Eligibility Criteria for Obtaining an NBFC License

Eligibility Criteria for Obtaining an NBFC License. Non-Banking Financial Companies (NBFCs) play an important role in supporting financial inclusion in India. They provide loans and financial services to people who are often left out by traditional banks like rural borrowers, small business owners, first-time loan applicants, and other underserved groups. Because of their growing impact, the Reserve Bank of India (RBI) regulates NBFCs under the RBI Act, 1934 and has set clear rules and requirements for getting an NBFC license.
Eligibility Criteria For NBFC License
If a company wants to do financial business, and more than 50% of its total assets and 50% of its income come from financial activities (like giving loans or investing), it must get an NBFC license from the RBI. This rule is called the “Principal Business Criteria” or the 50-50 test.
If a company qualifies under this rule but does not get the license, it is breaking the law and can be penalized by the RBI.
Company Structure and Legal Incorporation
To start with, any entity seeking to operate as an NBFC must be incorporated as a company under the Companies Act, 2013 or earlier under the Companies Act, 1956. This means that individuals or partnership firms are not eligible to apply directly for an NBFC license. The applicant must be a registered company either private limited or public limited depending on the business scope. It is also mandatory that the company’s main objective, as stated in its Memorandum of Association, should be to carry out financial services. This foundational step is crucial because RBI does not grant NBFC licenses to entities not primarily focused on financial business.
Minimum Net Owned Fund (NOF) Requirement
One of the most important financial requirements to qualify for an NBFC license is the minimum Net Owned Fund (NOF). According to current RBI regulations, the applicant company must have a minimum NOF of Rs.10 crore. This requirement is higher for certain types of NBFCs. For example, NBFC-Microfinance Institutions (NBFC-MFIs) must have at least Rs.5 crore in NOF, though this is relaxed to Rs.2 crore for companies operating in the North- Eastern Region. Net Owned Fund refers to the actual capital owned by the company, excluding any borrowed funds, intangible assets, and losses. This amount must be clearly verified and certified by a chartered accountant and maintained in a bank account.
Principal Business Criteria (50-50 Test)
Another important test set by the RBI is known as the Principal Business Criteria, commonly referred to as the 50-50 test. This test states that more than 50 percent of the company’s total assets must be financial assets, and more than 50 percent of its total income must come from financial services. If a company meets both conditions, it must register as an NBFC with the RBI. Operating as an NBFC without proper registration while fulfilling the Principal Business Criteria is considered a legal violation and can result in penalties or prosecution.
Fit and Proper Promoters and Management
RBI also evaluates the quality and integrity of the people behind the company. The promoters, directors, and key managerial personnel must meet the "fit and proper" criteria set by the RBI. This includes having a clean background with no criminal records, no history of financial fraud, and good credit standing. RBI expects the leadership team to have relevant experience and knowledge in finance, banking, economics, or law, to ensure that the company is in capable hands. A poor track record or lack of financial expertise among promoters can lead to rejection of the license application.
Business Plan and Operational Readiness
A well-drafted business plan is another essential part of the eligibility process. RBI expects the applicant to submit a clear and comprehensive business plan that outlines the nature of the financial activities the company intends to undertake. This plan should include target markets, risk management strategies, projected financials, organizational structure, and customer acquisition plans for at least the next three to five years. This helps RBI assess the seriousness and sustainability of the applicant’s business intent. It is not enough to simply have funds and registration; the company must also prove that it has a sound strategy for operating a financial business responsibly.
KYC, AML Compliance and Regulatory Framework
The applicant must also be ready to comply with all RBI guidelines and policies. This includes adopting Know Your Customer (KYC) norms and Anti-Money Laundering (AML) procedures as mandated under the Prevention of Money Laundering Act, 2002. Companies must be prepared to maintain proper records, conduct customer verification, and report suspicious transactions. Having the necessary infrastructure in place to support these compliance requirements such as trained staff, systems for reporting, and internal controls—is also important.
Clean Banking and Legal Track Record
In addition to meeting capital and managerial qualifications, the applicant company must maintain a clean banking record. A banker's report from the company’s existing bank is typically required to confirm that the company has conducted its financial affairs in a satisfactory manner. This document helps RBI verify that the company’s funds are legitimate and have not been raised through suspicious means.
Moreover, the company should not have any pending cases or involvement in financial misconduct. Any ongoing criminal or civil litigation involving the company or its promoters can significantly delay or even derail the registration process. A clean legal record is, therefore, essential.
Application Process and RBI Evaluation
When applying for a license, the applicant must submit an online application through the RBI’s COSMOS portal, followed by a hard copy submission of all relevant documents to the concerned regional office of the RBI. The application is thoroughly reviewed by RBI officials. The review process may take anywhere from three to six months or even longer, depending on the complexity of the application and the applicant’s preparedness. During this time, RBI may seek clarifications, request additional documentation, or ask for in-person meetings to better understand the applicant’s business and background.
Post- NBFC Registration Compliances
It’s also important to note that obtaining an NBFC license is not a one-time process. Even after NBFC registration, the company must follow several post-registration compliances. These include maintaining capital adequacy ratios, submitting periodic returns, conducting statutory audits, filing annual reports, and adhering to RBI’s Fair Practices Code. Non-compliance with these regulations can result in penalties, suspension of license, or even cancellation.
Conclusion
Securing an NBFC license in India involves much more than just filing a form and showing capital. It requires a well-prepared company structure, a clean and experienced management team, adequate financial backing, a viable business plan, and a genuine commitment to comply with RBI regulations. The eligibility criteria are designed to ensure that only serious, capable, and ethical companies enter the NBFC sector, which plays a vital role in India’s economic development. With proper planning and expert guidance, meeting these criteria is certainly achievable and can open the doors to a rewarding journey in the financial services industry. 
FAQs
Q1. What is the 50-50 rule for NBFC? 
Ans. When company financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income.
Q2. What is the minimum net owned by NBFC?
Ans. The minimum NOF stood at Rs.2 crore. In October 2021, the RBI introduced a scale-based regulatory framework that revised the minimum NOF to Rs.10 crore in a phased manner.
Q3. Who gives the licence to NBFC? 
Ans. If Reserve bank of India has ensured that documents submitted are complete and satisfactory, it will grant the license to commence the business of NBFC.
Q4. What is the full form of MFI? 
Ans. The most common full form of MFI is Microfinance Institution. These institutions provide financial services, particularly loans, to individuals and communities with low incomes, often those who lack access to traditional banking. 
Q5. How much does a NBFC license cost? 
Ans. Obtaining an RBI NBFC license is a significant financial and administrative undertaking. While the application fee of Rs.3,00,000 and the minimum Net Owned Fund requirement of Rs.2 Crore. 
Q6. What activities are not permissible for NBFC?
Ans. Agricultural operations; (b) Industrial activity; (c) Purchase or sale of any goods other than securities or providing any services; and (d) Purchase, construction or sale of immovable property.
Q7. What is the processing fee for NBFC? 
Ans. You can usually get a loan for up to Rs. 25 lakh or higher, with a processing fee of 2% to 3% of the loan amount.
Q8. How to check NBFC status? 
Ans. To check the status of an NBFC (Non-Banking Financial Company), you should verify its registration with the Reserve Bank of India (RBI) and also review its financial reports and regulatory compliance.
Q9. What is AML in NBFC? 
Ans. Anti-money laundering (AML) refers to the activities financial institutions perform to achieve compliance with legal requirements to actively monitor for and report suspicious activities.
Q10. How to get a NBFC license? 
Ans. a company needs to be registered under the Companies Act, have a minimum Net Owned Fund (NOF) of Rs.10 crore, and submit an online application to the Reserve Bank of India (RBI) along with necessary documents.

