NBFC (Non-Banking Financial Company) can be a good option in finance for HNI (High Net Worth Individual), depending on the specific goals and needs of the HNI.

An HNI typically has a significant amount of wealth and therefore, may have unique financial needs that traditional banking institutions may not be able to fully satisfy. In such cases, an NBFC can be a viable alternative as they offer a range of financial products and services tailored to the specific requirements of HNIs, including personalized wealth management services, structured finance solutions, and investment advisory services.

However, it's important to note that NBFCs may be subject to higher risks compared to traditional banks as they operate without a banking license and may not have the same regulatory oversight. Therefore, it's crucial for HNIs to conduct thorough due diligence and evaluate the reputation, financial stability, and track record of any NBFC they plan to work with.

In India, NBFCs are financial institutions that provide a wide range of financial services and products similar to banks, but they are not licensed as banks. NBFC are regulated by the Reserve Bank of India (RBI) and are required to comply with various rules and regulations issued by the RBI from time to time.

NBFCs have emerged as an important component of the Indian financial sector and have played a key role in supporting economic growth by providing credit to a wide range of borrowers. They have been able to fill the gaps left by traditional banks by focusing on specific segments of the market and providing innovative products and services that meet the needs of their customers.

One of the reasons why NBFCs are attractive to high-net-worth individuals and businessmen is that they often provide more flexible and customized financing solutions than traditional banks.

For example, NBFCs may be willing to offer loans that are secured against non-traditional collateral, such as real estate, inventory or receivables, which may be more difficult to finance through traditional channels. Additionally, NBFCs may be able to process loan applications more quickly and efficiently than banks, which can be important for time-sensitive transactions.

Therefore, NBFCs have become an important source of financing for many businesses and individuals in India, and their continued growth is likely to be driven by their ability to provide innovative solutions that meet the evolving needs of their customers.

Some examples of NBFC activities include –

» Lending and investment activities,

» Providing financial guarantees and leasing services, and

» Offering credit cards and other payment services.

NBFCs play an important role in the Indian financial sector by providing access to credit and other financial services to underserved and unserved segments of the population.

Types of NBFCs that are regulated by the RBI in India-

1. Asset Finance Companies (AFCs) - These NBFCs primarily provide finance for the acquisition of physical assets such as automobiles, equipment, and machinery. Example- Bajaj Finance Limited, Mahindra & Mahindra Financial Services Limited, Tata Motors Finance Limited.

2. Investment Companies (ICs) - These NBFCs invest in securities such as shares, debentures, and bonds, and may also provide fund management services. Example- Reliance Capital Limited, L&T Finance Holdings Limited, Edelweiss Financial Services Limited.

3. Loan Companies (LCs) - These NBFCs provide loans and advances, and may also engage in activities such as hire-purchase and leasing. Example- Muthoot Finance Limited, Shriram Transport Finance Company Limited, Cholamandalam Investment and Finance Company Limited.

4. Infrastructure Finance Companies (IFCs) - These NBFCs provide long-term finance for infrastructure projects such as power, telecom, and transportation. Example- IDFC Limited, Power Finance Corporation Limited, Rural Electrification Corporation Limited.

5. Systemically Important Core Investment Companies (CICs) - These NBFCs hold at least 90% of their assets in the form of investments in equity shares, preference shares, bonds, debentures, and other debt securities. Example- HDFC Limited, LIC Housing Finance Limited, ICICI Securities Primary Dealership Limited.

6. Microfinance Companies (MFIs) - These NBFCs provide financial services to low-income households and small businesses in rural and semi-urban areas. Most demanding NBFC. Example- Ujjivan Small Finance Bank Limited, Equitas Small Finance Bank Limited, Janalakshmi Financial Services Limited.

7. Non-Operative Financial Holding Companies (NOFHCs) - These NBFCs are formed to promote the holding of shares of banks and other financial companies. Example- IDBI Bank Limited, Bandhan Bank Limited, HDFC Bank Limited.

Each type of NBFC is subject to specific regulations and guidelines issued by the RBI. The RBI also periodically reviews and updates the regulatory framework for NBFCs to ensure that they operate in a safe and sound manner and do not pose risks to the financial system.

Eligibility criteria for obtaining an NBFC license from RBI

Any Indian citizen or a registered company, society or a trust can apply for an NBFC license. However, there are certain eligibility criteria that need to be met for obtaining an NBFC license from the Reserve Bank of India (RBI).

»The applicant must have a minimum net owned fund (NOF) of Rs. 10 crores (Amended). The NOF is the total amount of capital invested in the company by its owners, minus the total amount of liabilities.

»The company must have a satisfactory credit rating, and its directors must have a good track record of financial integrity and management.

»The company must have a business plan that clearly defines its proposed activities, target customers, and financial projections.

»The company must have a robust compliance framework in place, with adequate policies and procedures to ensure compliance with all applicable laws and regulations.

»The company must have a physical presence in India, with a registered office and a team of qualified professionals to manage its operations.

Once the company meets these eligibility criteria, it can apply for an NBFC license from the RBI. The application process involves submitting various documents and undergoing a rigorous evaluation process by the RBI to ensure that the company is fit and proper to operate as an NBFC.

What is "principal business" in NBFC ?

The term "principal business" refers to the primary financial activity that the company engages in. According to the Reserve Bank of India (RBI), an NBFC is classified as an-

• "Asset Finance Company" (AFC),

• "Investment Company" (IC),

• "Loan Company" (LC), or

• "Infrastructure Finance Company" (IFC) based on its principal business activity.

