What is NBFC

What is NBFC

NBFC stands for Non-Banking Financial Company. It does not have a banking license, but it can still sell or provide facilities of finances to customers. 

NBFC is helping small businesses and MNCs start up and grow their business.   Companies engaged in loans and advancing business are under the companies act, which took place in 1956.

These companies are also engaged in acquiring securities, stocks, bonds, shares, etc., under any government or local authority action.

They are also responsible for other security actions such as hire-purchase, business, insurance, chit business, etc. 

A Non-Banking Financial Company is also a company that is known to receive deposits based on a few deals and arrangements by any means.

Non-banking financial companies are becoming more popular because they offer loans and other financial facilities to companies, individuals, and other banks. 

This is one of the major reasons why most people are becoming influenced towards NBFC over traditional banks in India. 

The steps of registration for NBFC are very simple and are mentioned below. Also, take a look at the documents that are necessary for registration. Here is an overview of NBFC and its incorporation.

Key takeaways

  • The loans generated and given by NBFC are at lower interest rates than the loans that the banks generate.
  • The eligibility, as well as the criteria for NBFC, is very easy to meet.
  • Many customers can apply for registration and get a license under NBFC.
  • The loan applications for NBFC are processed and regulated faster than the applications processed by the bank.
  • Rules, as well as regulations that are required for NBFC, are less complicated than those acquired by banks.

NBFC vs Traditional Banks

  • NBFCs are not allowed to accept demand deposits. They can only accept Public deposits.
  • No credit facilities guarantee as well as insurance are given by NBFC.
  • They are neither part of the settlement nor the payment system. Due to this, they cannot issue a cheque for themselves.

Exceptions of NBFC

There are a few exclusions or exceptions of NBFC where the definition is not held. These businesses or companies form an exception for NBFC.

  • Agricultural business or activity.
  • Construction, purchase, and sale of a property that cannot be moved.
  • Industrial business or activity.
  • Sale and purchase of goods and services that don't include security.

Principle Business of NBFC

What do you mean by principal businesses? This term is defined by the Reserve Bank of India rather than being defined by the Reserve Bank of India act. 

They are the financial activities that take place in a business that is monitored and regulated as a Non-Banking Financial Company. These criteria are also known as the 50-50 test.

What are the criteria for a 50-50 test?

There are two main conditions or criteria for registration under a 50-50 test. For a company to be registered or not under NBFC, it is important to complete both these criteria together. 

A principle business or a 50-50 test is determined by

  • The total income should constitute more than 50% of the company's total profit or financial asset.
  • The total assets should constitute more than 50% of the total financial assets of the company.

Which NBFC doesn't require registration?

A few Non-Banking Financial Companies do not require any registration for the 50-50 test. 

This test is not needed to be registered under the Reserve Bank of India. They can be registered or acquired by any other regulators. 

These NBFCs are:

  • Chit Fund Organisation or Companies. They are mentioned in the Chit Fund Act of 1982 (Section 2 clause b).
  • Core Investment Organisation or Companies. Public funds, as well as assets less than 100 crores, are not considered.
  • Merchant Banking Organisation or Companies.
  • Nidhi Companies. They are mentioned in the Companies Act of 1956 (Sec 620(A)).
  • Stock broking companies are also not considered if they are engaged in them.
  • If any insurance company has a registration certificate which IRDA regulates.
  • Companies and organisations that deal with Venture Capital business are also not considered.
  • Housing Finance Firms or Companies.

Required Documents For NBFC Registration

The required and necessary documents should be kept in handy for the registration of a Non-Banking Financial Company. 

  • Company's  Incorporation Certificate.
  • Documents of administration as well as management of the respective company.
  • The company's documents include a Memorandum of Association and an Article of Association.
  • Document of proof or verification of the location of the company.
  • A proof and document related to the company account. This account should be audited for at least the past 3 years.
  • Document issued by the board that favours the formation or registration of NBFC.
  • The account should hold a minimum amount of RS 2 Crores of funds.
  • A copy of the original Pan card of the organisation or company.
  • Any additional document which can be asked during registration related to the company.

Procedure for Incorporation of NBFC for a company

The procedure for incorporation of an NBFC company is handled by the Reserve Bank of India and the Ministry of Corporate Affairs. 

The Reserve Bank of India is responsible for providing the license of operation for this process. 

This license also stands for any law and other regulations responsible for the company or land under NBFC.

