How to start an NBFC

Obtaining a Non-Banking Financial Company (NBFC) license in India is a detailed process governed by the Reserve Bank of India (RBI). This process requires careful planning, adherence to regulatory standards, and preparation of a comprehensive application. Below is a detailed step-by-step guide:

1. Company Incorporation

Action: Incorporate a company under the Companies Act, 2013.
Specification: The company should have financial services as one of its main objectives.
Timeline: Varies based on the complexity of the incorporation process, typically 1-2 months.

2. Minimum Net Owned Funds

Action: Ensure the company has a minimum net owned fund (NOF) of ₹2 crores.
Specification: NOF is calculated as the difference between the amount of owned funds and the investments in shares of its subsidiaries, companies in the same group, and all other NBFCs.
Timeline: Must be achieved before applying for the license.

3. Open a Fixed Deposit

Action: Deposit ₹2 crores in a fixed deposit and obtain a ‘No Lien’ certificate.
Specification: The fixed deposit should be with a commercial bank.
Timeline: Can be done concurrently with Step 2.

4. Prepare for Application

Action: Gather all necessary documents, including company incorporation certificate, company articles and memorandum of association, details of directors, audited financial statements, bank account and fixed deposit details, business plan, and KYC documents.
Specification: Ensure all documents are accurate, current, and comply with RBI requirements.

5. Apply through COSMOS

Action: Submit the application for the NBFC license through the RBI’s online system, COSMOS.
Specification: Fill in the application form accurately and attach all required documents.
Timeline: Immediate submission, but preparation might take a few weeks to months.

6. Receive Company Application Reference Number

Action: Upon successful submission, you will receive a Company Application Reference Number.
Specification: Keep this number for future reference and tracking.

7. Hard Copy Submission

Action: Send a hard copy of the application and documents to the regional office of the Department of Non-Banking Supervision of the RBI.
Specification: Must be done within one week of the online submission.

8. Due Diligence and Inspection

Action: RBI conducts due diligence, which includes verifying documents and assessing the company’s business model, promoters, directors, and operational readiness to adhere to NBFC regulations.
Specification: Be prepared for possible queries or requests for additional information.
Timeline: This stage can take 3-6 months, depending on the RBI’s workload and the completeness of your application.

9. Grant of License

Action: If the RBI is satisfied with the due diligence, it grants the NBFC license.
Specification: The license is specific to the type of NBFC activity you proposed in your application.
Timeline: Typically, the entire process from application to license grant can take up to 6-12 months.

10. Fees and Other Requirements

Application Fee: There is no specified application fee, but the process incurs costs related to the preparation of documents, legal consultations, and operational readiness.
Annual Fees: Post-licensing, NBFCs must pay annual fees based on their asset size and type of operations.
Regulatory Requirements: NBFCs must adhere to RBI’s prudential norms, KYC guidelines, anti-money laundering standards, and specific regulations related to their operations.

11. Continuous Compliance

After obtaining the license, NBFCs are subject to continuous compliance and reporting requirements as per RBI guidelines. These include periodic financial statements, compliance with capital adequacy norms, and adherence to specific operational guidelines.

