Starting a lending or financing business in India requires more than incorporating a company. Businesses intending to carry out non-banking financial activities may need regulatory approval from the Reserve Bank of India (RBI), depending on the nature of their activities and whether they meet the applicable criteria.
For promoters planning to enter the financial services sector, understanding the requirements for an NBFC license in India is an important first step. The registration process involves corporate, financial, managerial and regulatory requirements that should be assessed before submitting an application.
What Is an NBFC?
A Non-Banking Financial Company (NBFC) is a company engaged in specified financial activities such as lending, financing or investment, subject to the regulatory framework applicable to its category.
The RBI uses the Principal Business Criteria to determine whether a company’s principal business falls within the scope of non-banking financial activity. Broadly, both the financial assets and income from financial assets are considered when determining the principal business of a company.
Companies carrying on activities that require NBFC registration generally need to obtain a Certificate of Registration (CoR) from the RBI before commencing the relevant business.
Is an NBFC License Mandatory in India?
A company cannot simply start carrying on a regulated non-banking financial business without considering the RBI registration requirement.
Section 45-IA of the RBI Act provides the framework for registration of companies carrying on non-banking financial institution business. The applicable requirements can vary depending on the type of NBFC and its proposed activities.
There are also certain entities and financial activities that may fall under other regulatory frameworks or exemptions. Therefore, promoters should determine the applicable regulatory category before beginning the application process.
Key Requirements for NBFC Registration
1. Company Incorporation
The applicant should first have an appropriate company structure under the applicable corporate law framework.
The company’s constitutional documents, proposed business activities and objects should be aligned with the financial activities it intends to undertake.
Before proceeding with NBFC Registration, promoters should therefore ensure that the company’s corporate structure is suitable for the proposed business model.
2. Adequate Net Owned Funds
Capital adequacy is an important consideration when applying for an NBFC license.
The RBI’s Scale Based Regulation framework increased the regulatory minimum Net Owned Fund (NOF) for several NBFC categories, including NBFC-Investment and Credit Companies, NBFC-Micro Finance Institutions and NBFC-Factors, with a phased requirement reaching ₹10 crore by March 31, 2027. Different requirements can apply to specialised categories.
Because the NOF requirement depends on the category and applicable regulations, promoters should verify the current requirement applicable to their proposed NBFC before making financial commitments.
3. Suitable Business Model
Promoters should clearly define the proposed business activities before applying.
For example, an NBFC may be involved in lending, investment, microfinance, factoring or other specialised financial activities. The proposed activity can influence the applicable regulatory requirements and the regulatory layer in which the NBFC falls.
The RBI’s Scale Based Regulation framework broadly places NBFCs into Base, Middle, Upper and Top Layers depending on factors such as size, activity and perceived risk.
4. Fit and Proper Management
The experience and suitability of the promoters and directors are important considerations in establishing a regulated financial business.
The RBI’s regulatory framework also places emphasis on appropriate management experience and governance. For example, the Scale Based Regulation framework specifies relevant experience requirements for directors in applicable NBFCs.
Promoters should therefore prepare appropriate information regarding their professional background, financial experience and proposed management structure.
5. Business Plan and Financial Projections
A well-prepared business plan helps demonstrate how the proposed NBFC intends to operate.
The plan may cover:
- Proposed lending or investment activities
- Target customer segments
- Sources of funds
- Expected revenue model
- Risk management approach
- Projected financial performance
- Management structure
- Compliance framework
Financial projections should be realistic and consistent with the proposed business model.
6. Supporting Documents
The RBI requires applicants to submit prescribed information and supporting documentation for NBFC registration. RBI provides an application form and checklist for NBFC registration through its regulatory resources.
Depending on the applicant and category, documentation may include corporate records, financial information, details of directors and promoters, business plans and other supporting information.
A complete and internally consistent application can help reduce avoidable issues during the regulatory review process.
Understanding the RBI’s Scale-Based Framework
The RBI introduced the Scale Based Regulation framework to apply regulatory requirements according to the size, activities and risk profile of NBFCs.
Under this framework, NBFCs can fall into four regulatory layers:
- Base Layer
- Middle Layer
- Upper Layer
- Top Layer
For example, non-deposit-taking NBFCs below the specified asset threshold generally fall within the Base Layer, while larger or specified categories can fall within the Middle Layer. The Upper Layer consists of NBFCs specifically identified by the RBI based on the applicable assessment methodology.
This means promoters should not assume that every NBFC follows exactly the same regulatory requirements.
Common Mistakes Promoters Should Avoid
Several issues can create unnecessary complications during the registration process. Promoters should pay attention to:
- Choosing an unsuitable business structure
- Not assessing the Principal Business Criteria
- Misunderstanding the applicable NOF requirement
- Preparing an unclear business plan
- Providing inconsistent financial information
- Overlooking governance requirements
- Selecting the wrong NBFC category
- Starting regulated financial activities before obtaining the required approval
A proper regulatory assessment before filing can help identify these issues early.
How Professional NBFC Advisory Support Can Help
NBFC registration involves regulatory, corporate and financial considerations. Professional assistance can help promoters understand the applicable category, prepare documentation, structure the proposed business model and coordinate the registration process.
Businesses planning to establish an NBFC should also consider their ongoing compliance responsibilities rather than treating the RBI license as a one-time requirement.
Conclusion
Obtaining an NBFC license in India requires careful planning and compliance with the applicable RBI framework. Promoters should evaluate their proposed financial activities, company structure, capital requirements, management, documentation and regulatory category before beginning the registration process.
Since NBFC regulations can differ according to the nature and scale of the business, obtaining category-specific guidance is important before making operational or financial commitments.
For businesses planning NBFC Registration, a structured assessment at the initial stage can help establish the appropriate regulatory pathway and prepare the organisation for its responsibilities after registration.