Non-Banking Financial Companies (NBFCs) play an important role in supporting financial inclusion in India. They provide loans and financial services to people who are often left out by traditional banks like rural borrowers, small business owners, first-time loan applicants, and other underserved groups. Because of their growing impact, the Reserve Bank of India (RBI) regulates NBFCs under the RBI Act, 1934 and has set clear rules and requirements for getting an NBFC license.

Eligibility Criteria For NBFC License

If a company wants to do financial business, and more than 50% of its total assets and 50% of its income come from financial activities (like giving loans or investing), it must get an NBFC license from the RBI. This rule is called the “Principal Business Criteria” or the 50-50 test.

If a company qualifies under this rule but does not get the license, it is breaking the law and can be penalized by the RBI.

Company Structure and Legal Incorporation

To start with, any entity seeking to operate as an NBFC must be incorporated as a company under the Companies Act, 2013 or earlier under the Companies Act, 1956. This means that individuals or partnership firms are not eligible to apply directly for an NBFC license. The applicant must be a registered company either private limited or public limited depending on the business scope. It is also mandatory that the company’s main objective, as stated in its Memorandum of Association, should be to carry out financial services. This foundational step is crucial because RBI does not grant NBFC licenses to entities not primarily focused on financial business.

Minimum Net Owned Fund (NOF) Requirement

One of the most important financial requirements to qualify for an NBFC license is the minimum Net Owned Fund (NOF). According to current RBI regulations, the applicant company must have a minimum NOF of Rs.10 crore. This requirement is higher for certain types of NBFCs. For example, NBFC-Microfinance Institutions (NBFC-MFIs) must have at least Rs.5 crore in NOF, though this is relaxed to Rs.2 crore for companies operating in the North- Eastern Region. Net Owned Fund refers to the actual capital owned by the company, excluding any borrowed funds, intangible assets, and losses. This amount must be clearly verified and certified by a chartered accountant and maintained in a bank account.

Principal Business Criteria (50-50 Test)

Another important test set by the RBI is known as the Principal Business Criteria, commonly referred to as the 50-50 test. This test states that more than 50 percent of the company’s total assets must be financial assets, and more than 50 percent of its total income must come from financial services. If a company meets both conditions, it must register as an NBFC with the RBI. Operating as an NBFC without proper registration while fulfilling the Principal Business Criteria is considered a legal violation and can result in penalties or prosecution.

