The RBI has granted the NBFCs their authorization to broaden its footsteps for participation in the insurance sector or related businesses. NBFCs have not yet been authorised to act in an autonomous framework. The launch of NBFCs in insurance business helps insurers stabilise their capital and satisfy extra needs provided by IRDAI.

The non-banking finance companies are financial institutions that lend money and provides financial assistance to lower-income groups and small businesses, but they are not banks. They are approved by RBI, through the NBFC Registration process. NBFC Registration is mandatory and they must adhere to the provided RBI guidelines. NBFCs are significant for the infrastructural development projects in India, and they contribute largely to the Indian economy. The government of India provides them additional benefits and relaxation to work efficiently.

In this article, we will enlighten you, on the topic of NBFC Incorporation in the insurance sector, eligibility criteria, and intent of new NBFCs to enter the insurance sector business.

What Are the Major Requirements For NBFCs To Enter In Insurance Businesses?

The NBFCs or any other private lender are not allowed to operate outside the authoritarian regime. In order to operate the insurance business smoothly, NBFCs are necessary to obtain mandatory consent of RBI and IRDAI.

Insurance Agency Business

RBI approved NBFCs can get into business as insurance agencies on the basis of a fee and risk involvement, which covers the following conditions:

• In that situation, NBFCs need IRDAI’s obligatory authorisation to serve as an insurance company composite agent;
• There is no need for RBI permission;
• In the area of funded assets, NBFCs shall not constrain customers’ interests to work with alternative agencies;
• Since the acceptance of insurance products is voluntary, advertising material should be indicated in the NBFCs;
• NBFCs are not supposed to associate clients with financial services provided;
• The insurance premium must go to the insurance company instead of NBFC;
• NBFCs are not accountable to share risk in the insurance business.

Insurance Joint Ventures

• Those NBFCs which comply with all the requirements and are committed to establishing a joint venture based on risk participation should use RBI authorization to ensure continuance. 
• The same applies to those NBFCs seeking major insurance company investments.
• NBFCs may own up to 50 per cent of the paid-up capital from the insurance company in the Joint Venture, but no engagement in the insurance company is possible as a subsidiary of the NBFC or a different company in the same area of interest.

What are the Eligibility Criteria for the Participation of NBFCs in the Insurance Business?

The below listed eligibility criteria must be met by NBFCs for participation in the insurance sector:

• The NBFC shall have under its own control at least 500 crore rupees fund;
• The insurance company cannot enter an NBFC with public deposits unless its CRARs (Risk Capital Assets Ratio) are greater than 15%. 
• The conventional NBFCs with no public deposit ownership should maintain more than 12 per cent CRAR (Risk Capital Assets Ratio);
• The NBFC restriction on NPA’s non-recurring total assets such as loans, recruitment, etc. shall not be more than 5%;
• Net owned funds subordinate NBFCs are seeking certain investment under RBI;
• For the last three years, NBFC shall not be subject to any financial loss;
• Public deposits and conformity with regulations, when kept.

Failure to meet the eligibility criteria, What’s Next?

If NBFC is not eligible as per the above listed eligibility criteria, then NBFC can make ten per cent of the owned fund of fifty rupees investment, whichever is less in the insurance company.

Such financing should be considered as a non-contingent NBFC liability investment.

The eligibility criteria for these groups of NBFC are as follows:

• CRARs (Risk Asset Capital Ratio) of a minimum of 12 per cent should be available to NBFCs with public deposits and involving the purchase of equipment such as leasing and renting services.
• On the other hand, a CRAR of 15% must be available for NBFC dealing with loan/credit service; 
• Maximum net NPA should amount to 5% of the total outstanding assets and loans.

Deposits Acceptance Rule

The laws concerning acceptance for NBFC of public deposits provide for exemption from the relative deposit of the director. The financing cannot, however, be directly redirected to the NBFC unless a depositor requests it. In order to ensure transparency, non-Banking financial companies subject to authority provision should provide crucial data on each incoming deposit.

The aforementioned provisions would be considered violated, in the situation of an infringement on the date of acceptance of the notice of such relationship between directors and depositors.

Scope for Participation of smaller NBFCs in Insurance Business Sector

The Reserve Bank wants to add as many NBFCs to the insurance company. Should the NBFC not be substantial enough, it can still be an insurance agent for the insurance companies. This also allows smaller NBFCs to enter the market without any risk. This is also possible. It protects small NBFCs and enables them to work in the insurance market at the same time.

End Note

The Indian Insurance industry is progressively flourishing, with all insurance types in the nation being subject to the demand and supply cycles. This has contributed to NBFCs’ growth metre for this industry.

