NBFC registration: what the RBI expects before it grants a licence

A company is an NBFC, and must register before starting business, if financial activity is its principal business. The RBI applies a two-part test on the last audited balance sheet:

• financial assets are more than 50% of total assets, and
• income from financial assets is more than 50% of gross income.

Only companies can register. Firms, LLPs and individuals cannot carry on NBFC business at all, and doing so without registration is an offence under the RBI Act.

Net owned fund means paid-up equity and free reserves, less accumulated losses, intangible assets and investments in or loans to group companies above 10%. It must be real capital, invested in the company and usually held in a fixed deposit until registration.

Under the RBI’s scale-based regulation, most new NBFCs sit in the base layer, with lighter rules than middle- and upper-layer lenders.

1. Incorporate a company (private or public) whose memorandum lists financial activity as its main object. See our MoA and AoA guide.
2. Bring in the net owned fund and park it in a bank fixed deposit, with a no-lien certificate from the bank.
3. Build the board: directors with experience in finance or banking, clean credit histories and no regulatory actions. The RBI applies fit-and-proper tests to directors and significant shareholders.
4. Prepare the application on the RBI’s PRAVAAH portal: constitution documents, board resolutions, a detailed business plan with five-year projections, source-of-funds evidence for the promoters, credit reports, the auditor’s net owned fund certificate and the FD certificate.
5. Answer the regional office’s queries. This is where most time goes; applications with thin business plans or unclear sources of capital are returned.
6. Receive the certificate of registration, then start business only in the category registered. Processing usually takes several months.

• Maintain the minimum net owned fund at all times, and capital adequacy if applicable.
• File periodic returns to the RBI and an annual statutory auditor’s certificate confirming continued eligibility.
• Adopt a fair practices code, KYC policy and grievance redressal mechanism.
• Become a member of all four credit information companies and report data to them.
• Take RBI approval before a change in control, merger or change in management above the thresholds.

• A business plan that reads like a template, with no clear borrower segment, pricing or collection process.
• Capital that cannot be traced to the promoters’ own tax-paid funds.
• Directors with no financial services background.
• Group structures where the NBFC’s money would flow mainly to promoter companies.
• Inconsistencies between the MoA objects, the business plan and the category applied for.

The RBI can return an application rather than reject it, which means starting the queue again. Getting the first filing right usually saves more time than anything else.