What are the various types of NBFCs

Feature/Type	Asset Finance Company (AFC)	Investment Company (IC)	Loan Company (LC)	Infrastructure Finance Company (IFC)	Microfinance Institution (MFI)	Housing Finance Company (HFC)
Primary Activity	Financing of physical assets supporting productive/economic activity (e.g., automobiles, tractors, lathe machines).	Dealing in investments (shares, stocks, bonds) without accepting public deposits.	Providing finance for any activity other than its own (excluding AFCs and ICs).	Providing credit facilities or loans to companies engaged in the development of infrastructure.	Providing small loans to the underserved or low-income population.	Providing finance for housing.
Minimum Net Owned Funds (NOF)	₹2 crore	₹2 crore	₹2 crore	₹300 crore	₹5 crore for MFIs wanting to qualify for NBFC-MFI status (₹2 crore otherwise).	The National Housing Bank (NHB) specifies NOF requirements, generally ₹10 crore.
Regulatory Body	Reserve Bank of India (RBI)	Reserve Bank of India (RBI)	Reserve Bank of India (RBI)	Reserve Bank of India (RBI)	Reserve Bank of India (RBI)	Primarily regulated by the National Housing Bank (NHB), though it must also follow certain RBI guidelines.
Deposit Acceptance	Cannot accept public deposits unless registered and specifically allowed by the RBI.	Cannot accept public deposits.	Cannot accept public deposits unless registered and specifically allowed by the RBI.	Cannot accept public deposits.	Cannot accept public deposits.	Can accept public deposits subject to regulations by the NHB.
Liquidity Ratio Requirements	Subject to RBI guidelines.	Subject to RBI guidelines.	Subject to RBI guidelines.	Must maintain a minimum of 15% of its net demand and time liabilities in liquid assets.	Subject to RBI guidelines, including maintaining a percentage of net assets in liquid form.	Must adhere to liquidity ratio requirements as prescribed by the NHB.
Credit Rating Requirement	Not mandatory, but beneficial for raising funds.	Not mandatory, but beneficial for raising funds.	Not mandatory, but beneficial for raising funds.	Must have a minimum credit rating of ‘A’ or equivalent.	Not mandatory, but beneficial for raising funds and regulatory compliance.	Credit rating may be required for public deposit acceptance and is regulated by the NHB.
Capital Adequacy Ratio	As prescribed by the RBI, typically around 15%.	As prescribed by the RBI.	As prescribed by the RBI, typically around 15%.	Required to maintain a minimum capital adequacy ratio of 15% of its risk-weighted assets.	Required to maintain a capital to risk-weighted assets ratio (CRAR) of 15%.	NHB prescribes the capital adequacy requirements, usually around 12-15%.
Focus Sector	Industrial, commercial, or consumer activities.	Investment in securities and other financial assets.	Broad, including personal loans, business loans, etc.	Infrastructure projects like highways, power, telecom, railways, etc.	Small-scale, unbanked, and underprivileged segments of society.	Primarily residential housing finance, but may also include commercial housing.
Special Regulatory Provisions	Must adhere to RBI guidelines specific to asset financing.	Must adhere to RBI guidelines for investment companies.	Subject to RBI guidelines specific to loan companies.	Subject to higher scrutiny and specific regulations due to the strategic importance of infrastructure financing.	Stringent regulations regarding loan recovery practices, interest rates, and operational methodology.	Regulated by the NHB with specific guidelines on funding practices, loan disbursement, and recovery processes.

What are the regulatory compliance requirements of an NBFC?

The following regulations are applicable for an NBFC:

Registration and Licensing: NBFCs must obtain a Certificate of Registration (CoR) from the RBI. They must have a minimum Net Owned Funds (NOF) of ₹2 crore, or as specifically prescribed for certain categories.
Capital Adequacy Requirements: NBFCs are required to maintain a minimum capital ratio, which is the ratio of NOF to risk-weighted assets. The standard requirement is 15% for most NBFCs, ensuring financial stability and risk mitigation.
Liquidity Ratio Requirements: NBFCs must maintain a high-quality liquid asset ratio, as stipulated by the RBI, to manage liquidity risk effectively.
Asset Classification and Provisioning Norms: The RBI mandates specific asset classification norms (Standard, Sub-standard, Doubtful, and Loss assets) and provisioning requirements to ensure that NBFCs maintain a healthy asset portfolio.
Income Recognition: Income recognition must be based on recognized accounting principles, ensuring that income from non-performing assets (NPAs) is not recognized on an accrual basis.
Corporate Governance: NBFCs are required to follow stringent corporate governance practices, including the formation of various committees (Audit Committee, Nomination Committee, Risk Management Committee) to oversee critical aspects of operations.
Customer KYC and Anti-Money Laundering Measures: Adherence to Know Your Customer (KYC) guidelines and Anti-Money Laundering (AML) standards is mandatory, involving customer identification procedures, monitoring of transactions, and reporting of suspicious activities.
Fair Practices Code: The RBI mandates the adoption of a Fair Practices Code for lending activities, ensuring transparency, fairness, and ethical behaviour in dealings with customers.
Public Deposits: NBFCs accepting public deposits must comply with specific regulations regarding the amount, tenure, and interest rates of deposits. They are also required to maintain a certain percentage of their deposits in liquid assets.
Branch Operations and Reporting: The RBI requires periodic reporting on various aspects of an NBFC’s operations, including financial statements, branch details, deposits, and loans. NBFCs must also report any new branches or changes in their network.
Information Technology Framework: NBFCs must implement a robust IT framework for the security and integrity of their digital operations, including data protection measures and cybersecurity policies.
Ombudsman Scheme: NBFCs are covered under the Ombudsman Scheme for Non-Banking Financial Companies, 2018, which addresses grievances related to certain services rendered by NBFCs.
Exposure Norms: The RBI sets limits on the exposure that an NBFC can have to a single borrower or a group of borrowers, aimed at diversifying risk and promoting sound risk management practices.
External Commercial Borrowings (ECB): For NBFCs looking to borrow from overseas, compliance with the ECB framework prescribed by the RBI is necessary, including end-use restrictions, minimum maturity periods, and reporting requirements.
Prudential Norms on Income Recognition, Asset Classification, and Provisioning Pertaining to Advances: Detailed guidelines on how NBFCs should recognize income, classify assets, and make provisions for advances to ensure transparency and accuracy in financial reporting.

What is a Non-Banking Financial Company or NBFC