In India, Non-Banking Financial Companies (NBFCs) play a vital role in enhancing financial inclusion and offering credit to segments often underserved by traditional banks. However, a frequently asked question by startups and entrepreneurs is: “Is it mandatory for every NBFC to register with the Reserve Bank of India (RBI)?” This article explores this in detail, focusing on RBI registration requirements, exceptions, penalties for non-compliance, and the overall legal framework.
What is an NBFC?
A Non-Banking Financial Company (NBFC) is a company incorporated under the Companies Act, 2013, or earlier, that provides financial services similar to banks but without holding a banking license. NBFCs are primarily involved in:
- Loans and advances
- Investments in stocks, bonds, debentures, and securities
- Leasing, hire purchase, and insurance services
NBFCs are regulated under the RBI Act, 1934, especially Chapter III-B, and the RBI (Non-Banking Financial Companies) Directions, 2023.
Is Registration with RBI Mandatory for NBFCs?
Yes, but there are some exceptions.
As per Section 45-IA of the RBI Act, 1934, a company must obtain a Certificate of Registration (CoR) from the RBI before commencing any non-banking financial business if:
- It has a Net Owned Fund (NOF) of at least Rs. 10 crore (Rs. 300 crore for NBFC-IFCs), and
- It meets the Principal Business Criteria, also known as the 50-50 test:
- Over 50% of total assets should be financial assets
- Over 50% of gross income should come from financial activities
If both conditions are met, the company must register as an NBFC.
Exceptions: NBFCs Not Required to Register with RBI
Some financial entities are regulated by other statutory bodies and hence exempt from RBI registration:
- Insurance companies – regulated by IRDAI
- Stockbrokers & Merchant Bankers – regulated by SEBI
- Mutual Funds & Venture Capital Firms – SEBI
- Nidhi Companies – MCA
- Chit Funds – under Chit Funds Act, 1982
Types of NBFCs That Must Register with RBI
- NBFC-Investment and Credit Company (NBFC-ICC)
- NBFC-Infrastructure Finance Company (NBFC-IFC)
- NBFC-Micro Finance Institution (NBFC-MFI)
- NBFC-Factor
- NBFC-P2P Lending Platform
- NBFC-Account Aggregator (NBFC-AA)
- NBFC-Non-Operative Financial Holding Company (NOFHC)
- NBFC-Housing Finance Companies (HFCs)
- NBFC-Core Investment Company (CIC)
These must comply with RBI’s prudential norms, governance standards, and periodic filings.
Penalties for Non-Registration
Operating as an NBFC without RBI registration can lead to:
- Fines up to Rs. 25,000/day
- Cease and desist orders
- Criminal prosecution
- Loss of credibility
- Ineligibility for government schemes, credit bureaus, and formal funding
Benefits of RBI Registration
- Legitimacy & Trust – Enhances brand value and investor confidence
- Access to Funding – Eligible for institutional finance and equity investments
- Credit Bureau Access – Share and receive credit data
- Regulatory Compliance – Avoid penalties and legal issues
- Business Scalability – Easier expansion into new segments like digital lending
How to Register an NBFC with RBI
- Register under Companies Act
- Maintain minimum NOF of Rs. 10 crore
- Prepare required documents:
- Certificate of Incorporation
- MOA & AOA
- Board Resolution
- Net Worth Certificate
- Audited financials
- Bank reports and director KYC
- Apply via COSMOS portal
- Submit physical documents to RBI regional office
- Respond to RBI queries if any
- Receive Certificate of Registration
Post-Registration Compliance
- File annual NBS-9 returns
- Follow Fair Practices Code
- Maintain Capital Adequacy Ratio (CAR)
- Submit SAC by Statutory Auditor
- Follow KYC & AML norms
- Appoint Compliance Officer
Conclusion
To conclude, every NBFC must register with the RBI unless it falls under exempt categories regulated by other bodies. Unauthorized operation as an NBFC can lead to serious consequences.
For startups and entrepreneurs, proper legal consultation is highly recommended. Experts like Lal Ghai & Associates can help you navigate the RBI registration process and stay compliant with evolving NBFC regulations.