  • That company must be registered under the popular act known as the Companies Act 2013. If the company is not registered under the Companies act 2013, then it should always be registered under the Companies Act 1956. If registered under the Companies Act 1956, they are either mentioned as a Public Limited Company or a Private Limited Company.
  • Earlier, there was a limit for the minimum fund that the company should own. This limit was Rs 2 Crores. But now this has been increased to Rs 10 crores. This means that the company that should be registered under NBFC should not have capital or funds less than Rs Ten Crores.
  • Directors of the NBFC company should have at least one by the third experience in finances.
  • The NBFC or company registered under NBFC should have a successful business plan for at least 5 years.
  • The company is responsible for meeting all the conditions or requirements for FEMA as well as capital compliance.
  • The records (CIBIL) of directors and companies must be clean.
  • When all the above conditions and requirements are fulfilled and satisfied completely, the next step is to fill out an online application. This online application can be filled out by visiting the official website cosmos.rbi.org.in (reserve Bank of India). The application is submitted with all the important other necessary documents. 
  • Take notice when the Company Application Reference Number(CARN) is generated.
  • More than any other document, sending a hard copy of the official application to the Reserve Bank of India is important. It should be sent to only the regional branch.
  • When the above steps are completed carefully, and the online application is filed and regulated successfully, the licence under NBFC will be successfully given to the company.

Benefits of Non-Banking Financial Company Registration

Some top benefits of registration under NBFC are given below:

  • Easier Loan Recovery

It is clear that NBFC requires less time and complications related to other banks. This means that they offer a small and successful amount of loan. You can easily recover and return this loan without any pressure on your shoulders. Thus, the process is ideal and easy for borrowers and lenders.

  • Low Time and Cost

It takes less time for registration as well as approval from NBFC. Even small banks can simply consume more time than an NBFC for registration processes. And less time means less cost. The cost and time are fully convenient and manageable.

  • The ratio of Industrial Growth

Everyone is searching for an easy and quick source of funds and money. So this is the perfect time for entrepreneurs and other financial companies to invest and get loans from NBFC. This is one of the main reasons why this industry is blooming.

  • Convenient Registration

The registration process for NBFC is very easy as well as convenient. It takes simple steps and documents without any complex complications. The consultant with whom you are consulting can easily explain to you the difference between registration steps for NBFC and other banks. 

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A non-Banking Financial Company or NBFC is a company which the Reserve Bank of India manages. 

These companies are registered under an act known as the Companies Act of 2013. Non-banking financial companies have similar functions as a bank, but it has minor differences. 

These minor differences play the main role in making them what you need and convenient in their own way. 

The popular function of the NBFC is to provide financial and loan facilities to other companies and individuals. 

The main objectives of a financial banking company are to offer personal loans, capital loans, investments, stocks, etc. 

The government or local authorities can authorise these loans and other facilities. There are many financial gaps between organised businesses, unorganised businesses, and even individuals. 

These financial gaps are covered and filled by NBFCS. Traditional banks are also responsible for providing companies with loans and investment options, but they do this for big companies. 

Their processes and registration also require more time and cost than the processes by NBFC. So, the NBFCs are enlarging in the market and doing remarkable work in financial markets.

FAQs Related to NBFC

1. How are NBFCs Incorporated? 

A Non-Banking Financial Company is known to be a company which is registered as well as incorporated under the Companies Act of 1956. These companies are responsible for providing loan facilities and advances. Local authorities or the government also authorises debentures and other security.

2. What is the benefit of incorporating NBFC?

There are major benefits to incorporating an NBFC. These benefits are also held over traditional banks. They can offer credit facilities as well as loan facilities faster. Not only faster but also at less cost with fewer complications. The portfolios of shares and stocks can easily be managed with the help of the NBFC. The process of registration and approval is also easy and convenient.

3. Does RBI register NBFC?

The companies that are regulated under NBFC are managed under rules and regulations made by the Companies Act. Show that the companies' act determines the basic rules of NBFC; the Reserve Bank of India still manages them. As soon as they were exempted from the Companies act, NBFC came under the Reserve Bank of India act.

4. What is the main objective of NBFC?

NBFCs are becoming an integral and important part of the financial marketplace. They are responsible for providing financial facilities for organised and unorganised businesses. Besides credit and loan facilities, they also offer retirement plans, merger activities, money markets, etc. They are responsible for offering financial facilities to banks and companies, local markets, and borrowers. 

5. Why are NBFCs more profitable?

Nowadays, Non-Banking Financial Companies are increasing and blooming in the market. They are more profitable than small banks. One of the major reasons that make NBFC more profitable is lower time and cost. They can give cheap offers and loans to customers. In return, customers can easily pay these loans as returns without any complications. As a result, the credit of NBFC also grows. So finally, the amount of credit or loan being given to customers increases as compared to the banks. In addition, borrowers can easily pay off their lenders.

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