires strict adherence to eligibility criteria and compliance requirements outlined by the Reserve Bank of India (RBI). This article delves into the key eligibility conditions and compliance obligations for NBFC registration in India.

Eligibility Criteria for NBFC Registration

To establish an NBFC in India, businesses must meet specific eligibility criteria set by the RBI:

- Incorporation as a Company

• An NBFC must first be registered as a company under the Companies Act, 2013 or the earlier Companies Act, 1956.

• The business must include financial activities as its principal objective, reflected in its Memorandum of Association (MOA).

- Minimum Net Owned Fund (NOF)

• The applicant company must have a minimum NOF of ₹2 crore.

• For NBFCs operating in the North Eastern Region, the minimum NOF requirement is ₹1 crore.

• The NOF is calculated by deducting intangible assets and certain other liabilities from the total equity capital.

- Financial Activity Threshold

• At least 50% of total assets should be financial assets, and income from financial assets should constitute 50% of total income. This is known as the Principal Business Criteria (PBC).

- Director Qualifications

• The directors of the company must have adequate experience in financial services or banking.

• A clean track record with no history of financial misconduct is mandatory.

- Capital Adequacy Ratio (CAR)

• Certain types of NBFCs, such as deposit-taking NBFCs, must maintain a minimum CAR of 15%.

- RBI Approval

• Obtaining an NBFC registration certificate from the RBI is mandatory before commencing business activities.

Compliance Requirements for NBFCs

Once registered, NBFCs are required to adhere to a comprehensive framework of regulations to ensure transparency, stability, and fair practices.

- Prudential Norms

• NBFCs must comply with prudential norms related to income recognition, asset classification, and provisioning.

• Non-performing assets (NPAs) must be identified, and adequate provisions made.

- RBI Returns and Reporting

• NBFCs are required to file various returns with the RBI, such as:

  • NBS-1: Quarterly returns on financial indicators.

  • NBS-2: Quarterly returns on prudential norms.

  • NBS-7: Monthly returns on exposure to capital markets.

- Fair Practices Code (FPC)

• NBFCs must implement an FPC to ensure transparency in lending and collection practices.

• The FPC must be displayed on the company’s website and shared with borrowers.

- Anti-Money Laundering (AML) Compliance

• NBFCs must comply with the Prevention of Money Laundering Act (PMLA), 2002.

• KYC (Know Your Customer) norms must be strictly followed for customer onboarding.

- Credit Rating

• NBFCs accepting public deposits must obtain a credit rating from an RBI-approved credit rating agency.

• The rating must be reviewed periodically.

- Corporate Governance

• NBFCs must adopt strong corporate governance practices, including the formation of a Board of Directors with independent members.

• Audit committees and risk management frameworks are essential for larger NBFCs.

- Restrictions on Deposits

• Only certain NBFCs, such as Asset Finance Companies (AFCs) and Loan Companies (LCs), can accept public deposits.

• These companies must comply with specific conditions, including maintaining a minimum credit rating and adhering to deposit caps.

Process for NBFC Registration in India

Registering an NBFC in India involves the following steps:

Step 1: Incorporate a Company

Register your business as a private limited copmpany registartion or public limited company under the Companies Act, ensuring financial activities are included in the MOA.

Step 2: Raise Capital

Ensure the company’s NOF meets the RBI’s minimum requirement of ₹2 crore (or ₹1 crore for the North Eastern Region).

Step 3: Prepare Documentation

Gather the required documents, such as:

• Certificate of Incorporation.

• MOA and Articles of Association (AOA).

• Audited financial statements.

• Banker’s report confirming NOF compliance.

Step 4: Submit Online Application

• File the online application for NBFC registration on the RBI’s COSMOS portal.

• Upload the necessary documents and pay the registration fee.

Step 5: Await RBI Approval

The RBI reviews the application and may request additional information. Once satisfied, the RBI issues the Certificate of Registration (CoR).

Challenges in NBFC Registration

Despite the streamlined process, businesses may encounter challenges during NBFC registration:

1. Stringent Financial Requirements: Meeting the minimum NOF requirement can be a hurdle for startups.

2. Time-Consuming Approval Process: Obtaining RBI approval can take several months, delaying business operations.

3. Regulatory Updates: Frequent changes in compliance norms require constant monitoring and adaptation.

4. Sector-Specific Challenges: NBFCs operating in niche sectors, such as microfinance or housing finance, face additional regulatory requirements.

Conclusion

NBFC registration in India is a rigorous process designed to ensure financial stability and consumer protection. Meeting eligibility criteria like minimum NOF, financial activity thresholds, and director qualifications is essential for approval. Once registered, NBFCs must adhere to a host of compliance requirements, including filing returns, implementing a Fair Practices Code, and maintaining robust corporate governance.

While the process can be challenging, the benefits of operating as an NBFC—including access to a vast market and opportunities for financial innovation—make it a worthwhile endeavor for businesses committed to adhering to regulatory standards.