Everything You Need to Know About Getting an NBFC License in India

A Non-Banking Financial Company (NBFC) is a financial institution that provides banking services like loans, asset financing, and investment without holding a banking license. The Reserve Bank of India (RBI) regulates NBFCs under the Reserve Bank of India Act, 1934, ensuring they operate within the financial framework of the country.

Getting an NBFC license in India involves a structured application process, compliance with regulatory norms, and adherence to capital requirements. Businesses looking to enter the financial services sector must understand the licensing process, government norms, and the advantages and disadvantages of running an NBFC.

This article explains the process of obtaining an NBFC license, the norms set by the RBI, and the benefits and challenges of operating an NBFC in India.

What is an NBFC?

An NBFC is a financial institution that provides lending and investment services but does not accept demand deposits like banks. These institutions play a vital role in credit distribution, asset financing, and microfinance, catering to individuals and businesses that may not have access to traditional banking services.

Types of NBFCs in India

NBFCs are classified based on their nature of operations and liabilities:

1. Deposit-Taking NBFCs (NBFC-D) – Allowed to accept public deposits.
2. Non-Deposit Taking NBFCs (NBFC-ND) – Not permitted to take deposits but engage in lending and financial services.
3. NBFC-Investment and Credit Companies (NBFC-ICC) – Focus on asset financing and lending.
4. NBFC-Microfinance Institutions (NBFC-MFI) – Provide small loans to low-income individuals.
5. NBFC-Factors – Engage in receivables financing and invoice discounting.
6. NBFC-Housing Finance Companies (NBFC-HFC) – Specialize in home loans.

Each category has different regulatory requirements and compliance measures set by the RBI.

Process of Obtaining an NBFC License

Acquiring an NBFC license involves multiple stages, from fulfilling capital requirements to submitting an application to the RBI. The key steps include:

1. Company Incorporation

• The first step is to register a company as a Private Limited Company or Public Limited Company under the Companies Act, 2013.
• The company’s primary objective must be financial services, and it should not be engaged in any agricultural or industrial activity.

2. Meet Minimum Capital Requirements

• The RBI mandates a minimum net owned fund (NOF) of ₹2 crores (₹5 crores for NBFCs in certain categories like housing finance).
• The NOF must be maintained in a fixed deposit with a scheduled commercial bank before applying for the license.

3. Prepare Required Documents

An applicant must submit several documents, including:

• Certificate of Incorporation
• Memorandum of Association (MoA) & Articles of Association (AoA)
• Bankers’ report confirming the NOF deposit
• Detailed business plan for the next five years
• Directors’ profiles and KYC documents

4. Submit Application to RBI

• Applicants must register on the COSMOS portal, an RBI online application platform.
• A physical copy of the application and documents must be sent to the RBI’s regional office for review.

5. RBI Verification and Approval

• The RBI conducts a thorough evaluation of the business plan, financial stability, and compliance with regulatory norms.
• Upon approval, the company is granted an NBFC registration certificate, allowing it to commence operations.

The entire process can take 4 to 6 months, depending on the completeness of documents and RBI scrutiny.

Government Norms for NBFC Licensing and Operations

The RBI has laid out several regulatory norms to govern NBFCs:

1. Capital Adequacy Norms

• The minimum capital requirement is ₹2 crores, with higher limits for certain NBFC types.
• Capital adequacy ratio must be above 15% to maintain financial stability.

2. Prudential Norms for Lending

• NBFCs must follow guidelines on loan exposure limits, provisioning for bad debts, and risk management.
• They must maintain liquidity coverage ratios to meet financial obligations.

3. Compliance with KYC and Anti-Money Laundering (AML) Guidelines

• NBFCs must conduct due diligence on customers as per Know Your Customer (KYC) norms.
• They must report suspicious transactions to the Financial Intelligence Unit (FIU-IND).

4. Restrictions on Public Deposits

• Only NBFC-D (deposit-taking NBFCs) can accept deposits, and they must obtain separate approval from the RBI.
• Deposit-taking NBFCs must maintain a credit rating from an approved agency.

5. Corporate Governance Requirements

• NBFCs with assets over ₹500 crores must comply with Board-approved policies for risk management and governance.
• Regular reporting to the RBI is mandatory for transparency.

These regulations help maintain the credibility and stability of NBFCs in India’s financial system.

Advantages of Getting an NBFC License

1. Financial Growth and Market Expansion

NBFCs offer financial services in areas where traditional banks have limited reach, enabling business expansion.

2. Lower Compliance Burden Compared to Banks

NBFCs have fewer regulatory constraints than banks, allowing them to operate with more flexibility.

3. High Profitability in Lending and Investment

Since NBFCs do not have strict lending restrictions like banks, they can offer customized financial products with higher interest rates, leading to increased profitability.

4. Multiple Business Opportunities

NBFCs can operate in microfinance, asset financing, housing finance, and wealth management, making them diverse financial entities.

5. Contribution to Financial Inclusion

NBFCs play a major role in supporting small businesses, startups, and individuals who lack access to formal banking.

Disadvantages of Running an NBFC

1. High Capital Requirement

NBFCs must maintain significant capital reserves, which can be a challenge for new businesses.

2. Regulatory and Compliance Burden

Though NBFCs have fewer restrictions than banks, they must still comply with strict RBI regulations, requiring dedicated resources for compliance.

3. Limited Access to Public Deposits

Unlike banks, most NBFCs cannot accept demand deposits, making them reliant on external funding sources such as loans and equity investments.

4. Risk of Loan Defaults

NBFCs primarily focus on lending, and high default rates can impact profitability, especially in unsecured lending businesses.

5. Dependence on Market Conditions

NBFCs are highly sensitive to economic conditions, and any financial downturn can lead to liquidity crises.

Conclusion

Obtaining an NBFC license in India requires careful planning, financial preparedness, and adherence to RBI regulations. The process involves company incorporation, capital compliance, document submission, and RBI approval, ensuring only financially stable entities enter the sector.

NBFCs offer multiple advantages, including financial expansion, profitability, and contribution to financial inclusion. However, they also come with challenges such as high capital requirements, regulatory burdens, and credit risk.

For businesses looking to enter the financial services sector, securing an NBFC license opens doors to lucrative opportunities. However, careful compliance with government norms and risk management strategies is essential for long-term success in the industry.