How to Start a Non-Banking Financial Company (NBFC) in India

What is a Non-Banking Financial Company?

A Non-Banking Financial Company (NBFC) is a company incorporated under the Companies Act, 2013 (or an earlier applicable companies law) that carries on specified financial activities, such as loans and advances or investment in securities, as its principal business. The governing definitions are in section 45-I of the Reserve Bank of India Act, 1934.

For classification purposes, RBI commonly applies the principal business (50-50) test: financial assets constitute more than 50% of total assets and income from financial assets constitutes more than 50% of gross income. The test must be assessed against the actual business and relevant exemptions. Businesses primarily engaged in agriculture, industrial activity, trading goods or services, or certain immovable-property activities are generally outside the NBFC definition solely on that account.

Insurance, chit funds, securities intermediation and other specialist financial activities may fall under separate regulatory regimes. They should not be treated as automatically eligible for an ordinary NBFC licence.

Difference between banks and NBFCs

NBFCs may participate in payment ecosystems through arrangements permitted by law, but such participation does not give them a banking licence.

Types and regulatory classification of NBFCs

Older references to separate asset finance, loan and investment companies reflect historical classifications. RBI subsequently consolidated these into NBFC-Investment and Credit Company (NBFC-ICC). Other categories include NBFC-Microfinance Institution (NBFC-MFI), NBFC-Factor, Infrastructure Finance Company (IFC), Infrastructure Debt Fund NBFC (IDF-NBFC), Core Investment Company (CIC), and other specialised categories subject to their own eligibility rules.

The RBI's Scale Based Regulation (SBR) framework groups NBFCs into Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL) and, if warranted, Top Layer (NBFC-TL). Classification depends on size, activity, risk and supervisory criteria; it is not simply a choice made by the applicant.

How to register an NBFC with RBI

Section 45-IA of the RBI Act, 1934 generally prohibits a company from commencing or carrying on the business of a non-banking financial institution without obtaining an RBI Certificate of Registration (CoR) and meeting the prescribed Net Owned Fund (NOF) requirement, unless a valid exemption applies.

1. Define the business model: identify the lending, investment or specialised activity and check whether RBI registration or another regulator's authorisation is required.
2. Incorporate a company: register under the Companies Act, 2013 through the Ministry of Corporate Affairs (MCA); ensure its constitutional documents permit the proposed activities.
3. Arrange eligible capital: meet the applicable NOF requirement with legitimate, verifiable sources of funds and maintain supporting banking records.
4. Build governance: appoint fit-and-proper directors and establish credit, risk, internal control, compliance, KYC and information-security arrangements appropriate to the business.
5. Apply through RBI: use the RBI PRAVAAH portal or the application channel specified by RBI for the relevant category, and submit the required documents and declarations.
6. Await approval: RBI assesses the application against statutory and supervisory conditions. Incorporation alone does not authorise regulated NBFC business.
7. Start permitted operations: commence only activities covered by the CoR and applicable permissions, and observe ongoing regulatory reporting requirements.

Some entities supervised by other regulators or covered by specific RBI exemptions may not need a standard NBFC CoR. The exact exemption must be verified rather than assumed.

How much capital is required to start an NBFC?

The old blanket statement that every new NBFC requires only Rs 2 crore is outdated. Under the SBR framework, RBI raised the minimum NOF for specified categories such as NBFC-ICC, NBFC-MFI and NBFC-Factor, with a phased transition for existing entities. For a new NBFC-ICC, the generally applicable entry-level minimum NOF is Rs 10 crore, subject to the latest category-specific directions and exceptions. Other NBFC categories can have different and sometimes substantially higher requirements.

Net Owned Fund is a regulatory measure based on paid-up equity capital and eligible free reserves, less accumulated losses, intangible assets and prescribed deductions, including certain excess investments and exposures to subsidiaries, group companies and other NBFCs. It is not the same as authorised share capital, cash balance or total loan book.

Other startup and operating costs

• Company incorporation, professional advisory, statutory filings and audit fees.
• Office rent or purchase, utilities, secure document storage and furniture.
• Core lending software, accounting, cybersecurity, backups and customer support systems.
• Credit appraisal, collections, risk management, legal and compliance staffing.
• Liquidity buffers, operating expenses and funding for the proposed loan portfolio.

