For most of the last decade, RBI’s approach to NBFCs has followed a single direction – more layers, more disclosures, more committees. So when the Reserve Bank of India (Non-Banking Financial Companies-Registration, Exemptions and Framework for Scale Based Regulation) Amendment Directions, 2026 came into force on 1st July, and actually relieved a category of NBFCs of registration itself, it was worth pausing on. Classification under the amendment turns on several conditions together – customer interface, public funds, asset size, and group aggregation among them. Of these, “public funds” is the one most often misread, and the one this piece spends most of its time on.
Two Types, Not One Size
Every NBFC now sits in one of two buckets. Type I does not access public funds and has no customer interface – investment holding companies, family offices, and treasury vehicles parking money between group entities are the usual examples. Type II is everyone else: NBFCs taking deposits where permitted, lending to retail borrowers, or otherwise dealing with the public in ways that create consumer-facing risk.
The label decides the entity’s entire compliance load – capital adequacy, provisioning, the Fair Practices Code, KYC and AML, supervisory reporting. Type II entities in the Upper Layer will find little relief here. Some of them, in fact, face a requirement Type I entities never will: certain Upper Layer NBFCs, once identified under RBI’s scoring methodology, become subject to a mandatory stock exchange listing within three years, alongside board-level risk committees and large exposure norms closer to what banks follow.
“Public Funds” – Wider Than It Sounds
The “public funds” definition itself, however, now sits in the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025, as amended by the 2026 Amendment Directions referred to above. It defines public funds as a residuary category. It picks up money raised, directly or indirectly, through public deposits, inter-corporate deposits, bank finance, and other outside borrowing such as commercial paper or debentures. The one exclusion is money raised through instruments compulsorily convertible into equity within five years. RBI’s own Frequently Asked Questions on NBFCs make the same point in plain language: public funds are not the same as public deposits; deposits are only one part of a much wider basket.
That basket names ICDs specifically, and this is where I have seen genuine confusion, including among experienced finance teams. An Inter-Corporate Deposit has no standalone definition in the Companies Act, 2013 – it is market parlance for an unsecured placement of surplus funds by one company with another. The Companies Act touches the subject only indirectly. Section 186 governs how much a company may lend, guarantee, invest in, or acquire securities of another body corporate. Separately, Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014 excludes any amount received by a company from another company from the definition of “deposit” under company law altogether.
An entity can therefore tell its statutory auditor, quite correctly, that it has accepted no “deposits” as company law understands the term – and still fall within RBI’s public funds net the moment it takes an ICD. Company law is asking whether shareholder-protection rules are triggered; RBI’s framework is asking whether the entity depends on funds beyond its own capital. An ICD answers the second question regardless of what the first one says. RBI has not expressly ruled on whether an interest-free or short-tenure ICD would be treated differently, so I would not go further than this: such an ICD would ordinarily be regarded as public funds too, since the Master Direction draws no distinction based on tenure or rate, and none based on the lender being a related party.
The practical consequence for advisers is straightforward. Any entity that has availed ICDs from group companies, however small or informally documented, is unlikely to satisfy the “no public funds” limb of the Type I test – irrespective of balance sheet size. The borrowings schedule, not the registration certificate, is where this question actually gets settled.
The Unregistered Type I NBFC
The part of the amendment most likely to change files on a practitioner’s desk is the new “Unregistered Type I NBFC” category. An entity with no customer interface, no public funds, and an asset size below Rs 1,000 crore can now stay outside registration under Section 45-IA altogether, and is spared the reserve fund requirement under Section 45-IC. Where a group runs more than one such entity, the Rs 1,000 crore ceiling is tested on an aggregated group basis, so splitting one large book into several small shells achieves nothing.
Existing Type I NBFCs that genuinely meet the criteria may apply for deregistration through the PRAVAAH portal by 31st December 2026. The application must be accompanied by, among other things, a statutory auditor’s certificate confirming the absence of public funds and customer interface, and a board undertaking to disclose the entity’s unregistered status – together with its public-fund and customer-interface position – in the Notes to Accounts going forward. That disclosure obligation is not optional paperwork; it is a condition RBI has written into the deregistration framework itself, and it continues year on year, not just at the point of exit.
A Checklist Before Advising Deregistration
- Pull the borrowings schedule for the last three years and check specifically for ICDs, however small or short-tenured.
- Confirm there is no customer interface – no retail lending, no direct dealing with borrowers or depositors.
- Test the Rs 1,000 crore asset threshold on an aggregated basis across all group entities, not on a standalone basis.
- Check whether any lender covenant, credit rating mandate, or tender eligibility clause depends on the entity holding a live CoR.
- Line up the statutory auditor’s certificate and the board resolution the PRAVAAH application requires before starting the process.
- Update the Notes to Accounts template in advance, since the disclosure requirement runs every year, not only at the point of deregistration.
Mistakes Worth Watching For
- Assuming a promoter loan is not “public funds” merely because it comes from a related party – the definition draws no such distinction.
- Forgetting the PRAVAAH deregistration window closes on 31st December 2026, and starting the correspondence too close to that date.
- Overlooking the annual Notes to Accounts disclosure once an entity has actually deregistered.
- Testing the Rs 1,000 crore threshold entity-by-entity instead of on a group-aggregated basis.
Enforcement Has Not Slowed
Alongside this relief, RBI has kept up its usual pace of enforcement. In a press release dated 10th June 2026, the central bank cancelled the certificates of registration of 135 NBFCs under Section 45-IA(6) of the RBI Act, 1934, with 125 of the affected entities registered in West Bengal; a further 13 companies surrendered their registration voluntarily following mergers, amalgamations, or exit from the business. Read together with the reclassification, the direction of travel is fairly clear: RBI is prepared to lighten the load for entities that pose no systemic or consumer risk, but has little patience for a certificate that is either unused or misused.
For practitioners, the July 2026 framework is less about reducing regulation and more about correctly identifying which entities deserve to be regulated. That determination begins not with the certificate of registration, but with a careful reading of the balance sheet. In many cases, one overlooked ICD may prove more decisive than an entire compliance manual.
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The author is a practising Chartered Accountant advising NBFCs and real estate clients on internal audit, regulatory and tax matters. Views are personal.