Their growing interest in the Indian insurance sector will ensure new product designs and simple access to distribution channels further speed up the expansion of the insurance industry. In addition, government policy for private operators has been liberalised, such as NBFCs.  The Indian Parliament’s recent resolution opened the way to raise FDIs in the insurance business and therefore generate more employment opportunities, enhance customer service and compete.

There are more than enough reasons to migrate into the insurance industry for non banking finance companies newcomers. As NBFCs participate in the insurance industry, they are able to maximise their growth graph in a short period. The bulk of new firms are thus trying to enter the insurance market through NBFC registration. 

It is interesting to watch, how NBFCs will take this opportunity to raise their business and how they will convert this situation into a win-win condition.

The post An Assessment on NBFCs’ Insurance Business Participation appeared first on MUDS.

What are Microfinance Companies?

Microfinance Company or Institution (MFI) operate at a smaller level compared to NBFCs. It serves the similar motive of NBFCs that is, providing lending services to the underprivileged and impoverished sections of the society that do not have an access to traditional banking facilities. MFI lends small funds to the poor people that vary from Rs. 1000 to 20000 for starting a business. There have been complaints of MFIs regarding irregularities in their functioning as they charge relatively higher interest rates than the NBFCs. Besides, it mainly indulges in giving loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation.

How they Differ from NBFCs?

The state governments have taken some steps to convert MFIs into NBFCs to ensure better regulation by RBI. Also, MFIs wants to get NBFC status because they will get access to wide-scale funding from banks. 

Both NBFC and Microfinance Companies play an important role in rural areas. Where there is an absence of banks, the Non-banking financial institution can perform similar functions like a bank. Although, Non-Banking Financial company cannot issue checks drawn on itself it can facilitate term deposits and medium scale lending. On the other hand, MFI stands for Microfinance institutions which are established to operate at a smaller level than NBFC and provide small loans facilities to the underprivileged sections of the society. Unlike NBFCs, the MFIs are not regulated through any financial institution of the government.

Advantages of Opening an NBFC

• Ensures the smoother flow of credit for small debtors and so acts as an important tool of maintaining accuracy in the market. 
• Catering to a variety of clients in online/offline mode with a relatively smaller size of staff..
• Reduces load on other lenders and hence loan processing time is also reduced leading to an overall increase in efficiency of the lending process. 
• Reduces the risk of lending bad loans as the profile of a customer is analysed by NBFCs before considering them eligibility for the loan.

Getting NBFC License in India

The procedure to get the NBFC license is completed according to the master directions given by the Reserve Bank of India. The NBFC of this category should not have any client interface or a public fund. Let us understand the process of registration in the following section.

Eligibility Criteria for NBFC License and Registration

• The first step to be followed is the registration of the company according to the Companies Act, 2013.
• The company must have some fundamental infrastructure that can support the offering of such services. 
• The company must have an adequate capital structure to seamlessly offer account aggregator services. 
• The general image of the company’s administration should be free or unbiased of public intrigue.  
• A prerequisite amount of Rs. 2 crores are required to apply for getting the certificate of registration from RBI. Without getting the registration certificate the company won’t be allowed to operate as an NBFC. 
• The company should provide information related to its data innovation framework that can provide services of account aggregation. 

It is recommended that new entrepreneurs should reach out to firms specializing in the registration process. These firms have experts who can help the customers to get their NBFC license easily. Hiring an expert will help to compile all the necessary documents, filing the Application correctly, and getting all the verification and paperwork done on time. So, do not wait any more, just hire an expert from any reputed firm and get your NBFC license as soon as possible.

The post NBFC Vs Micro Financing Institution: Things to Know before Setting Up Finance Company appeared first on MUDS.

As per RBI, the above step was taken to ease the operational flexibility of the NBFCs by following the principle of “Activity-Based Regulation” in place of the traditionally followed “Entity Based Regulation” policies. The NBFC-ICC so formed resulted in the merger of similar activities conducted by three different institutions which led to an increase in robustness and flexibility of operations under a single window.

If you are looking for information on how the new NBFC-ICC is beneficial or what is the reason behind the merger of three different categories of non-banking financial institutions, then read on to find out the answers. Here we will understand,

• What is NBFC-ICC and How It Came into being?
• Why creating an NBFC-Investment and Credit Company by Merging three NBFCs was necessary? 
• What is the current scope of opening an NBFC-ICC in Indian Market?
• How to start an NBFC-ICC in India and what is the NBFC registration process?

If you are a new investor and looking to set up your own NBFC to lend and finance then you must continue reading as it will clear all your doubts and also inform you how we at MUDS can help you grow as a new NBFC-Investment and Credit Company in India.

How NBFC-Investment and Credit Company Category Created?