Office, employees and infrastructure

An NBFC needs a verifiable registered office and adequate operational facilities. Premises may be owned or rented, subject to company-law documentation and other local requirements. The team size depends on scale, portfolio, customer channels and outsourcing arrangements; there is no single universal employee number for all NBFCs.

Useful infrastructure includes computers, secure internet, business telephone systems, printers, licensed software, furniture and, where operationally justified, vehicles. Fax machines are generally not essential. Outsourced functions remain subject to applicable RBI outsourcing and accountability requirements.

Can an NBFC accept public deposits?

No, not automatically. Most newly established NBFCs are non-deposit-taking. Only NBFCs with the necessary RBI authorisation and category eligibility may accept public deposits under the prevailing Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions and other applicable requirements.

Section 45-I(bb) of the RBI Act defines the term deposit broadly and provides statutory exclusions. The regulatory definition of public deposit adds further specified exclusions; whether a receipt is excluded depends on its legal nature and the conditions of the applicable direction, not merely its label.

• NBFCs cannot accept deposits repayable on demand.
• Permitted deposit tenure, interest ceilings, credit ratings, limits, disclosures and liquid-asset requirements must be checked against current RBI directions.
• NBFC public deposits are not insured by DICGC, and RBI does not guarantee repayment.
• Deposits from non-resident persons are also subject to foreign-exchange rules and specific RBI restrictions; do not rely on old NRI deposit exceptions without verification.

Historical figures for deposit interest ceilings, deposit multiples and prudential ratios appearing in older RBI FAQs should not be used as current operating limits.

Ongoing RBI compliance and reporting

Applicable requirements depend on the NBFC's classification and business. Key obligations may include:

• Prudential norms: capital adequacy, asset classification, income recognition, provisioning, concentration limits and liquidity requirements under applicable RBI directions.
• KYC and anti-money laundering: customer identification and monitoring under RBI's Master Direction - Know Your Customer (KYC), the Prevention of Money-laundering Act, 2002 and applicable rules.
• Fair lending: RBI's Fair Practices Code, transparent loan terms, responsible recovery practices and customer grievance redressal.
• Digital lending: additional requirements where loans are sourced, processed or serviced through digital lending arrangements.
• Financial reporting: audited financial statements, statutory auditor certificates, regulatory returns and asset-liability management reporting as applicable to the category and layer.
• Corporate compliance: Companies Act filings, applicable tax law, employment law, data protection and cybersecurity obligations.
• Regulatory supervision: timely reporting of material changes and cooperation with RBI inspections and information requests.

Older reporting labels such as NBS-1 and historical asset-size thresholds should not be treated as a complete current filing checklist. RBI's reporting systems and applicability rules change over time.

Deposit repayment and investor protection

Where a deposit-taking NBFC is lawfully permitted to hold deposits, repayment, interest on overdue matured deposits, disclosures and complaints are governed by the applicable RBI directions and contractual terms. Depositors should check the entity's RBI registration and deposit-taking authorisation rather than relying on advertisements alone.

Opening a company bank account

After incorporation, a company normally supplies its certificate of incorporation, PAN, memorandum and articles of association, registered-office proof, board resolution or authorisation, and identification/KYC documents of authorised signatories and beneficial owners, plus any additional documents requested by the bank. Banking documentation varies with the account type and applicable KYC rules.

Official resources and legal references

• Reserve Bank of India - NBFC regulation, master directions, circulars, FAQs and public notices.
• RBI PRAVAAH - regulatory applications and approvals.
• Ministry of Corporate Affairs - company incorporation and filings under the Companies Act, 2013.
• India Code - official text of the Reserve Bank of India Act, 1934, including sections 45-I and 45-IA, and other central legislation.
• Deposit Insurance and Credit Guarantee Corporation - deposit insurance coverage and exclusions.

This guide is general business and regulatory information, not a substitute for the current RBI directions, category-specific licensing conditions or professional legal advice. Confirm the applicable requirements before commencing financial activities.