The financial services sector in India is a well-organized system that includes banks, non-banking financial companies (NBFCs), insurance firms, mutual funds, pension funds, and other financial intermediaries. The framework is supervised by multiple regulatory bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA). Among these, NBFCs play a pivotal role in extending credit and providing various financial services to underserved sectors, especially where traditional banks may be limited in reach or flexibility. These organizations are structured as companies under the Companies Act and are regulated primarily by the RBI, depending on their type and operational model.
Categorization of the Different Types of NBFCs
The RBI has classified NBFCs into various categories based on the nature of their operations. These categories are inclusive, offering a glimpse into the diverse types of financial services available through non-banking channels.
Asset Finance Company
An Asset Finance Company is a financial institution that focuses on the financing of physical assets that support productive or economic activity. These assets typically include vehicles such as automobiles, tractors, and industrial equipment like lathe machines, generators, earth-moving machines, and general-purpose industrial machinery. The principal business of such a company revolves around the support of these tangible asset acquisitions, making them critical players in infrastructure and industrial sectors.
Investment Company
An Investment Company is a financial institution engaged mainly in acquiring securities. Its primary business involves investing in shares, bonds, debentures, and other market instruments. These companies help pool investor funds and direct them toward selected investment avenues to generate returns, essentially contributing to the capital market ecosystem.
Loan Company
A Loan Company provides finance to individuals or businesses in the form of loans or advances. Unlike Asset Finance Companies, Loan Companies do not focus on financing physical assets. They lend for a broad range of purposes such as personal needs, business operations, or working capital requirements. They offer more flexible financing options and can cater to customers who may not meet traditional banking norms.
Infrastructure Finance Company
An Infrastructure Finance Company is a specialized NBFC that supports the funding of large-scale infrastructure projects. To qualify, the company must deploy at least 75 percent of its total assets in infrastructure loans. It should maintain a minimum Net Owned Fund of 300 crore rupees, hold a minimum credit rating of ‘A’ or its equivalent, and maintain a Capital to Risk-weighted Assets Ratio (CRAR) of at least 15 percent. These companies are vital for the execution of high-value projects such as highways, power generation, airports, and urban development schemes.
NBFC-Factor
A company classified as an NBFC-Factor engages primarily in factoring business, which involves the financing of receivables. The financial assets related to factoring must form at least 50 percent of its total assets, and the income from factoring must also account for at least 50 percent of its gross income. Factoring is a financial transaction where a business sells its receivables to a third party (a factor) at a discount, helping businesses manage their working capital needs more efficiently.
Mortgage Guarantee Company
Mortgage Guarantee Companies provide guarantees to lending institutions against borrower defaults on housing loans. To qualify, at least 90 percent of their turnover or income should come from mortgage guarantee operations. Additionally, they are required to maintain a Net Owned Fund of not less than 100 crore rupees. These companies play an essential role in supporting the housing finance sector by enhancing the creditworthiness of borrowers and protecting lenders from potential losses.
Non-Operative Financial Holding Company
A Non-Operative Financial Holding Company (NOFHC) is a financial institution that acts as a holding company for a new bank and other financial services companies belonging to a promoter group. The NOFHC must be wholly owned and is allowed to hold equity investments in various financial entities such as insurance firms, asset management companies, and non-banking financial companies. The primary objective is to ensure financial and regulatory separation between the banking and non-banking arms of large corporate houses.
Systemically Important Non-Deposit Taking NBFC
These are non-banking financial companies that do not accept public deposits but hold total assets of 500 crore rupees or more, as shown in their latest audited balance sheet. Due to their significant scale of operations and influence in the financial system, they are subjected to stricter regulatory norms and risk assessment measures by the RBI. They are key players in credit delivery to retail, small business, and underserved sectors of the economy.
Benefits of Incorporating an NBFC
NBFCs offer multiple advantages for entrepreneurs and investors looking to participate in India’s evolving financial landscape. One of the primary benefits is the flexibility in offering competitive interest rates. In recent years, many NBFCs have been able to match or even beat traditional banks in terms of lending rates. This makes them attractive to borrowers seeking cost-effective credit.
Another notable advantage is faster loan processing. NBFCs generally have fewer eligibility constraints and offer quicker approvals compared to banks. This ease of access is particularly valuable for first-time borrowers and small businesses that may lack formal financial documentation.
NBFCs are also governed by a less stringent regulatory framework than banks, allowing them more room for innovation in loan structuring and credit delivery. Their regulations are still aligned with financial stability goals but offer more operational flexibility.