The new category of NBFCs names as NBFC-Investment and Credit Company came into being by a notification from RBI last year.  The story behind the creation of the new category is as follows,

To harmonize regulation of different categories of NBFC by activity (which were earlier regulated entity wise), the RBI formed a committee on Comprehensive Financial Services for Small Businesses and Low-Income Households which was chaired by Dr Nachiket Mor. RBI also created an internal committee chaired by Shri G, Padmanabhan. These committees submitted their reports in January 2014 and April 2014 respectively suggesting that harmonization of various categories of NBFCs based on activity was needed. 

So, last year RBI decided to merge three categories of NBFCs which cover 99% of the no. of NBFCs in India. These categories were Asset Finance Company, Investment Company and Loan Company. We will study about these categories in the following section. To make the newly formed NBFC category clear to investors and borrowers, RBI came out with the following definition,

“Investment and Credit Company – (NBFC-ICC)” means any company which is a financial institution carrying on as its principal business – asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities; and is not any other category of NBFC as defined by RBI in any of its Master Directions.

The idea behind the creation of this new category was to give NBFC-ICC more freedom to allocate its assets. This has led to flexibility in the operation of NBFCs in this category and made the operation of lending and finance efficient. Lets study in more detail about the need for this merger and formation of the new category and what are its benefits. 

Need for a New NBFC Category and Related Reforms

Many of you might be wondering why RBI changed its regulation approach from entity-based to activity-based and why the new category of NBFCs was created? To understand the answer to these questions we must understand the no. of NBFCs in India, how they operate and how RBI conceptualised that operations of these NBFCs could be made flexible. 

Nearly 10000 NBFC are operating in India as of now. Out of these, almost 90% NBFCs are non-deposit NBFCs and rest are deposit taking NBFC. The RBI deduced that having too many NBFC categories is creating a high compliance cost for the NBFC sector and a reform was needed to reduce the no. of categories or create broader categories to accommodate more NBFCs and ensure freedom of operation for the companies. This thought led to the introduction of the merger of three categories of NBFC into one by RBI last year. To understand how this merger helped NBFCs from these categories, let us understand in brief about the operation the NBFCs from the three categories.

Asset Financing Companies (AFC): An asset financing company can be defined as an institution that finances the manufacturing companies to invest in buying physical assets to create products. These assets support the productivity of the manufacturing units and are responsible for the main economic activity of any manufacturing facility. Some examples of such assets include tractors, automobiles, lathe machines, earthmoving machines, generators, material handling equipment, supply chain equipment, and other industrial machines. These companies are essential to support the business of small and medium enterprises in case of emergency or to upgrade their manufacturing plants.

Loan Company (LC): The principal business of a loan company is defined as providing finance to borrowers in the form of loans and advances.  These loans are assets of these companies and could include personal loans to borrowers in need of emergency loans. This category doesn’t include asset financing and therefore, these companies cannot finance businesses for buying manufacturing equipment or industrial machinery. This obviously created lack of freedom among these companies as they needed the borrower to specify the reason to avail the loan. Also, granting large loans wasn’t possible for these companies as people generally took to them for small emergency loans. 

Investment Companies (IC): The principal business of these types of companies was to acquire securities by investment. The securities thus acquired were assets for these companies which helped in bringing revenue for their operations. 

The objective of Harmonization of Categories

The objective of merging these three categories of NBFC was to impart greater operational flexibility to them. After the merger of categories, these institutions were under the same set of regulations as they were now operating under NBFC-ICC category. Although their principal area of business and sources of finances varied, the same set of regulations gave them the liberty to increase their business and reach a wider audience. The principal business criterion set for AFC in this category was calculated as the total of real/physical financing assets that supported their financial activity and its income. It was expected that this should not be lower than 60% of the total assets and income for any AFC. After harmonization, this principal business criterion was lowered to 50% of total assets and income for all the three categories which helped these businesses. Now, after the merger of categories, the broad head of the NBFC under RBI could be classified into three categories:

• NBFC-ICC
• Mutual Benefit Financial Company (MBFC)
• NBFC-Factor

The RBI also capped the investment limit for deposit-taking NBFC-ICC to 20% of their owned funds which can be invested in unquoted shares of any other company which is not the same group company or subsidiary company. The text of the regulation from RBI said:

“40. Restrictions on investments in land and building and unquoted shares

(1) No NBFC-ICC, which is accepting the public deposit, shall invest in

a. Land or building, except for its own use, an amount exceeding ten per cent of its owned fund;

b. Unquoted shares of another company, which is not a subsidiary company or a company in the same group of the non-banking financial company, an amount exceeding twenty per cent of its owned fund.

