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Corporate and Economic Laws · Laws and Regulations related to Banking Sector

Regulation of NBFCs under Chapter IIIB of the RBI Act

Updated 11 October 2026 · Fact-checked

An NBFC is a company whose principal business is lending, investing or taking deposits, but which is not a bank. Under Chapter IIIB of the RBI Act you must hold an RBI registration certificate and the required net owned fund, transfer at least 20% of net profit to a reserve fund, and follow RBI deposit directions. Apply each rule to the facts.

Understand Regulation of Non-Banking Financial Institutions (Chapter IIID)

A non-banking financial company (NBFC) does financial business but is not a bank. It lends, invests in shares and securities, does hire purchase or similar business, and may take deposits. Chapter IIIB of the Reserve Bank of India Act, 1934 gives the RBI the power to regulate and supervise such companies.

The Act defines a financial institution as a non-banking institution that carries on, as its business or part of it, activities such as loans and advances, acquiring shares or securities, hire purchase, insurance or chit business. Agricultural activity, industrial activity, trading in goods, providing services and buying or building immovable property are excluded from this list. An NBFC is a company that is a financial institution, or a company whose principal business is receiving deposits or lending in any manner, or another institution the RBI notifies. In practice the RBI tests principal business by looking at whether financial assets and financial income are each more than 50% of the totals.

The chapter works through four controls. First, registration: under section 45-IA, no NBFC may start or carry on business without a certificate of registration from the RBI and the net owned fund the RBI specifies. The RBI can cancel the certificate if the company breaks the conditions. Second, liquid assets: under section 45-IB, a deposit-taking NBFC must keep a prescribed percentage of its assets in unencumbered approved securities. This percentage is not less than 15% of its deposits. Third, the reserve fund: under section 45-IC, every NBFC must create a reserve fund and transfer to it at least 20% of its net profit every year, before it declares any dividend. Fourth, control over deposits and information: the RBI can issue directions on deposits and policy, collect information, inspect books and prohibit a company from accepting deposits.

A bank is different. A bank is a banking company under the Banking Regulation Act, 1949, and can take demand deposits and operate cheque-based payment services. An NBFC cannot. Deposit insurance cover is also not available to NBFC depositors. If a bank is in trouble, section 45 of the Banking Regulation Act lets the RBI apply to the Central Government for a moratorium, and the total moratorium cannot exceed six months. That section covers banking companies, so do not use it for NBFCs.

The Act also contains penalty provisions for contravention. Remember that the RBI, not the Companies Act regulator, is the primary regulator for the financial business of NBFCs.

Key rules to remember

Registration (section 45-IA)
No NBFC may carry on business without (RBI certificate of registration + required net owned fund)
The RBI specifies the net owned fund amount from time to time. The Act does not fix a figure, so do not quote one without a source.
Reserve fund (section 45-IC)
Minimum transfer = 20% × net profit of the year
Transfer is made out of the profit disclosed in the profit and loss account, before any dividend is declared. Appropriation from the fund only for purposes the RBI specifies, and each such appropriation must be reported to the RBI within 21 days.
Liquid assets (section 45-IB)
Unencumbered approved securities ≥ prescribed % of deposits (not less than 15%)
Applies to NBFCs that accept deposits. The RBI prescribes the exact percentage.
Principal business test
Financial assets > 50% of total assets and financial income > 50% of gross income
This is the RBI's regulatory test, not a text of Chapter IIIB. Use it when the question asks whether a company is an NBFC.
RBI powers over NBFCs
Directions + collection of information + inspection + prohibition of deposit acceptance
Includes policy and direction powers, information powers (section 45-K), the power to prohibit deposit acceptance and alienation of assets (section 45-MB) and inspection (section 45-N).
Bank moratorium (Banking Regulation Act, section 45)
Total moratorium period ≤ 6 months
Applies to a banking company, on RBI's application to the Central Government. Use it only to contrast banks with NBFCs.

How to solve Regulation of Non-Banking Financial Institutions (Chapter IIID) questions

Most questions give you a company and a set of facts. You must decide whether the law applies and what the company must do. Use the same sequence every time.

  1. 1Identify the entity. Is it a bank (banking company) or a company doing financial business without a banking licence? Check its principal business and whether it is a company.
  2. 2Check registration. Does it hold an RBI certificate of registration and the net owned fund the RBI requires? If not, it cannot lawfully carry on NBFC business.
  3. 3Check deposits. Is it accepting public deposits, and does it have RBI permission and the liquid-asset holding required?
  4. 4Apply the reserve fund rule. Take net profit as disclosed, compute 20% as the minimum transfer, and confirm it is made before any dividend.
  5. 5List RBI's powers that fit the facts: directions, information, inspection, prohibition of deposits, cancellation of registration.
  6. 6Mention the consequence of breach, such as cancellation of the certificate, prohibition orders and penalties, without quoting figures you cannot verify.
  7. 7Close with a clear conclusion in one or two lines: what the company must do and what the RBI can do.