Additionally, NBFCs cater to individuals with poor credit scores who might be denied access to credit by traditional banks. Many such institutions use alternative data and modern credit assessment tools to evaluate risk, providing credit opportunities to financially excluded segments.
Overall, NBFCs are well-positioned to fill gaps in the formal financial sector, especially in rural and semi-urban regions where traditional banks may be less accessible. Their agility, customer-centric approach, and domain-specific expertise make them a crucial component of India’s inclusive growth story.
Incorporation of NBFCs Under the Companies Act
Non-Banking Financial Companies (NBFCs) in India must first be incorporated as companies under the Companies Act, 2013. The process begins with selecting a suitable company name and reserving it through the online filing of Form SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus). The name must reflect the core business of the NBFC, and ideally should contain a reference to finance or financial services. The chosen name is subject to approval by the Registrar of Companies and must be unique and compliant with naming guidelines.
Once the name is approved, the next step is drafting the Memorandum of Association (MOA) and Articles of Association (AOA). These documents define the company’s structure, objectives, and internal rules. The MOA must specify the principal business activities such as lending credit, financing, making investments in shares and securities, leasing, hire-purchase, and receiving deposits under permissible schemes. The incorporation application must be submitted with all supporting documents, including identity and address proof of directors and shareholders, proof of registered office, consent letters, and declarations.
The company must ensure that its Authorised Share Capital and Net Owned Funds are not less than two crore rupees. This financial threshold is critical as it forms the basis for the subsequent registration with the Reserve Bank of India. Once incorporated, the company receives a Certificate of Incorporation, a Corporate Identity Number (CIN), and becomes eligible to proceed to the next phase of registration.
Pre-Registration Conditions with the Reserve Bank of India
Before a company can operate as an NBFC, it must obtain a Certificate of Registration (CoR) from the Reserve Bank of India. The registration process is detailed and requires the company to fulfill several preconditions.
One of the key requirements is the Net Owned Fund criterion. The company must have a minimum Net Owned Fund of two crore rupees, calculated as the aggregate of paid-up equity capital and free reserves less accumulated losses and deferred revenue expenditure. The funds must be maintained in a fixed deposit in a scheduled bank and marked with a banker’s certificate indicating that the funds are free from any lien.
The company must also ensure that it has at least one director with experience in the field of finance or banking. Ideally, the full-time director should possess a background in NBFC operations or financial services management. The presence of experienced directors assures the RBI that the company is well-positioned to manage financial risk and regulatory compliance.
The company should also have a clean credit history. All directors must have satisfactory CIBIL scores and must not be associated with any entities declared as defaulters or blacklisted by financial regulators.
Additionally, the applicant company must be capable of understanding and complying with NBFC regulations. It should have a comprehensive business plan, organizational structure, and internal control systems to manage financial operations. If the company has already conducted any financial activities, it must provide clear documentation showing the cessation of such activities until registration is obtained.
Registration Process with the Reserve Bank of India
Once the company satisfies the pre-registration conditions, it may proceed to apply for registration as a non-banking financial company with the Reserve Bank of India. This process involves multiple stages, beginning with an online application followed by the submission of physical documents.
In the first stage, the applicant must visit the RBI’s secured portal for company registration. Here, the application form in Excel format can be downloaded. The form must be completed with accurate data relating to the company’s background, capital structure, directors’ details, shareholding patterns, and financial position. The completed form is uploaded through the portal, and a Company Application Reference Number (CARN) is generated. This reference number is crucial for tracking the status of the registration.
Once the online submission is complete, the company must print the application form and submit a hard copy to the concerned Regional Office of the Reserve Bank of India. This submission must be accompanied by all supporting documents, such as a certified copy of the Certificate of Incorporation, MOA,, and AOA, fixed deposit receipt, bankers’ certificate, directors’ educational and professional qualification certificates, financial projections, and declarations as required.
The company should ensure that it correctly indicates the name of the RBI Regional Office in the relevant field of the application form. Failure to do so may delay the processing of the application. The application is reviewed in detail by RBI officials who assess the company’s financial strength, promoter credibility, and operational readiness.
Throughout the review process, the company may be asked to provide clarifications or submit additional documents. The final decision is communicated to the applicant after a comprehensive evaluation, and upon successful verification, a Certificate of Registration is issued, authorizing the company to commence operations as an NBFC.
