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Are non-banking financial companies (NBFCs) the new banks?

Following the various restrictions on banks and the need for a free environment to satisfy fast financial transactions, NBFCs are proven to be the best alternatives. Read More:

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RBI's recent notifications: Impacts on NBFCs in 2023 - RBI Updates

Famous for a superior understanding of regional needs, robust financial system, and personalized offerings - NBFCs ain’t untouched by rigorous changes, whether market-influenced or regulatory bodies like RBI. So let's discuss them.

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7 Topmost Advantages of Hiring a VCFO at your NBFC and Scaling it

Looking for a virtual CFO but need clarification about whether you should hire them. Here are 7 topmost advantages of hiring a VCFO at your fintech or NBFC that you need to know.

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NBFC Registration Pre-requisite and Required Documents

NBFC Registration Overview

As defined by Section 45-IA of the RBI Act of 1934 and the Organizations Act of 2013, non-banking financial companies, or NBFCs, are significantly involved in economic operations such as secured and unsecured loans, marketplace lending, investments, or information service providers, among others. NBFCs differ from commercial and cooperative banks in that they must abide by the Reserve Bank of India's (RBI) Rules and Regulations even though they do not need a banking license.

The NBFC Registration process includes different steps, which include prerequisites and documents required while registering a Non-Banking Financial Company.

Prerequisite for NBFC Registration

Financial Assessment

The quality of capital is equally as important as the membership of the board.

The seed investment should be proportionate to the declared and certified net worth and should come from reliable sources.

2. The Promoters' Profiles

Directors The Promoters Directors, as the Company's public face, must be people of high integrity and knowledge. All Directors are not required to have prior experience in banking or finance. But it is expected that 25% of the Board would have a background in finance.

3. Strategic Business Plan

The NBFC license's lifeline is an extensive business plan. It will resemble a road map for the next five years. The growth of lending institutions throughout the nation makes it essential to grant licenses to qualified and legitimate promoters.

4. Operative Area

Although many regions of the country lack essential banking services, a few high-priority areas will be given priority and will be taken care of as quickly as feasible. The licensing process will be a little simpler if an NBFC is established in Tier-2, Tier-3, or Tier-4 cities.

4. Choosing an Untouched Sector

The upcoming NBFCs will target the demographic segment that cannot get loan facilities because of a bad credit rating or a lack of papers. To reduce risks, NBFC must execute a better-planned risk management strategy.

Documents Required for NBFC Registration

The following documents are necessary for NBFC registration in the manner described below:

KYC of All Directors and Shareholders.

Directors' and shareholders' professional backgrounds.

Receipt for FD Certificate.

Report from Bankers.

Certified Net Worth.

Reports on credit scores.

We at NBFC Advisory provide end-to-end expert support in NBFC registration, from application completion to registration certificate acquisition - we handle everything to get your NBFC up and running!

With more than 15 years of combined advising and counseling expertise, our team of experts is your go-to source for all your NBFC-related requirements and concerns.

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Blockchain technology can transform how we interact with the digital world. In this Blog, we will discuss how is Blockchain changing and revolutionizing the fintech industry and NBFCs.

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Why is NBFC licensing so popular among fintech companies?

Though a relatively new notion in the financial services industry, fintech companies revolutionize how customers interact with their banks and other financial service providers. To keep up with this fast-paced and ever-changing industry, these companies need to have the appropriate licenses and permissions. And for many fintech, that means opting for an NBFC license instead of a banking license. There are a few key reasons why NBFC Licensing is so popular among Fintechs.

To Run Business with Regulations

The world of fintech is constantly evolving, which means that regulations will also be changing. FinTechs have to remain up to date with their regulatory requirements or risk losing credibility in the eyes of potential investors. They also risk getting fined for non-compliance with specific rules and regulations.

FinTechs must keep up with all types of regulatory requirements regarding customer protection, money laundering prevention, and other aspects related to financial services regulation. It includes things like Know Your Customer (KYC) policies which help verify identity data provided by customers before they can open an account or use a product or service offered by your company.

While these may sound like tedious tasks at first glance, they are vital because they protect both consumers and businesses from the harm caused by unscrupulous individuals who could potentially misuse any online personal information (i.e., identity theft).

Regulations can be beneficial for fintech companies because they help ensure consumer security when dealing with sensitive financial information such as credit card numbers; without them, there would be no way for customers’ funds to be stolen even if criminals managed somehow bypass security measures put forth by their host institutions!