An AFC is an NBFC that is primarily engaged in the business of financing physical assets such as vehicles, machinery, and equipment. An IC is an NBFC that is primarily engaged in the business of acquiring securities such as stocks, bonds, and debentures. An LC is an NBFC that is primarily engaged in the business of providing loans, advances, or other forms of credit. An IFC is an NBFC that is primarily engaged in the business of providing long-term finance for infrastructure projects.

In order to be classified as an NBFC, a company must have financial activity as its principal business. This means that at least 50% of the total assets or income of the company should be related to financial activities. For example, if an NBFC's primary business is to provide loans to individuals and businesses, then the majority of its assets and income should come from lending activities.

It's worth noting that the RBI has set different regulations and guidelines for different types of NBFCs based on their principal business activity. This is to ensure that each type of NBFC operates within a framework that is appropriate for its specific business model and risk profile.

Process to apply for an NBFC license-

NBFC Company registration from MCA will be the first step to start and thereafter post incorporation it is mandatory or requires obtaining a certificate of registration (CoR) from the Reserve Bank of India (RBI) before commencing any business activity.

It can be time-consuming and involves several steps. While there is no shortcut to obtaining an NBFC license, there are some tips that can help expedite the process:

»Before you apply for an NBFC license, make sure that you meet all the eligibility criteria specified by the RBI. This includes having a minimum net owned fund of Rs. 10 crores, a satisfactory credit rating, and a robust compliance framework in place. On the basis of this criteria at prima facie application getting rejection if not maintained.

»Your business plan should clearly define your proposed activities, target customers, and financial projections. It should also highlight the unique value proposition of your business and how you plan to differentiate yourself from other NBFCs in the market.

»The RBI places a lot of emphasis on the qualifications and experience of the management team specially for finance Director and board of directors of the NBFC. Ensure that you have a team of qualified professionals with relevant experience in the financial services industry or Sector.

»The RBI requires a range of documents to be submitted as part of the NBFC license application process. Make sure that you have all the necessary documents ready and that they are complete and accurate.

Therefore, Engaging with a Compliance Calendar LLP who has experience in the NBFC licensing process can be helpful in expediting the process. They can guide you through the application process, help you prepare a robust business plan, and ensure that all necessary documents are submitted in a timely manner. It's important to note that the NBFC licensing process normally takes 5-6 months, and there is no guaranteed way to expedite the process. although, following the tips cited above can increase the likelihood of obtaining an NBFC license in a timely manner with the help of Compliance Calendar Team of Expert in NBFC Registration and consultancy.

Growth of NBFC Registration in India-

As of March 2021, there were 10,952 Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India (RBI) in India. This includes companies that are registered under various categories such as asset finance companies, loan companies, investment companies, microfinance companies, infrastructure finance companies, and others.

It's worth noting that the number of NBFCs can fluctuate over time as new companies are registered and existing companies may surrender their license or merge with other entities. Additionally, the RBI regularly reviews and updates its regulatory framework for NBFCs, which can impact the number of companies that are registered and operating in the country. Normally, the NBFC sector in India has grown significantly in recent years, and plays an important role in providing access to credit and other financial services to individuals and businesses, particularly those that may not have access to traditional banking services.

The Reserve Bank of India (RBI) may reject an application for an NBFC license if the applicant does not meet the eligibility criteria or if there are any concerns regarding the fit and proper status of the applicant if-

»The RBI requires that an NBFC have a minimum net owned fund (NOF) of Rs. 2 crores. If the applicant's NOF is less than the required amount, the application may be rejected.

»The RBI considers the credit rating of the applicant as a key factor in determining the viability of the proposed NBFC. If the applicant's credit rating is unsatisfactory, the application may be rejected.

»The RBI examines the track record of the directors of the applicant company to assess their integrity and suitability to run an NBFC. If the directors have a poor track record, the application may be rejected.

»The RBI expects NBFCs to have a robust compliance framework in place to ensure that they operate in a transparent and ethical manner. If the applicant does not have an adequate compliance framework in place, the application may be rejected.

»The RBI requires various documents to be submitted as part of the NBFC license application process. If the documentation is incomplete or inaccurate, the application may be rejected.

It's important to note that the grounds for rejection of an NBFC license application can vary depending on the specific circumstances of the applicant. The RBI evaluates each application on a case-by-case basis and may reject an application if it deems it to be not in the best interests of the financial system or the public at large.

How NBFC is different from the Bank ?

Amendment to NBFC-

Reserve Bank of India (RBI) has announced an increase in the minimum Net Owned Fund (NOF) requirement for all categories of Non-Banking Financial Companies (NBFCs) in India to Rs. 20 crore by March 31, 2022, and further to Rs. 25 crores by March 31, 2023.

But, there are certain exceptions for some categories of NBFCs.

For example, NBFC-Investment and Credit Companies (ICC), NBFC-Microfinance Institutions (MFI), and NBFC-Factors have been given a phased implementation of the increased NOF requirement as follows:

»NBFC-ICC: The present NOF requirement of Rs. 2 crore will be increased to Rs. 5 crore by March 31, 2022, and further to Rs. 10 crore by March 31, 2024.

»NBFC-MFI: The present NOF requirement of Rs. 5 crore will be increased to Rs. 7 crore by March 31, 2022, and further to Rs. 10 crore by March 31, 2023.

»NBFC-Factors: The present NOF requirement of Rs. 5 crore will be increased to Rs. 7 crore by March 31, 2022, and further to Rs. 10 crore by March 31, 2023.

It's worth noting that NOF refers to the net worth of an NBFC, which is calculated as its total assets minus its total liabilities. The increased NOF requirement is aimed at strengthening the financial stability of NBFCs and ensuring that they have adequate capital to support their business activities.