Provided that the land or building or unquoted shares acquired in satisfaction of its debts shall be disposed of by the non-banking financial company within a period of three years or within such period as extended by the bank, from the date of such acquisition if the investment in these assets together with such assets already held by the non-banking financial company exceeds the above ceiling;”

To summarize, we can say that this harmonization was needed to bring better administration with uniformity of norms for NBFCs. This new categorisation has also brought a huge number of NBFCs in the category of NBFC-ICC and so the operation of a large section of the NBFC is under the regulation of common norms and regulation. This will, of course, facilitate the business of this sector and make the lending and investment process efficient. Now let us understand the business and advantages of NBFC-ICC before moving to the process of their registration. 

Advantages of Registering as a New NBFC-ICC in India

1. Venturing into Financial Market of MSMEs

Many experts believe that the NBFC-Investment and Credit Company could play a vital role in the development of Indian economy. The NBFC-ICCs are could become a key player for facilitating the development of the small business or MSMEs financing markets. Most of the MSMEs are looking for small loans for their businesses which they may not get from big banks due to the strict norms or other unavoidable reasons. Now, due to ease of regulation brought by RBI, the AFC in the new category of NBFC-ICC can lend loans to these small businesses to restart their economic activities in the tough financial situation created by COVID-19. The Government has also facilitated credit flow to the NBFC-ICC to maintain liquidity which can further help the small business without facing any cash crunch. 

2. Low-Cost Loans for All

Various reports across the country have indicated that despite having branches of regional rural banks spread across the country and other banks trying to reach the far hinterlands of India, the financial inclusion among small towns and rural areas remains low. The credit deficit in such areas could be easily managed by NBFCs as they won’t need high-grade infrastructural support to operate their business-like banks. The cost required for NBFCs to operate in such areas is very low and therefore, they can easily have a physical presence in such areas compared to a large bank. Many NBFC-ICCs are rapidly expanding their business to many small towns in India and offering loans at a reduced interest rate to small businesses. This shows the contribution of NBFCs toward increasing financial inclusion and development of the population in small towns and rural areas. We all know that NBFC-ICC can provide loans at a lower rate to the borrower to get for their businesses or any other personal activity. 

3. More Finance Options

The requirement of small businesses differs from that of large corporates. Hence, the loan requirements for different activities also differ for small enterprises. Mostly these enterprises need small loans to meet a temporary shortfall of cash. These could include paying salaries to the employees, executing a large order suddenly, or in research and development. The larger banks have plans that rarely if ever cater to the needs of these small businesses and are mostly focussed on the requirement of large corporates. Whereas, the AFC or LC under the NBFC-ICC category can have an assortment of plans that can meet the requirement of these small vendors, merchants, and distributors to buy assets for their business. This also leads to increased financial engagement of small business owners in the financial market. 

4. Increased Credit Supply

Gone are the days when credit supply was the sole responsibility of the banks and other bigger financial institutions. These big organisations follow inflexible policies to finance a small business or give small loans that have acted as a roadblock to access the large part of the Indian population with a humble background. The alternative credit supply chain created by many financing companies that are now NBFC-ICC has led to financial inclusion of the lower class of society.  These lenders have also reduced the loads from banks to cater to every section of society. Also, these lenders work with relatively smaller infrastructure and so they can reach to the far hinterlands of India easily compared to banks.  

5. Increased Research and Development in Small Business

Banks had a restraining policy towards small businesses as they were termed as potentially the riskier clients. The small business could not come back from any sudden downfall in business and so, were not eligible for loans from most of the banks. Also, these businesses refrained from investing in Research and Development due to lack of financial support which led to delay in up-gradation of machinery in their factories. The AFCs have flexible norms to lend loans to small business and offer cheaper interest rates that make paying off the loans easy for these businesses. This has led to the financial inclusion of the small business who were traditionally kept out of the purview of the organized credit system. 

In the above sections, we saw how India’s financial market has high growth potential and with a high influx of investment by various lenders, the future of NBFC-Investment and Credit Companies looks bright. To the investors we can only say, it is a great opportunity to take advantage of the growth potential of this market, many investors are multiplying their income by reinvesting their returns from their NBFC investments. Due to the current dim situation created by COVID-19, the Indian business sector needs finance. The Indian government is also focussing on maintaining liquidity in the market and therefore the NBFC-ICCs are currently getting ample support to thrive in the Indian financial market. This marks a great opportunity for all the business owners who want to start their new Non-Banking Financial Company in India. The process for registration as a new NBFC-ICC is given in the following section. 

MUDS Management Consultancy Firm helps new businesses to start as a new NBFC-Investment and Credit Company in India.  We offer complete guidance to new business starters on the procedure to open a new Asset financing NBFC or a finance company specializing in lending loans or investment only. All three types of companies can be registered as NBFC-ICC with the Reserve bank of India. 