Exemptions from RBI Registration
Not all companies that engage in financial activities are required to register with the Reserve Bank of India. The RBI has exempted certain categories of institutions that are already regulated by other statutory authorities. This exemption is to avoid dual regulation and ensure coordinated supervision.
Entities such as Venture Capital Funds, Merchant Banking companies, and stock broking companies registered with the Securities and Exchange Board of India are not required to seek NBFC registration from the RBI. Similarly, insurance companies holding a valid Certificate of Registration from the Insurance Regulatory and Development Authority are also exempt.
Other exempted entities include Housing Finance Companies regulated by the National Housing Bank, Chit Fund companies governed under the Chit Funds Act, and Nidhi Companies recognized under the Companies Act. Mutual Benefit Companies and entities operating stock exchanges are also outside the scope of RBI registration for NBFC purposes.
However, these entities must limit their financial activities within the bounds of their primary regulatory framework. If they expand their services or modify their structure in a way that brings them under the purview of NBFC regulations, they may then be required to register with the RBI.
Key Documentation and Compliance for Registration
During the NBFC registration process, accurate and complete documentation is critical. The RBI mandates a list of documents to assess the applicant’s eligibility, legal compliance, and financial health. These documents include a certified copy of the Certificate of Incorporation, MOA, and AOA reflecting the company’s financial objectives, board resolution confirming that the company will not commence financial business until registration is obtained, and a banker’s report certifying the fixed deposit of two crore rupees held in the name of the company.
Further, the company must submit details of all directors, including their background, qualifications, experience in financial services, and CIBIL reports. If any of the directors have previously been associated with financial institutions, the company must furnish appropriate experience certificates.
The application must also include a fair practices code in line with RBI guidelines, a financial business plan for at least three years, and projected financial statements including income, expenditure, and balance sheet forecasts.
In addition, a certificate from a practicing Chartered Accountant verifying the Net Owned Fund position and confirming the source of capital contribution is mandatory. The financial statements for the last three years (if applicable), audit reports, and any evidence of existing financial business must also be enclosed.
It is the responsibility of the applicant to ensure that none of the promoters or directors are associated with entities that have defaulted on loan repayments or are involved in illegal financial activities. Non-compliance with these documentation requirements may result in rejection of the application or extended processing delays.
Post-Registration Compliance for NBFCs
Once an NBFC receives its Certificate of Registration, it must comply with several regulatory obligations to remain in good standing with the RBI. The company is required to maintain the minimum Net Owned Funds at all times and ensure the timely submission of statutory returns and financial statements.
The NBFC must also implement adequate risk management systems, maintain proper loan documentation, adopt a fair practices code, and establish internal audit functions. Any changes in the company’s shareholding pattern, capital structure, or directorship must be reported to the RBI within the prescribed time frame.
NBFCs are required to submit annual returns such as the NBS-1, NBS-2, and NBS-3 forms depending on their classification. They are also required to disclose their financial statements publicly and submit an auditor’s certificate annually confirming compliance with financial norms.
Failure to comply with regulatory requirements may attract penalties, suspension of operations, or even cancellation of the Certificate of Registration. Therefore, NBFCs must maintain transparency, follow ethical lending practices, and strengthen governance mechanisms to align with RBI’s prudential standards.
Post-Incorporation Steps for NBFCs
Once a company is incorporated and ready to operate as a Non-Banking Financial Company (NBFC), it must fulfill several critical post-incorporation requirements before seeking a license from the Reserve Bank of India (RBI). These steps are mandatory and help ensure regulatory compliance, business preparedness, and transparent financial operations.
Setting Up a Registered Office
After incorporation under the Companies Act, it is essential to establish a registered office from which the NBFC will operate. The address must be updated in all official documents, websites, letterheads, and communication platforms. This location should be accessible to RBI for inspection and correspondence.
Appointing Statutory Auditors
NBFCs are required to appoint statutory auditors registered with the Institute of Chartered Accountants of India (ICAI). These auditors play a vital role in reviewing the company’s financials, verifying capital infusion, and authenticating compliance with RBI’s financial norms.
Opening a Bank Account and Infusing Capital
The next step is to open a bank account in the name of the company and deposit the required Net Owned Fund (NOF). For an NBFC, the minimum NOF required is ₹2 crore. This capital must be infused by the shareholders and certified by a Chartered Accountant through a certificate that confirms the source of funds and that the amount is unencumbered.
Adopting an Internal Governance Framework
An NBFC must develop and implement an internal governance framework that includes board structure, compliance procedures, reporting lines, and financial management systems. These should align with RBI’s expectations for responsible lending, risk management, and data privacy.
