From the Knowledge Centre
NBFC Registration: The Principal Business Test, Net Owned Fund and Scale Based Regulation
Many businesses lend money as a side activity: to group companies, dealers or employees. The question is when that lending turns the company into a Non-Banking Financial Company that needs RBI registration under Section 45-IA of the RBI Act. Carrying on NBFC business without registration is an offence.
The principal business test
RBI treats a company as engaged in financial activity as its principal business when both of these hold:
- financial assets are more than 50% of total assets, and
- income from financial assets is more than 50% of gross income.
Both are tested on the audited balance sheet. A trading or manufacturing company that parks surplus funds in loans can drift into this test without noticing. A periodic check is worthwhile.
Net Owned Fund
Net Owned Fund (NOF) is owned funds, meaning paid-up capital and free reserves less accumulated losses, intangible assets and deferred revenue expenditure, further reduced by investments in and advances to group companies beyond 10% of owned funds.
Under the Scale Based Regulation framework, the minimum NOF for NBFC-ICCs (investment and credit companies), NBFC-MFIs and NBFC-Factors is moving to ₹10 crore, on a glide path:
| By | Minimum NOF |
|---|---|
| 31 March 2025 | ₹5 crore |
| 31 March 2027 | ₹10 crore |
New applicants must meet the current requirement on the date of application. Peer-to-peer lending platforms and account aggregators have their own NOF requirements.
The layers
- Base Layer – non-deposit-taking NBFCs with assets below ₹1,000 crore, P2P platforms, account aggregators and similar
- Middle Layer – deposit-taking NBFCs, non-deposit NBFCs with assets of ₹1,000 crore and above, and certain specified types such as housing finance companies
- Upper Layer – NBFCs specifically identified by RBI on a scoring basis
- Top Layer – kept empty unless RBI sees a specific risk
Governance, capital adequacy, concentration norms and disclosures become stricter as an NBFC moves up the layers.
What RBI examines in an application
- Source of NOF. Promoters must show where the capital came from, with bank statements and income tax returns. Unexplained or borrowed capital is a common reason for return of the application.
- Fit and proper status of directors and promoters, including credit history and any regulatory actions.
- Experience. At least one director with finance experience is expected.
- Business plan – a realistic five-year plan with the products, sources of funds and target customers.
- Policies – KYC/AML, fair practices code, grievance redressal, asset-liability management and loan policies.
The application is filed on RBI's PRAVAAH portal. Processing time depends on how complete the application is and how quickly queries are answered.
After registration
An NBFC files periodic returns with RBI, gets a statutory auditor's certificate on continuing to meet the principal business criteria and NOF, follows the RBI's directions on IRACP norms, and reports to credit information companies.
If you need to lend only within your group, or in very limited ways, there are exemptions. Explore them before applying, because an NBFC licence carries ongoing obligations.
The information in this article reflects the law as on the date of publication and is for general guidance only.