Read on to understand how to start a new NBFC-ICC in India and how we can help you throughout the process of registration. 

Read Also: Pros and Cons of NBFC Business in India

Procedure to Start NBFC-ICC in India

Now, let’s understand the procedure of starting a new NBFC in a step by step manner. 

• Register Your NBFC Under the Companies Act, 2013: Start by registering your NBFC as a public or private company with the government. 
• Raise Authorized Paid-up Capital of Up to Two Crores: The company must raise an authorized and paid-up capital of about 2 crores to meet the required standards of registration.
• Depositing the Sum in Bank and Getting Certificate: After raising this sum the company is required to open a fixed deposit account in a bank and deposit the money. After this, they must obtain a Certificate of no lien from the bank to move forward with the process of registration. 
• Getting All the Certified Copies to Complete the Checklist of RBI Registration
• Fill Online Application: Once you have all the documents ready for registration, fill the online application form for NBFC registration. After filling the form, the company will get an autogenerated Company Application Reference Number or CARN which will be used as a reference number in all further communication with RBI. 
• Submit the Hard Copy of Application to RBI’s Regional Office: After filling the online application form and getting the CARN for your company, the physical copies of all the necessary and supporting documents must be compiled with the application form and should be submitted to the regional RBI Office to complete the process of registration. 

Documents Required for Registration as a New NBFC-Investment and Credit Company:

• ID Proof (Could be Aadhar Card, Voter ID Card, Passport or Driving License)
• Copy of PAN Card
• Passport Size Photos 
• Address Proof (Bank Statement, Telephone bill, Mobile Bill, and Electricity Bill)
• Ownership Documents or Rent Agreement for office space
• Electricity bill
• Certified Copy of Certificate of Registration
• A copy of Fixed Deposit receipt and bankers’ certificate of lien indicating balances in support of Net Owned Funds.
• Bankers Report for Applicant Company/ group companies
• Certified copy of an extract of the main object clause in the MOA (Memorandum of Association) relating to the financial business.
• Certified Copy of the Board resolution
• No Objection Certificate from the owner for rented property
• CIBIL records of all shareholder (more than 10% share in Company) and directors
• Education & Experience proof of promotors
• Net worth certificate of directors and shareholders

Some of the documents required may change depending upon the nature of the business of your new company. You can contact us on the details mentioned at the end of the article to understand the process specific to your business.

How Muds Management Assists in Registration of New NBFCs?

Now, it is understood from the above sections that any new company trying to enter the business of financing in India must start by registering itself as an NBFC-ICC with the Reserve bank of India. The process for the same is outlined in the above sections. However, this process could become cumbersome and time taking for founders of the new NBFCs, and therefore, taking assistance from MUDS management helps them in saving time and the hassle of the registration process. This also becomes necessary as registering in different categories of NBFC may require a different approach so consulting a firm specializing in the registration of businesses is a good idea. 

Already one of the best management consulting service providers, MUDS Management has worked with top NBFCs in India to streamline the process of their registration and other legal formalities. With the experience of assisting many clients in legal and regulatory services across different domains, you can rely on MUDS Management to get the best services for your business. You can reach out to MUDS Management Consulting for assistance on new NBFCs registration by contacting them on +91 9599653306 or by email on info@muds.co.in.

The post Everything You Need to Know about NBFC-Investment and Credit Company appeared first on MUDS.

NBFCs have created a niche for themselves as they have aggressively strategized to fill in the gap that exists between the banks and the public. They have diversified interests and are mainly engaged in loans and advances, acquisition of shares and stocks, insurance, leasing, hire-purchase, deposits, etc. Their customer-friendly approach combined with attractive rates of return and great flexibility has worked well in their expansion at a good pace.

The NBFCs are governed by the RBI, under the Reserve Bank of India Act, 1934, and time to time guidelines and directions issued by it.

If you are inclined towards exploring this space, then you should be aware of the factors that need to be fulfilled and followed for the Incorporation of an NBFC.

1. The very first step should be registration of the said company under the Companies Act, 2013 or Companies Act, 1956, as a Private Limited Company or Limited Company.
2. The company should have a minimum Net Owned Fund (NOF), which should be calculated as per RBI definition, of Rs. 200 lakhs. (Equity Share Capital, not Preference Share Capital)
3. Open a bank account, keep a sum of at least Rs. 200 lakhs, free of any liens.
4. At least one full-time director should be from a banking or NBFC background.
5. The CIBIL record should be clean.
6. Apply for Certificate of NBFC Registration online. The checklist of documents that needs to be submitted to the RBI is stated here-

• Certificate of Incorporation, issued by respective ROC.
• Certified copy of the MOA of the extract of main object clause explicitly depicting the financial business.
• Board resolution stating:

1. The company is not carrying any NBFC activities and will not be indulging in any such activities before getting NBFC registration with RBI.
2. It is adhering to the ‘Fair Practice code’ as laid down by the RBI guidelines.
3. It is not in the business of accepting public funds; has never held such funds and does not intend to do so in the future too, without the approval of RBI.
4. It has no public interface to date and will not begin one in the future unless approved by the RBI.