Documenting Business Plan and Financial Projections
A comprehensive business plan is required that details the company’s financial services, targeted market segments, pricing strategy, expected profitability, and five-year financial projections. This document serves as a strategic roadmap and a key part of the RBI’s assessment of the applicant’s seriousness and viability.
Appointing Directors and Key Management Personnel
Directors and key managerial personnel (KMPs) must meet RBI’s “fit and proper” criteria. Their personal and professional information must be shared with RBI, including PAN, DIN, identity proofs, qualifications, work experience, and declarations confirming no criminal proceedings, disqualification, or financial misconduct.
Complying with KYC and AML Norms
NBFCs are expected to implement robust Know Your Customer (KYC) and Anti-Money Laundering (AML) practices. They must adopt the KYC Master Direction issued by RBI and ensure all customers are verified before services are rendered. This is critical for maintaining transparency and preventing illicit activities.
Filing Application for RBI License
Once the post-incorporation requirements are completed, the NBFC can proceed to apply for a license with the RBI. This process includes online submission and physical verification of documents.
Online Registration with RBI
RBI has launched the COSMOS portal for NBFC applications. The applicant company must register on the portal and submit the required application form along with scanned copies of the necessary documents.
Documentation Checklist for RBI Registration
The following documents are mandatory:
- Certificate of Incorporation
- Memorandum and Articles of Association (MoA & AoA)
- Board Resolution for NBFC Registration
- Banker’s Report confirming NOF deposit
- Statutory Auditor’s Certificate certifying NOF..
- Income Tax Returns and Audited Financials of promoters
- Detailed business plan and five-year projections
- Profile of promoters and directors with identity proofs
- Organizational structure with ownership pattern
- “Fit and Proper” declarations by directors
- Net worth certificate of each shareholder and director
- Source of funds statement from each shareholder
- Credit reports of directors from all credit bureaus
- KYC policy and IT policy of the company
All these documents must be correctly compiled and verified to ensure there is no delay or rejection during scrutiny.
Physical Submission of Documents
In addition to online uploading, hard copies of the complete application set and supporting documents must be sent to the Regional Office of the RBI under whose jurisdiction the registered office of the company falls.
RBI Scrutiny and Follow-up
Once the application is submitted, RBI initiates a thorough due diligence process. It examines the company’s structure, source of funds, business model, and compliance with RBI norms.
Background Verification
RBI may verify the personal and financial backgrounds of promoters and directors, examining their credit history, litigation status, and regulatory compliance. Any past violations or defaults could negatively impact the licensing outcome.
Inspection and Clarifications
RBI may also inspect the registered office or ask for further clarifications or documentation. Prompt and transparent responses to such inquiries are essential to keep the process on track.
Grant of Certificate of Registration (CoR)
If satisfied with all compliance and documentation, RBI will issue a Certificate of Registration under Section 45-IA of the RBI Act, 1934, permitting the applicant to operate as an NBFC. The CoR will also specify whether the NBFC is allowed to accept public deposits or operate as a non-deposit-taking NBFC.
Conditions Imposed by RBI
Even after registration, the NBFC must comply with ongoing conditions such as:
- Not accepting public deposits unless permitted
- Following the Fair Practices Code
- Maintaining a minimum CRAR (Capital to Risk-weighted Assets Ratio)
- Filing periodical returns with RBI
- Adhering to Prudential Norms
Failure to meet any of these obligations may result in penalties, license suspension, or cancellation.
Validity and Renewal of License
The Certificate of Registration granted by RBI does not have an expiry date. However, the NBFC must continue to comply with evolving regulations. If the RBI introduces any new eligibility criteria or compliance rules, the NBFC must upgrade its systems and file necessary reports or applications for updated approvals.
Post-Licensing Compliance Obligations
1. Fair Practices Code (FPC)
Every NBFC must frame and implement a Fair Practices Code that governs its lending policies, customer interactions, and grievance redressal mechanisms. The FPC must be approved by the board and published on the company website. It ensures ethical conduct and transparency in operations, particularly with retail borrowers.
2. Prudential Norms Compliance
NBFCs must comply with the RBI’s prudential norms covering:
- Income recognition (based on actual realization, not accrual)
- Asset classification (Standard, Sub-Standard, Doubtful, Loss)
- Provisioning for NPAs (Non-Performing Assets)
- Capital Adequacy (maintaining a minimum CRAR of 15%)
These norms ensure financial stability and risk management within the company.
