Concept 1 · free preview
What is an NBFC? Definition and the 50-50 principal business test
Understand
A Non-Banking Financial Company (NBFC) is a company that does 'banking-like' work — lending, investing in securities, leasing, hire-purchase — without being a bank. Think of Bajaj Finance giving a consumer-durable loan, or Muthoot Finance giving a gold loan. They borrow from banks, the market and (a few) the public, and lend onward, so they carry bank-like risks. That is why the RBI regulates them under Chapter III-B of the RBI Act, 1934. Legally, an NBFC must be a company registered under the Companies Act, 1956 or 2013 whose principal business is loans and advances, acquiring shares/bonds/debentures/government securities, leasing, hire-purchase and similar activity. A company whose principal business is agriculture, industry, buying and selling goods (other than securities), providing services, or buying/selling/constructing immovable property is NOT an NBFC, even if it does some lending on the side. The RBI Act does not define 'principal business'. So the RBI defined it through a press release dated 8 April 1999: a company is in financial business as its principal business when BOTH (a) financial assets are more than 50% of total assets (netted off by intangible assets) AND (b) income from financial assets is more than 50% of gross income. This is the famous '50-50 test'. Only a company that meets both limbs must register with the RBI. Section 45-IA says no company can start or carry on the business of a non-banking financial institution without a Certificate of Registration (CoR) from the RBI and the minimum Net Owned Fund (NOF) — roughly, paid-up capital plus free reserves, minus losses and intangible assets.
Rule
Law: RBI Act, 1934, Chapter III-B. Section 45-I(f) defines a non-banking financial company; Section 45-I(c) lists what counts as a 'financial institution'.
Section 45-IA: a CoR from the RBI is compulsory before commencing or carrying on non-banking financial business.
Principal business = 50-50 test (RBI press release of 8 April 1999): financial assets > 50% of total assets AND financial income > 50% of gross income. Both must be met.
Excluded activities: agriculture, industry, trading in goods (other than securities), services, and real estate (sale/purchase/construction).
An NBFC must be a company. Individuals, firms and associations (unincorporated bodies) are barred from accepting deposits under Section 45S of the RBI Act.
RBI powers over NBFCs: register, issue directions, inspect, regulate, supervise, penalise and cancel the CoR.
Not every financial company is regulated by the RBI — insurers (IRDAI), stock brokers and merchant bankers (SEBI), chit funds (State Governments) and Nidhis (MCA) are exempted from RBI registration to avoid dual regulation.
Current position
As of 2026-10-11 (RBI FAQ updated 15 Sep 2026): minimum NOF for registration is ₹10 crore with effect from 1 October 2022. New applicants need ₹10 crore from the start; existing NBFCs (ICC) must reach ₹10 crore by 31 March 2027 (glide path ₹5 crore by 31 March 2025).
Effective: 1 Oct 2022Source (opens in a new tab)
Example
Sunrise Capital Ltd has total assets of ₹200 crore (after removing intangibles), of which ₹120 crore are loans and bonds — 60% financial assets. Its gross income is ₹30 crore, of which ₹18 crore (60%) is interest and dividend. Both limbs exceed 50%, so it must hold an RBI CoR. If only ₹12 crore (40%) of its income came from financial assets, it would fail the second limb and would not be an NBFC, even though 60% of its assets are financial.
Common mistake
The test is 'more than 50%' on BOTH assets and income — meeting only one limb is not enough.
'Principal business' is not defined in the RBI Act; it comes from the RBI's 8 April 1999 press release.
A manufacturing company that gives a few loans is a non-banking non-financial company — its deposits are governed by MCA rules, not the RBI.
Partnership firms and individuals cannot become NBFCs; an NBFC is always a company.
Net Owned Fund is not the same as total capital: losses and intangible assets are deducted.