Business Continuation

NBFC license allows FinTech companies to provide a broader range of services such as loans and other credit products. With an NBFC license, FinTechs can offer more products and services; they can better serve investors and consumers by having greater access to funding, credit, and data.

As per the RBI directive, the NBFC license enables FinTech companies to provide a broader range of services such as loans and other credit products, including after-market financing. It gives them an edge by providing a one-stop solution to their customer base as they provide all credit facilities under one roof. This license helps FinTech businesses scale faster.

Asset-Liability Management

FinTechs face myriad challenges daily: managing liquidity and interest rate risk, understanding foreign exchange risks, and complying with the regulations that govern their businesses. NBFC license gives FinTechs the ability to conduct business in India by empowering them to offer financial services across all sectors of the economy. It allows them to use their technology platforms and create new products through their NBFC license that all segments of society can use.

Cash Flow Management

In addition to protection, an NBFC license provides FinTechs with cash flow management benefits. By helping manage their cash flows and financial position, FinTechs can keep their businesses running smoothly and ensure that their customers receive funds promptly.

Some of the ways an NBFC license helps FinTechs manage cash flow include:

Staying competitive in the banking world requires technological developments in cash flow management, and FinTechs bring those technological advancements to the NBFC, which helps better determine cash flow.

NBFC license aids in required regulatory support to the FinTechs, and keeps a check on the regulatory framework applicable to NBFCs is followed by the FinTechs

Most of the FinTechs are coming up with revenue-based financing products and working towards solving the working capital and supply chain-related concerns, which in turn is helping MSMEs manage their cashflows efficiently and take advantage of the trade discounting with the help of NBFCs.

An NBFC license helps FinTechs become more sustainable, stable, and scalable.

A Non-Banking Financial Company (NBFC) license allows FinTechs to get access to:

Funds from the public by issuing bonds or debentures help them become more sustainable, stable and scalable.

The ability to offer loans to customers for investment in their products or services is the way they can diversify their offerings and reach a wider audience of customers.

Underwriting securities-related activities such as managing assets and liabilities, underwriting insurance policies etc., thereby making FinTechs more responsible towards their consumers and investors.

Conclusion

To sum it all up, a Non-Banking Financial Company license helps FinTechs become more sustainable, stable, and scalable. The cost of debt becomes lower, asset liability management is more accessible, cash flow management is better, and they have access to regulated funding. Some systems help them track their customer’s financial data better.

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How "Buy Now Pay Later" is altering consumer spending?

Do you make purchases from online retailers such as Amazon and Flipkart? If that's the case, you must have seen the "Buy Now Pay Later" (BNPL) choice when making your payments. If you haven't used it, you most likely have a lot of inquiries. What is this choice, for who is it intended, what are its benefits, and should you select it?

The evidence is self-evident! By 2025, it is expected that income from Buy Now, Pay Later (BNPL) solutions will total 20527.234 billion Rupees, growing at a 40% annual rate. The paying trend gained popularity due to overall spending by consumers who strongly opposed taking on debt during an uncertain economic climate. Consumer behavior has improved by means of digitalization, which has forced businesses—including those in the commercial banking or Non – banking financial companies (NBFC) sectors—to reconsider how they operate. Traditional banks urgently need to build better, more personalized experiences in order to offer a cutting-edge digital platform with the rise of e-commerce services.

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NBFC: Role & Impact on Indian Economy.

Before talking about NBFC, Do you remember the economic crisis of 2009? If you do not know, then know that businesses worldwide were stuck due to a lack of finance in this financial crisis. And even the banks that financed these businessmen had to struggle to save themselves.

We know that banks cannot go to every customer and inquire about their financial requirements, thus creating problems for those who don’t know how banks work. And one of the reasons for this is that there has been a massive gap in credit availability in India. And this is where the role of a non-banking financial company (NBFC) comes into play. NBFCs played an essential role in meeting the financial needs of customers who did not have access to banks and their services.

What is NBFC (Non-Banking Financial Company)?

NBFC acts as an intermediary in the finance business. In simple words, NBFCs are those companies which are registered under the Companies Act 1950-2013. The Reserve Bank of India (RBI) gives licenses to NBFCs.

For example, on TV or in the newspaper, you will hear the names of companies like Muthoot Finance, Mahindra & Mahindra Finance, and Bajaj Finance. While taking a phone, buying any electronic item, or buying a car, you must have often heard that these companies can provide loans to you. But these are not banking companies. So these companies, which work like banks in some ways, are called NBFCs.

