Summary: The article explains the legal framework, classification, regulatory structure, and compliance requirements applicable to Non-Banking Financial Companies (NBFCs) under the RBI Act, 1934. An NBFC is a company engaged in financial activities such as loans, investments, hire-purchase, insurance, or chit business, but without a banking licence. To qualify as an NBFC, both conditions of the Principal Business Test must be satisfied: more than 50% of total assets must be financial assets and more than 50% of gross income must arise from financial activities. The article distinguishes NBFCs from commercial banks on aspects such as deposit acceptance, payment systems, regulatory framework, and deposit insurance. It also outlines various categories of NBFCs including Investment & Credit Companies, Housing Finance Companies, Micro Finance Institutions, Peer-to-Peer Lending Platforms, and Core Investment Companies. Further, the article discusses RBI’s Scale-Based Regulation framework, Net Owned Fund requirements, NPA norms, registration obligations, governance standards, reporting requirements, Companies Act applicability, and practical compliance scenarios relating to public funds, related party loans, asset classification, and RBI approval for shareholding changes.
SECTION 01 — What is an NBFC?
Definition · Legal Framework · Principal Business Test · Exclusions
Meaning of NBFC — Sec. 45I(f), RBI Act, 1934
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act and engaged in the business of loans/advances, acquisition of shares/stocks/bonds, hire-purchase, insurance, or chit business — but is NOT a banking company.
Key criteria:
- Registered as a company under the Companies Act, 2013
- Engaged in financial activity: Loans, investments, hire-purchase, chit business
- Not a banking company — Does not hold a banking licence under Banking Regulation Act
- Principal business criteria: >50% assets AND >50% income must be from financial activities
Source: Section 45I(f) of the RBI Act, 1934
The Principal Business Test
| Condition | Requirement | Detail |
| Condition 1 | >50% Financial Assets | More than half of total assets must be financial assets (loans, investments, etc.) |
| Condition 2 | >50% Financial Income | More than half of gross income must arise from financial activities |
BOTH conditions must be satisfied simultaneously — failing either means the entity is NOT an NBFC.
Activities EXCLUDED from Financial Activities:
- Agriculture
- Industrial Activity
- Trading of Goods/Services
- Non-financing Real Estate
- Insurance (regulated separately)
SECTION 02 — NBFC vs. Bank
Key Differences · Regulatory Framework · Functions
NBFC vs. Commercial Bank — Key Differences
| Parameter | Commercial Bank | NBFC |
| Governing Law | Banking Regulation Act, 1949 | RBI Act, 1934 + Companies Act |
| Demand Deposits | Allowed | Not allowed |
| Payment System | Full access (cheques/NEFT) | No cheque facility |
| Deposit Insurance | DICGC coverage | Not covered |
| CRR / SLR | Mandatory | Limited / Not applicable (BL) |
| SARFAESI Rights | Full rights | Selective eligibility |
| FDI Limit | 74% | 100% (automatic route) |
| Capital Requirement | Higher (min Rs.500 Cr – SFB) | Rs.10 Cr NOF (ICC) |
| Licence Difficulty | Very stringent (RBI licence) | Easier (CoR-based) |
Note: SFB = Small Finance Bank | CoR = Certificate of Registration | NOF = Net Owned Fund | BL = Base Layer
SECTION 03 — Classification of NBFCs
Types · Activity-Based Categories · Regulatory Intent
Types of NBFCs (Activity-Based Classification)
| Abbreviation | Full Name | Description |
| ICC | Investment & Credit Company | Loans, investments, asset finance — the most common type |
| MFI | Micro Finance Institution | Small loans to low-income borrowers; priority sector |
| CIC | Core Investment Company | 90%+ assets in group company securities; limited public funds |
| HFC | Housing Finance Company | Home loans; regulated jointly by RBI and NHB |
| P2P | Peer-to-Peer Lending Platform | Online marketplace connecting borrowers and lenders |
| IFC | Infrastructure Finance Company | Long-term infra financing; 75%+ assets in infra loans |
| AA | Account Aggregator | Consent-based financial data aggregation platform |
| IDF | Infrastructure Debt Fund | Refinances infra projects via bonds/units |
SECTION 04 — Scale-Based Regulation (SBR)
4-Layer Framework · Risk-Based Supervision · RBI Circular (Oct 2021)
Scale-Based Regulation (SBR) — 4-Layer Framework
| Layer | Full Name | Criteria | Regulatory Intensity |
| TL | Top Layer | Extreme systemic risk — RBI discretion | Highest (RBI discretion) |
| UL | Upper Layer | Top 10 NBFCs + risk-selected entities | Bank-like norms; mandatory listing within 3 years |
| ML | Middle Layer | Assets over Rs.1,000 Cr + deposit-taking NBFCs | Stricter norms; board-level risk committee mandatory |
| BL | Base Layer | All others (assets below Rs.1,000 Cr), incl. P2P, AA | Lighter regulations; no mandatory risk-based audit |
Regulatory Intensity Increases Upward (BL → ML → UL → TL)
SBR — Layer-Wise Regulatory Requirements
| Layer | Criteria | Key Requirements |