• Companies already in existence need to present an audited Balance Sheet along with a Profit & Loss Account for the entire period of its existence or last 3 years (whichever is less). In addition, directors’ and auditors’ reports also are submitted.
• Directors the highest educational and professional degree.
• Directors experience certificate specifying financial and banking exposure.
• Fixed deposit receipts along with banker’s certificate indicating balances supporting minimum NOF.

Read Also: Pros and Cons of NBFC Business in India

Once the application is duly filled and submitted, RBI will review it and may seek clarifications or additional documents, if needed. Once completely satisfied, RBI will grant a Certificate of Registration to the company to carry on as an NBFC.

This is a broad outline of requirements for NBFCs to be incorporated and registered but in actuality, there are more intricate details related to it, depending on the category of NBFC you want to register.

“The pundits of the financial world feel that this is the opportune moment to register for NBFCs as there is a lot of scope of capturing a market which is in its infancy.”
–Shweta Gupta, Founder, and CEO, MUDS

The post Influx of NBFCs- Easy Procedure, Flexibility & Low Operative Costs: Decode the Checklist! appeared first on MUDS.

The procedure for incorporation of NBFC under Companies Act 2013 has been further made easy. The streamlining being done is as follows:

• Now an NBFC can be directly registered with MCA.
• No prior approval is required from RBI.
• RBI comes into picture only post the incorporation of the NBFC.
• Without receiving the NBFC license from RBI, one can now begin the lending business in our country.
• The registration procedure would only begin once the name of the proposed company receives approval.
• It should be seen in Inc-1 that the objective of the company should be financing.

“Establishing an NBFC is neither very difficult nor challenging. The governing body has provided much liberty to boost the NBFC business currently. For an effortless functioning of the entire financial system, control and supervision are required.”
– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

As per section 251(c) of the RBI Act, any organization dealing with the business of any financial institution would be considered as an NBFC. Both the Reserve Bank of India as well as the Ministry of Corporate Affairs govern an NBFC.

A few exceptions that do not need to obtain any registration from the Reserve Bank of India are as follows:-

The various Core Investment Companies whose assets are valued at less than one hundred crores or in case their public funds are not taken.

• Organizations that are involved in the business of Venture Capital and stock-broking.
• The Merchant Banking Companies
• Housing Finance Companies and Nidhi Companies
• The insurance companies having an IRDA certificate of registration.
• Incorporation of NBFC

The NBFC procedure is as follows:-

• The company ought to be registered first either under the Companies Act 2013 or the Companies Act 1956.
• The company should have a minimum of two crores net owned funds.
• The company should at least have a full-time senior banker or one director (full-time or other).
• The company should have clean CIBL records.
• Once all the above-mentioned conditions have been fulfilled, the RBI online application needs to be filled from the RBI website along with the requisition documents.
• Generation of the CARN number takes place next.
• The company has to send the hard copy of the application to the regional branch of the RBI.
• The application needs to be examined closely and only on approval the company would receive the license.

“All the deposits of NBFC are unsecured and they cannot offer any incentives or gifts or additional benefits to its depositors.”
— Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Guidelines to be followed by an NBFC:-

Once the company receives the license, it has to comply with the following guidelines:

• The deposits that are payable on demand cannot be received by them.
• Public Deposits being accepted by the company should be a minimum of twelve months and a maximum time period of sixty months.
• The ceiling prescribed by the RBI has to be religiously followed by all the companies and no one can charge more interest than the prescribed limit.
• The repayment of the amount (in case any), taken up by the company would not be guaranteed by the RBI.
• The entire information about the company along with details of the change in its composition has to be supplied to the RBI.
• The public deposits would be unsecured.
• Every year, the company also has to submit its audited balance sheet.
• The RBI also requires the report of the credit rating to be taken every six months.

“In case the NBFC fails in paying any amount that it has taken, the consumers have the right to go to the Consumer Forum or National Company Law Tribunal and file a case against the organization.”
-Shweta Gupta, Founder, and CEO, MUDS

The post Checklist for Incorporation of NBFC appeared first on MUDS.