NBFC company gives the loan and gets you to deposit money in insurance or SIP. It also works to provide loans to small businesses in the organized or unorganized sectors and caters to the growing financial needs in the corporate world. But at the same time, NBFCs also have some limitations. They cannot finance any industrial activity, agricultural activity, purchase or manufacture, and sale of immovable property.

History of NBFCs

In India late 1950s and early 1960s, various banks failed due to which a large number of ordinary depositors lost their deposits. At present, it has been noted by the Reserve Bank of India that deposit acceptance activities are being carried out by NBFCs. Although they were not as systemically important as banks, their regulation was initiated by the Reserve Bank of India as they were likely to cause harm to their depositors. Thus, after 1963 these institutions were regulated by the Reserve Bank of India.

In the early times, NBFCs were small organizations and did not exert much influence in the financial industry. But as their scope gradually increased, in December 1964, the Reserve Bank of India amended the RBI Act 1934 and introduced a new chapter to take NBFCs into effect.

The role of NBFCs was at its peak in 1992 after globalization and liberalization. These companies performed well even in the heavy recession of 2009 and today the revenue of NBFCs is more than the revenue of many banks.

Types of NBFCs?

In India, they are categorized by various criteria such as:

Based on liability:

Non-deposit acceptance (type 1): These NBFCs do not accept cash deposits. Which can further be divided into systemically important NBFCs and other NBFCs.

Deposit accepting NBFCs: These types of NBFCs do accept cash deposits.

Based on their business activities:

Credit and investment companies (such as loan companies, asset companies, and investment companies.)

Microfinance companies.

Mortgage guarantee company.

NBFC-NOFHC (Non-operative financial holding company)

Infrastructure debt fund.

Housing Finance companies.

What are the functions of Non-Banking Financial Companies (NBFCs)?

India’s financial sector is enormous. It comprises commercial banks. And the NBFCs offer various banking services without banking licenses, such as:

To give a loan or advance.

To lease or trade financing.

Asset management.

Trading money in market instruments.

Managing stock portfolios.

Investing in products.

retail finance

Hiring or Purchasing.

Investing money in insurance or chat business.

To make acquisitions in securities such as shares, bonds, mutual funds, debentures, and many more such instruments.

Role & Growth of NBFCs.

India’s capital market has seen significant ups and downs over the past few decades. As the trend of the people in the capital market has grown, the volume of transactions has also increased tremendously.

In such a situation, financial institutions like merchant banks, mutual funds and venture capital companies are the most important institutions that have grown very fast.

In addition, NBFCs often play a leading role in providing innovative financial services to the medium, small and micro industries that we know as MSMEs, best suited for their business needs.

We know that more than 60 per cent of India’s population comes from rural areas and people are not in direct contact with the bank due to a lack of education. NBFCs fill this gap. He takes all the facilities to the people’s homes and provides them with the necessary financial assistance.

Even if the bank cannot give loans to everyone, there may be some reasons behind this. The role of NBFCs also cannot be overlooked in providing assistance and guidance during emergencies which is why NBFCs can be the best option for you after the bank.

Impact of NBFCs on the Indian economy.

India’s economy has taken a long time to emerge since Corona. India’s development is founded on five pillars: economy, infrastructure, a technology-based system, vibrant demography, and demand.

We recognize the importance of NBFCs in the Indian economy. In the economy, NBFCs play a critical role in infrastructure, wealth management, and job creation while focusing on the poorest members of society.

Since the beginning of 2019, the NBFC sector has encountered numerous hurdles. The RBI recently introduced adjustments to the rules governing NBFC consumer loans. Some NBFCs’ licenses have also been revoked. This means that the Reserve Bank of India and the Indian Finance Ministry closely monitor NBFCs. However, considering the importance of NBFCs to the Indian economy, positivity must be maintained. With the future of NBFCs in mind, you may recall that it was decided to make India a $5 trillion economy by 2024.

The restrictions for NBFCs have recently been strengthened. NBFCs use cutting-edge technology to develop the most excellent and innovative goods.

In India, there are approximately 10,000 NBFCs, with thousands more being registered each year. In such a scenario, NBFCs are prepared to deploy artificial intelligence and machine learning techniques to assist lenders in assessing client sentiment and maintaining alternate credit rating models.

Conclusion

It can be concluded that NBFCs play a crucial role in the economy of India. Be it the banking sector, financial services or the insurance industry. Also, if we talk about the function of NBFC, it can be called the growth base for Indian Manufacturing and Infrastructure Development. Hope you got to learn something new from this article. Visit Us for NBFC Services such as NBFC Registration, NBFC Takeover, NBFC Compliances, and Virtual CFO.

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NBFC: Role & Impact on Indian Economy.