Complete Guide to Setting Up an NBFC in India

The Non-Banking Financial Company (NBFC) sector is a critical component of India's financial ecosystem, providing credit and other financial services where traditional banks may not operate. For anyone looking to enter this industry, setting up an NBFC involves understanding various regulatory norms, compliance requirements, and the necessary documentation. This comprehensive guide will walk you through the essential steps, highlighting the latest updates from the Reserve Bank of India (RBI).

Types of NBFCs in India

Based on Type of Liabilities

• Deposit-Accepting NBFCs: These NBFCs accept deposits from the public, similar to banks. However, they are not allowed to issue bank notes or provide checking account facilities.
• Non-Deposit-Accepting NBFCs: These NBFCs do not accept deposits from the public but raise funds through other means, such as issuing bonds or debentures.

Based on Size

• Systemically Important Non-Deposit Holding Companies (NBFC-NDSI): These are large NBFCs that can pose a significant risk to the financial stability of the system.
• Other Non-Deposit Holding Companies (NBFC-ND): These are smaller NBFCs that do not pose a systemic risk.

Based on Activities

• Asset Finance Companies (AFCs): These NBFCs primarily engage in financing assets like machinery, vehicles, and equipment.
• Loan Companies: These NBFCs offer various types of loans, including personal loans, home loans, education loans, and more.
• Investment Companies: These NBFCs invest in securities, such as shares and bonds.
• Infrastructure Finance Companies (IFCs): These NBFCs specialize in financing infrastructure projects, such as roads, bridges, and power plants.
• Microfinance Institutions (MFIs): These NBFCs provide small loans to low-income individuals and groups, often in rural areas.
• Housing Finance Companies (HFCs): These NBFCs primarily focus on providing home loans.
• Merchant Banking Companies: These NBFCs offer various financial services, including underwriting, mergers, and acquisitions.
• Core Investment Companies (CICs): These NBFCs primarily invest in other companies.

Each type of NBFC is regulated differently based on its risk profile, asset size, and specific focus areas

Regulatory Requirements for NBFC Registration

The RBI has established a robust regulatory framework to ensure the stability and integrity of the NBFC sector. The key requirements for registering an NBFC in India include:

1. Minimum Net Owned Fund (NOF): The latest RBI guidelines have increased the NOF requirements in a phased manner:
   NBFC-ICC, NBFC-MFI, and NBFC-Factors: NOF requirements will increase to ₹10 crore by March 31, 2027. Currently, these companies need to have ₹5 crore (₹2 crore for the North-Eastern region) by 2025.
   NBFC-P2P, NBFC-AA, and NBFCs without public funds or customer interfaces continue with an NOF requirement of ₹2 crore
2. Company Incorporation: The entity must be registered as a Private Limited or Public Limited company under the Companies Act, 2013.
3. Directors' Experience: At least one director must have relevant experience in the banking or NBFC sector, emphasizing the need for professional expertise in managing NBFC operations
4. NPA Classification: The RBI has introduced stricter norms for classifying Non-Performing Assets (NPAs). NBFCs must adhere to a 90-day NPA classification norm by March 31, 2026. The phased approach aims to enhance risk management across all NBFC categories
5. Internal Capital Adequacy Assessment Process (ICAAP): NBFCs must conduct an internal assessment of their capital needs based on their business risks, aligning with the guidelines set for commercial banks. This requirement encourages better internal risk management techniques for NBFCs
6. RBI Approval: A detailed application, including the company’s business plan, audited financial statements, and other relevant documents, must be submitted to the RBI for approval.

Key Documents Required for NBFC Setup

Setting up an NBFC involves preparing and submitting a series of essential documents to ensure compliance with regulatory standards. The key documents include:

• Incorporation Certificate: Proof that the business is registered as a Private Limited or Public Limited company.
• Memorandum of Association (MOA) and Articles of Association (AOA): These outline the company’s objectives and operational guidelines.
• Detailed Business Plan: The business plan should include an overview of the NBFC’s strategy, market analysis, and financial projections.
• KYC Documents of Directors and Shareholders: Identity and address proofs such as PAN, Aadhaar, and passport copies.
• Audited Financial Statements: Financial statements for the past three years, validated by a certified Chartered Accountant.
• Net Worth Certificate: A certificate from a CA confirming compliance with NOF requirements.
• Bankers’ Report: A report from your banker detailing the company’s account status, creditworthiness, and available funds.

Conclusion

Establishing an NBFC in India is a promising venture that comes with regulatory complexities. The recent updates from the RBI, such as the increased NOF requirements and stricter NPA classifications, reflect the evolving landscape of the financial sector. By understanding the types of NBFCs, meeting the latest regulatory requirements, and preparing the necessary documents, aspiring entrepreneurs can navigate the registration process with confidence.

Consulting with financial experts or regulatory advisors can further streamline the setup process and ensure full compliance, positioning your NBFC for success in India’s dynamic financial market.

Source: https://nbfcadvisory.com/complete-guide-to-setting-up-an-nbfc-in-india/