3. Maintenance of Net Owned Fund (NOF)
An NBFC must consistently maintain the minimum required Net Owned Fund (₹2 crore for general NBFCs). Any dip below this threshold can invite scrutiny or regulatory action.
Regulatory Returns and Filings
NBFCs must regularly file various returns with the RBI through the COSMOS online platform. These include:
1. NBS-1 Return
Filed quarterly, covering financial statements, asset profile, capital adequacy, and exposure limits.
2. NBS-2 Return
Provides information about the company’s compliance with prudential norms.
3. NBS-3 Return
For deposit-accepting NBFCs, detailing liquid assets held to cover deposits.
4. NBS-4 Return
Filed by companies whose CoR has been rejected or canceled but who hold public deposits.
5. Auditor’s Certificate
Annually submitted to confirm NOF maintenance and compliance with RBI guidelines.
6. Statutory Auditor’s Certificate on FDI
Required for NBFCs with Foreign Direct Investment, confirming compliance with minimum capitalization norms.
7. Annual Return on Foreign Liabilities and Assets (FLA)
Mandatory for all NBFCs with foreign investment or overseas liabilities.
Periodic Audit and Governance
Board Meetings
NBFCs must hold board meetings regularly and review key functions such as risk management, internal audit reports, and customer grievance mechanisms.
Internal Audit
An independent internal audit function must monitor adherence to operational and financial controls, ideally conducted quarterly or semi-annually.
Statutory Audit
Annual audits must be conducted by a registered Chartered Accountant to certify the books of accounts and verify compliance.
Key Compliance Areas
1. KYC/AML Compliance
NBFCs must strictly follow the RBI’s KYC Master Directions, including:
- Customer identification
- Risk profiling
- Enhanced due diligence for high-risk clients
- Reporting of suspicious transactions to FIU-IND
Non-compliance could result in heavy fines or reputational damage.
2. Corporate Governance
Large NBFCs (especially those with asset size over ₹500 crore) must comply with enhanced corporate governance norms, including:
- Constitution of Audit Committees
- Appointment of independent directors
- Rotation of statutory auditors
- Implementation of the Risk Management Committee
3. Complaint Redressal Mechanism
NBFCs must set up grievance redressal systems and designate a Nodal Officer for resolving customer complaints. Details of escalation must be displayed prominently at all branches and on the company’s website.
RBI Inspections and Supervision
The RBI conducts periodic on-site inspections under the powers conferred by the RBI Act, 1934. These inspections are focused on:
- Asset quality
- Loan portfolio
- Financial soundness
- Governance standards
- Statutory compliance
The inspection reports may lead to advisory notes or formal directions. NBFCs are expected to act promptly on any such recommendations.
Grounds for Cancellation of NBFC License
The RBI may cancel the NBFC’s Certificate of Registration under any of the following circumstances:
1. Failure to Commence Business
If the NBFC fails to commence business within six months of registration, the RBI can cancel the license.
2. Non-Compliance with NOF Requirements
Failure to maintain the minimum Net Owned Fund consistently could attract cancellation.
3. Engaging in Prohibited Activities
NBFCs are barred from certain activities like trading in goods, agriculture financing (without specific approval), or unauthorized deposit-taking.
4. Violation of RBI Directions
Repeated or willful non-compliance with RBI’s instructions may result in regulatory action.
5. Misrepresentation or Fraud
If the RBI discovers that the registration was obtained through misrepresentation, fraud, or concealment of facts, the license can be revoked.
6. Non-Filing of Returns
Failure to file the required returns consecutively or falsification of returns may lead to license suspension or cancellation.
7. Public Interest or Policy Grounds
RBI also holds the right to cancel the license if it believes it is in the interest of the public or financial system stability.
Post-Cancellation Obligations
Even after cancellation, the NBFC:
- Must repay all outstanding public deposits, if any
- Cannot engage in lending or financial business
- Must submit a final winding-up report to the RBI
- May be subject to legal action for any unresolved violations
Conclusion
Running a financial services organization as an NBFC involves more than just obtaining a license, it is a sustained journey of compliance, transparency, and accountability. Proper adherence to RBI norms, timely filings, ethical business practices, and corporate governance will not only prevent regulatory action but also build long-term credibility and investor trust.
With evolving RBI guidelines and increasing supervision, NBFCs must be proactive in staying informed, upgrading internal systems, and embracing compliance as a strategic pillar not a regulatory burden.