Fit and Proper Promoters and Management

RBI also evaluates the quality and integrity of the people behind the company. The promoters, directors, and key managerial personnel must meet the "fit and proper" criteria set by the RBI. This includes having a clean background with no criminal records, no history of financial fraud, and good credit standing. RBI expects the leadership team to have relevant experience and knowledge in finance, banking, economics, or law, to ensure that the company is in capable hands. A poor track record or lack of financial expertise among promoters can lead to rejection of the license application.

Business Plan and Operational Readiness

A well-drafted business plan is another essential part of the eligibility process. RBI expects the applicant to submit a clear and comprehensive business plan that outlines the nature of the financial activities the company intends to undertake. This plan should include target markets, risk management strategies, projected financials, organizational structure, and customer acquisition plans for at least the next three to five years. This helps RBI assess the seriousness and sustainability of the applicant’s business intent. It is not enough to simply have funds and registration; the company must also prove that it has a sound strategy for operating a financial business responsibly.

KYC, AML Compliance and Regulatory Framework

The applicant must also be ready to comply with all RBI guidelines and policies. This includes adopting Know Your Customer (KYC) norms and Anti-Money Laundering (AML) procedures as mandated under the Prevention of Money Laundering Act, 2002. Companies must be prepared to maintain proper records, conduct customer verification, and report suspicious transactions. Having the necessary infrastructure in place to support these compliance requirements such as trained staff, systems for reporting, and internal controls—is also important.

Clean Banking and Legal Track Record

In addition to meeting capital and managerial qualifications, the applicant company must maintain a clean banking record. A banker's report from the company’s existing bank is typically required to confirm that the company has conducted its financial affairs in a satisfactory manner. This document helps RBI verify that the company’s funds are legitimate and have not been raised through suspicious means.

Moreover, the company should not have any pending cases or involvement in financial misconduct. Any ongoing criminal or civil litigation involving the company or its promoters can significantly delay or even derail the registration process. A clean legal record is, therefore, essential.

Application Process and RBI Evaluation

When applying for a license, the applicant must submit an online application through the RBI’s COSMOS portal, followed by a hard copy submission of all relevant documents to the concerned regional office of the RBI. The application is thoroughly reviewed by RBI officials. The review process may take anywhere from three to six months or even longer, depending on the complexity of the application and the applicant’s preparedness. During this time, RBI may seek clarifications, request additional documentation, or ask for in-person meetings to better understand the applicant’s business and background.

Post- NBFC Registration Compliances

It’s also important to note that obtaining an NBFC license is not a one-time process. Even after NBFC registration, the company must follow several post-registration compliances. These include maintaining capital adequacy ratios, submitting periodic returns, conducting statutory audits, filing annual reports, and adhering to RBI’s Fair Practices Code. Non-compliance with these regulations can result in penalties, suspension of license, or even cancellation.

Conclusion

Securing an NBFC license in India involves much more than just filing a form and showing capital. It requires a well-prepared company structure, a clean and experienced management team, adequate financial backing, a viable business plan, and a genuine commitment to comply with RBI regulations. The eligibility criteria are designed to ensure that only serious, capable, and ethical companies enter the NBFC sector, which plays a vital role in India’s economic development. With proper planning and expert guidance, meeting these criteria is certainly achievable and can open the doors to a rewarding journey in the financial services industry.

FAQs

Q1. What is the 50-50 rule for NBFC?

Ans. When company financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income.

Q2. What is the minimum net owned by NBFC?

Ans. The minimum NOF stood at Rs.2 crore. In October 2021, the RBI introduced a scale-based regulatory framework that revised the minimum NOF to Rs.10 crore in a phased manner.

Q3. Who gives the licence to NBFC?

Ans. If Reserve bank of India has ensured that documents submitted are complete and satisfactory, it will grant the license to commence the business of NBFC.

Q4. What is the full form of MFI?

Ans. The most common full form of MFI is Microfinance Institution. These institutions provide financial services, particularly loans, to individuals and communities with low incomes, often those who lack access to traditional banking.

Q5. How much does a NBFC license cost?

Ans. Obtaining an RBI NBFC license is a significant financial and administrative undertaking. While the application fee of Rs.3,00,000 and the minimum Net Owned Fund requirement of Rs.2 Crore.

Q6. What activities are not permissible for NBFC?

Ans. Agricultural operations; (b) Industrial activity; (c) Purchase or sale of any goods other than securities or providing any services; and (d) Purchase, construction or sale of immovable property.

Q7. What is the processing fee for NBFC?

Ans. You can usually get a loan for up to Rs. 25 lakh or higher, with a processing fee of 2% to 3% of the loan amount.

Q8. How to check NBFC status?

Ans. To check the status of an NBFC (Non-Banking Financial Company), you should verify its registration with the Reserve Bank of India (RBI) and also review its financial reports and regulatory compliance.

Q9. What is AML in NBFC?

Ans. Anti-money laundering (AML) refers to the activities financial institutions perform to achieve compliance with legal requirements to actively monitor for and report suspicious activities.

Q10. How to get a NBFC license?

Ans. a company needs to be registered under the Companies Act, have a minimum Net Owned Fund (NOF) of Rs.10 crore, and submit an online application to the Reserve Bank of India (RBI) along with necessary documents.