1. An NBFC-P2P shall be required to disclose the following:
   1. to the lender
      1. details about the borrower/s including personal identity, required amount, interest rate sought and credit score as arrived by the NBFC-P2P.
      2. details about all the terms and conditions of the loan, including likely return, fees and taxes;
   2. to the borrower
      • details about the lender/s including proposed amount, interest rate offered but excluding personal identity and contact details;
   3. publicly disclose on its website
      1. overview of credit assessment/score methodology and factors considered;
      2. disclosures on usage/protection of data;
      3. grievance redressal mechanism;
      4. portfolio performance including share of non-performing assets on a monthly basis and segregation by age; and
      5. its broad business model.
2. NBFC-P2P shall ensure that the providing of services to a participant, who has applied for availing of such services, is backed by appropriate agreements between the participants and the NBFC-P2P. The agreements shall categorically specify all the terms and conditions among the borrower, the lender and the NBFC-P2P.
3. The interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format.

Participant Grievance Redressal

1. An NBFC-P2P shall put in place a Board approved policy to address participant grievances/complaints. Complaints shall be handled/ disposed of by NBFC-P2P within such time and in such manner as provided for in its Board approved policy, but in any case not beyond a period of one month from the date of receipt.
2. At the operational level, NBFC-P2P shall display the following information prominently, for the benefit of participants, on the website:
   1. the name and contact details (Telephone / Mobile Nos. as also email address) of the Grievance Redressal Officer who can be approached for resolution of complaints against the NBFC-P2P.
   2. that if the complaint / dispute is not redressed within a period of one month, the participant may appeal to the Customer Education and Protection Department of the Bank.

Information Technology Framework, Data Security and Business Continuity Plan

1. Business of an NBFC-P2P shall be primarily Information Technology (IT) driven. The technology should be scalable to handle growth in business.
2. There should be adequate safeguards built in its IT systems to ensure that it is protected against unauthorized access, alteration, destruction, disclosure or dissemination of records and data. The Bank may from time to time, prescribe technical specifications, as deemed fit.
3. NBFC-P2P should have a Board approved Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.
4. Information System Audit of the internal systems and processes shall be in place and shall be conducted at least once in two years by CISA certified external auditors. Report of the external auditor shall be submitted to the Regional Office of the Department of Non-Banking Supervision of the Bank, under whose jurisdiction the Registered Office of the NBFC-P2P is located, within one month of submission of the report by the external auditor.
5. There shall be reasonable arrangements in place to ensure that loan agreements facilitated on the platform will continue to be managed and administered by a third party in accordance with the contract terms, if the NBFC-P2P ceases to carry on the P2P activity.
6. NBFC-P2P would be required to conform with Master Direction DNBS.PPD. No. 04/66.15.001/2016-17 dated June 8, 2017 on Information Technology Framework for NBFC Sector, as stipulated in Section A from inception

Fit and Proper Criteria

1. An NBFC-P2P shall
   1. ensure that a policy is put in place, with the approval of the Board of Directors, setting out ‘Fit and Proper’ criteria to be met by its directors.
   2. ensure that Directors meet the fit and proper criteria at the time of their appointment and on an ongoing basis, certify and inform the same to the Bank on a half-yearly basis;
   3. obtain a declaration and undertaking from the Directors giving additional information.
   4. obtain a Deed of Covenants signed by the Directors.
   5. advise the Bank of any change of Directors, or key management personnel, and issue a certificate from the Managing Director/CEO of the NBFC-P2P that fit and proper criteria in selection of the Directors have been followed. The statement must reach the Regional Office of the Department of Non-Banking Supervision of the Bank under whose jurisdiction the Registered Office of the NBFC-P2P is located, within 15 days of the change. An annual statement shall be submitted by the CEO of the NBFC-P2P to the said Regional Office, giving the names of its Directors for the quarter ending on March 31, which should be certified by the auditors.The Bank, if it deems fit and in public interest, may independently assess whether the directors are, individually or collectively, fit and proper and the NBFC-P2P shall remove the concerned director/s, on being advised by the Bank to do so.

Requirement to obtain prior approval of the Bank for allotment of shares, acquisition or transfer of control of NBFC-P2P

Prior written permission of the Bank shall be required for –

1. any allotment of shares which will take the aggregate holding of an individual or group to equivalent of 26 per cent and more of the paid up capital of the NBFC-P2P; Explantation: For the purpose of this paragraph, the term
   1. “holding” refers to both direct and indirect holding, beneficial or otherwise. The holding will be computed with reference to the holding of the applicant, relatives (where the applicant is a natural person) and associated enterprises.
   2. “relative” has the same meaning as assigned under section 2(77) of the Companies Act, 2013.
   3. “associate enterprise” has the same meaning as assigned to it in Explanation I to Section 12B of the Banking Regulation Act, 1949.
2. any takeover or acquisition of control of an NBFC-P2P, which may or may not result in change of management;
3. any change in the shareholding of an NBFC-P2P, including progressive increases over time, which would result in acquisition by/ transfer of shareholding to, any entity, of 26 per cent or more of the paid up equity capital of the NBFC-P2P; Provided that, prior approval would not be required in case of any shareholding going beyond 26% due to buyback of shares / reduction in capital where it has approval of a competent Court. The same is to be reported to the Bank not later than one month from its occurrence;
4. any change in the management of the NBFC-P2P which would result in change in more than 30 per cent of the Directors, excluding independent Directors;
5. any change in share holding that will give the acquirer a right to nominate a Director.