| Base Layer (BL) | Assets below Rs.1,000 Cr | Lighter compliance burden; Includes P2P, AA platforms; No mandatory risk-based audit |
| Middle Layer (ML) | Assets Rs.1,000 Cr and above; Deposit-taking NBFCs (NBFC-D); IFC, IDF, CIC (systemically relevant) | Stricter norms; Board-level risk committee mandatory |
| Upper Layer (UL) | Top 10 NBFCs by RBI list + others | Bank-like capital/NPA regulations; Mandatory listing within 3 years; Differential standard asset provisioning |
| Top Layer (TL) | Extreme systemic risk — RBI identified | Conversion to bank may be required; Highest regulatory scrutiny; Rarely populated layer |
SECTION 05 — Compliance & Governance
NOF · NPA Norms · Registration · Reporting Requirements
Net Owned Fund (NOF)
NOF = Owned Funds (Equity + Reserves minus Losses) minus Investments in subsidiaries / group companies
| NBFC Category | Minimum NOF | Remark |
| ICC (Investment & Credit Company) | Rs.10 Cr | Minimum entry requirement |
| NBFC-MFI | Rs.10 Cr | For Tier 1; Rs.7 Cr for NE/hilly states |
| P2P Lending Platform | Rs.2 Cr | Lighter threshold for tech-focused platform |
| Account Aggregator (AA) | Rs.2 Cr | Lighter threshold |
| Core Investment Company (CIC) | Rs.100 Cr | If accessing public funds |
| Housing Finance Company (HFC) | Rs.20 Cr | Post-revised NHB/RBI norms |
Registration & Reporting Requirements
| Requirement | Description |
| CoR (Certificate of Registration) | RBI — mandatory before commencing business |
| FIU-IND Registration | Financial Intelligence Unit — AML/CFT compliance |
| CKYC Registration | Central KYC Registry for customer onboarding |
| CIC Registration | Credit Information Companies (CIBIL, Equifax, etc.) |
| CERSAI | Central Registry — security interest on immovable property |
| RBI Approval | Required for >26% shareholding or >30% director change |
| CRILC | Central Repository on Large Credits — quarterly submission |
| CIMS | Centralised Information Management System — periodic returns |
| Fraud Reporting | Report fraud to RBI within prescribed timelines |
| Auditor Certificate | Annual certificate from statutory auditor on asset classification |
| NPA Declaration | 90 DPD norm — uniform asset classification applies |
| Companies Act Returns | Annual returns, financial statements, board reports |
Companies Act Applicability & Small Company Concept
Exemptions Under Companies Act:
- Sections 185 & 186 (inter-corporate loans) — not applicable to NBFCs
- Deposit rules under Companies Act — not applicable (RBI directions prevail)
- RBI Master Directions override Companies Act on financial matters
- Governance, audit and CSR provisions still fully apply
Small Company Concept for NBFCs:
- Criteria: Paid-up capital up to Rs.4 Cr AND Turnover up to Rs.40 Cr
- NBFCs are NOT excluded from small-company status by Companies Act or RBI
- Benefits: No mandatory cash flow, fewer board meetings, CARO exemption
- Conclusion: An NBFC CAN qualify as a small company if criteria are met
SECTION 06 — Case Studies & Practical Scenarios
Exam-Style Problems with Detailed Analysis
Practical Scenarios — Part 1
Q1: Principal Business Test — NBFC Qualification
Company X: 55% of assets are financial assets, but only 45% of income is from financial activities. Is it an NBFC?
Answer: NOT an NBFC
Analysis: The Principal Business Test requires BOTH conditions simultaneously. Since the income criterion (above 50%) is not met, the entity does NOT qualify as an NBFC.
Q2: SBR Layer Classification
NBFC-Y has total assets of Rs.1,200 Cr and does not accept public deposits. Which SBR layer applies?
Answer: Middle Layer (ML)
Analysis: Any NBFC with assets of Rs.1,000 Cr or more is placed in the Middle Layer under Scale-Based Regulation, regardless of deposit-taking status.
Q3: Loans to Directors
An NBFC proposes to grant a Rs.6 Cr loan to one of its directors. What approval is required?
Answer: Board Approval Required
Analysis: Loans to directors/related parties require Board-level approval and mandatory disclosure. RBI norms on related party transactions apply strictly.
Practical Scenarios — Part 2
Q4: Public Funds Classification
An NBFC borrows Rs.50 Cr from a commercial bank. Does this constitute ‘public funds’?
Answer: Yes — Public Funds
Analysis: Public funds include bank borrowings, NCDs, and debentures. Only owned share capital is excluded. This determines NBFC classification and additional RBI obligations.
Q5: NPA Classification
A loan account of NBFC-Z has been overdue for 95 days. What is its NPA classification?
Answer: Non-Performing Asset (NPA)
Analysis: Under harmonised NPA norms (90 DPD), an account overdue for more than 90 days is classified as NPA. 95 days clearly breaches the threshold.
Q6: Shareholding Change — RBI Approval
A promoter holds 20% in an NBFC and proposes to acquire additional shares taking his stake to 30%. Is RBI approval needed?
Answer: Yes — Prior RBI Approval Required
Analysis: Change in shareholding exceeding 26% requires prior RBI approval. Moving from 20% to 30% constitutes a material acquisition triggering the approval requirement.
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