How to Start a Finance Company in India?

Finance companies are the heartbeat of the financial sector in India. They ensure the money keeps flowing across the economy. A finance company provides loans, makes investments, manages funds or offers financial protection to customers through insurance and other services.

Since finance companies handle financial transactions, they are heavily regulated by the Government of India so as to ensure customer protection as well as maintain stability in the financial system. In this blog post, we will explain in simple terms how to start a finance company in India.

What is a Finance Company?

The term finance company is commonly used as a shorter and simpler way to refer to a Non-Banking Financial Company (NBFC). It refers to a company that is engaged in the business of providing loans, financing and credit services to individual clients as well as corporate clients. The finance companies play an indispensable role in the economy as they help people and businesses in getting access to funds whenever they need it for certain purposes.

In India, to set up an NBFC, it is mandatory to secure NBFC registration. For this, an application needs to be filed with Reserve Bank of India (RBI) via the official RBI COSMOS portal. It is important to note that a financial company with NBFC registration cannot accept demand deposits like a bank can.

Eligibility Requirements for a Finance Company

Before you apply for NBFC licence to set up a finance business, you must ensure that your business entity meets the eligibility requirements we have listed below. If the entity does not meet the mentioned requirements, it is essential to take the necessary steps to fulfil them prior to filing the licence application as ineligibility may lead to the rejection of the application.

• Must have Minimum Net Owned Funds of Rs. 10 crore in place.
• Registration as Private Limited or Public Limited Company is a must.
• Must satisfy RBI 50-50 test. This means that at least 50% of assets and 50% of income of NBFC finance business must be from financial activities.
• At least one-third of directors of the company should have finance-related experience.
• Compliance with RBI regulations as well as licensing requirements is a must.
• There needs to be adequate financial and operational infrastructure for NBFC operations.

Documents Required for a Finance Company

The following documents are required to obtain an NBFC license for a finance business:

• Certificate of Incorporation of Pvt/Public Ltd Company.
• Memorandum of Association and Articles of Association.
• Board Resolution for NBFC Application.
• KYC details, PAN cards, business profiles and CIBIL/credit reports of all directors and major shareholders.
• Audited Financial Statements (3 years).
• Net Worth Certificate from a CA.
• Income Tax Returns (ITRs).
• A detailed 5 years business plan stating loan processes, market research and capital structure of NBFC Company.
• A Bank Report confirming Company’s fixed deposits and certifying that no lien has been marked on them.
• Other documents required by RBI.

Steps to Start an NBFC Finance Company

To  start an NBFC company, you need to follow the steps we have explained below. Once you go through all the steps, you will understand how one can apply for the NBFC license and how it is issued by the central bank:

Step 1: First, you must ensure that your business entity meets the eligibility requirements.

Step 2: After that, you need to collect all the necessary documents we listed in the previous section.

Step 3: Thereafter, you can file an online application for NBFC registration via RBI COSMOS portal and submit the required information as well as supporting documents.

Step 4: Once online application is submitted, you must send the physical copy of it along with all supporting documents to RBI Regional Office.

Step 5: Then, the RBI will examine the application and verify whether all conditions and requirements have been fulfilled.

Step 6: If the RBI is satisfied that your company complies with applicable regulations, it will grant NBFC licence.

Step 7: After receiving the license, your company can commence NBFC business activities.

Conclusion

A finance company is a company engaged in providing financial services such as loans, investments and fund management. In the financial sector, the role of finance companies is of utmost importance. By starting a financial company, you can contribute to the nation’s economic growth and help individuals as well as businesses to meet their financial needs. To start an NBFC finance company in India, you need to mandatorily register it as a private limited company or public limited company under Companies Act, 2013.

Entities like limited liability partnerships, partnership firms, sole proprietorships, etc., are ineligible to apply for and obtain the NBFC registration. Additionally, your company must maintain minimum Net Owned Funds of Rs. 10 crore and fulfill many other regulatory requirements. For assistance in finance company registration, you can contact Registrationkraft consultants!

Frequently Asked Questions (FAQs)

Q1. Can I apply for NBFC registration online?

A. Yes, you can apply for NBFC registration online. For this, you need to file an NBFC registration application with the Reserve Bank of India via official RBI COSMOS portal.

Q2. What is the validity of NBFC license?

A. The NBFC license comes with a perpetual validity. It does not expire.

Q3. Can an LLP operate as an NBFC?

A. No, only private limited companies and public limited companies can operate as NBFCs.

Q4. Can an individual applicant obtain the NBFC license?

A. No, only a company can obtain an NBFC license.

Q5. What is the minimum NOF requirement for NBFC registration?

A. Minimum NOF requirement for NBFC registration is Rs. 10 crore.

Also Read: Difference between NBFC and Bank