Application for Prior approval

1. An NBFC-P2P shall submit an application, on the company letter head, for obtaining prior approval of the Bank, along with the following documents:
   1. Information about the proposed Directors/ shareholders
   2. Sources of funds of the proposed shareholders acquiring the shares in the NBFC-P2P;
   3. Declaration by the proposed Directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
   4. Declaration by the proposed Directors/ shareholders that they are not associated with any company, the application for CoR of which has been rejected by the Bank;
   5. Declaration by the proposed Directors/ shareholders that they have not been convicted of any crime and that there are no pending criminal cases against them, including proceedings initiated under section 138 of the Negotiable Instruments Act,1881; and
   6. Bankers’ Report on the proposed Directors / shareholders.

Public Notice about Change in Control/ Management

1. Applications in this regard shall be submitted to the Regional Office of the Department of Non-Banking Supervision of the Bank where the company is registered.
2. A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFC-P2P and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Bank.
3. The public notice shall indicate the intention to sell or transfer ownership/control, the particulars of transferee and the reasons for such sale or transfer of ownership/ control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

Information with respect to change of address, directors, auditors, etc. to be submitted

1. Every NBFC-P2P shall communicate, not later than one month from the occurrence of any change in:
   1. the complete postal address, telephone number/s and fax number/s of the registered / corporate office;
   2. the residential addresses of the Directors of the company;
   3. the names and office address of the auditors of the company; and
   4. the specimen signatures of the officers authorised to sign on behalf of the NBFC-P2P to the Regional Office of the Department of Non-Banking Supervision of the Bank within whose jurisdiction the Registered Office of the NBFC-P2P is located.

Reporting Requirements

1. The Bank may, from time to time, prescribe return/s to be submitted by NBFC-P2P, as it deems fit.
2. The following quarterly statements shall be submitted to the aforesaid Regional Office within 15 days after the quarter to which these relate.
3. A statement, showing the number and amount in respect of loans;
4. a. disbursed during the quarter;
   b. closed during the quarter; and
   c. outstanding at the beginning and at the end of the quarter, including the number of lenders and borrowers outstanding as at the end of the quarter
5. The amount of funds held in the Escrow Account, bifurcated into funds received from lenders and funds received from borrowers, with credit and debit summations for the quarter.
6. Number of complaints outstanding at beginning and at end of quarter, and disposed of during the quarter, bifurcated as received from
   a. lenders and
   b. borrowers.
7. The Leverage Ratio, with details of its numerator and denominator.

Like NBFC registration for all entities, all NBFC-P2P Companies should also be registered under the Companies Act, 2013 or in case of existing Company under previous Company Act.

For the NBFC incorporation of a prospective NBFC-P2P, the company is required to make an application for registration to the Department of Non-Banking Regulation of the RBI.

No NBFC-P2P shall commence or carry on the business of a Peer to Peer Lending Platform without obtaining a Certificate of Registration (CoR) from the RBI. Thus, Peer to Peer lending registration is subject to a company fulfilling all the conditions specified by the RBI.

The Reserve Bank of India issued a Notification dated August 24, 2017 in terms of sub-clause (iii) of clause (f) of section 45I of the Reserve Bank of India Act, 1934.

This notification enumerates the Directions for compliance by every Non-Banking Financial Company that carries on the business of a Peer to Peer Lending Platform.

These Directions are known as the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 and came into force with immediate effect.

This notification is an extensive statement that outlines in detail the various rules and regulations that all existing and prospective entities carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending, commonly known as NBFC-P2P, will have to comply with.

An NBFC-P2P can act only as an intermediary that provides an online platform to the participants, that is, borrowers and lenders, involved in P2P lending. It must also ensure compliance to legal requirements applicable to the participants as mandated under relevant laws (including the KYC Directions prescribed by RBI). It is also required to store and process all data relating to its and its participants activities on hardware located within India.

The Master Directions, thus, provide a framework for the registration and operation of NBFC-P2Ps in India and some of the important disclosure, code and varied requirements to be followed by NBFC – P2P are mentioned below.

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