Quickest way: Three-question check for NBFC problems

When to use it: Use this for short case-based MCQs and for the opening lines of a written answer.

  1. Is it a bank or an NBFC? A bank can run demand deposits and cheque-based payment services. An NBFC cannot.
  2. Is the RBI registration and net owned fund in place? If not, the answer is almost always that it cannot carry on the business.
  3. Is it a profit-and-dividend question? Compute at least 20% of net profit for the reserve fund first, then look at dividend.

Common mistakes in Regulation of Non-Banking Financial Institutions (Chapter IIID)

  • Quoting a fixed net owned fund amount as if the Act prescribes it.

    Students remember figures from older notes or news items.

    Fix: Write that the NBFC must hold the net owned fund the RBI specifies. Give a figure only if the question supplies it.

  • Applying the reserve fund percentage to dividends or to total reserves instead of net profit.

    The 20% rule is remembered without its base.

    Fix: Take the net profit of the year as shown in the profit and loss account and multiply by 20% as the minimum transfer.

  • Paying a dividend first and then thinking about the reserve fund.

    Students treat the transfer as optional.

    Fix: State clearly that the transfer must be made before any dividend is declared.

  • Treating an NBFC as a bank because it lends and takes deposits.

    The activities look alike.

    Fix: List the differences: no demand deposits, no cheque-based payment services, no deposit insurance for depositors, and regulation under Chapter IIIB, not the Banking Regulation Act.

  • Applying the six-month bank moratorium under section 45 of the Banking Regulation Act to NBFCs.

    Both laws are in the same chapter of the syllabus.

    Fix: Remember that section 45 of that Act speaks of a banking company. For NBFCs, use RBI's powers under the RBI Act.

  • Assuming any company that lends is an NBFC.

    Students skip the principal business test.

    Fix: Check whether financial activity is the principal business. Trading and industrial companies are outside the definition of a financial institution.

Worked examples

Example 1

Lakshmi Finance Ltd, a registered NBFC, earned a net profit of ₹80,00,000 for the year. Its board proposes to declare a dividend of ₹30,00,000 and to transfer ₹10,00,000 to the reserve fund. Advise the board under Chapter IIIB of the RBI Act.

Show the solution
  1. Section 45-IC requires every NBFC to transfer at least 20% of its net profit to the reserve fund, out of profit disclosed in the profit and loss account.
  2. Minimum transfer = 20% × ₹80,00,000 = ₹16,00,000.
  3. The proposed transfer of ₹10,00,000 is less than ₹16,00,000, so it is short by ₹6,00,000.
  4. The transfer must be made before any dividend is declared, so the board cannot declare the ₹30,00,000 dividend until the transfer is correct.
  5. Once the fund is later drawn on, any appropriation must be only for a purpose the RBI specifies, and it must be reported to the RBI within 21 days.

Answer: The board must transfer at least ₹16,00,000 (20% of ₹80,00,000) to the reserve fund before declaring any dividend. The proposed transfer of ₹10,00,000 does not comply.

Example 2

Sunrise Finance Pvt Ltd, a company incorporated in Chennai, gives loans and hire-purchase finance as its principal business. It has no RBI certificate of registration and has begun accepting public deposits. Explain the legal position and the RBI's powers.

Show the solution
  1. Lending and hire purchase are financial activities listed in the definition of a financial institution. As a company with this as its principal business, Sunrise is an NBFC.
  2. Under section 45-IA, an NBFC cannot commence or carry on business without a certificate of registration and the net owned fund the RBI specifies. Sunrise holds no certificate, so it is carrying on business in contravention of the Act.
  3. Accepting public deposits also needs the RBI's permission and compliance with its deposit directions. A company without registration cannot meet these conditions.
  4. The RBI can issue directions, call for information and inspect the company.
  5. The RBI can prohibit it from accepting deposits and from alienating its assets (section 45-MB).
  6. Contravention also attracts the penalty provisions of the Act.

Answer: Sunrise is an NBFC carrying on business without the required registration. It must stop deposit acceptance, apply for registration and meet the net owned fund requirement. The RBI can issue directions, inspect, prohibit deposits and asset sales, and the company is exposed to penalties.

Exam tips

  • Learn the short list of sections: 45-IA (registration and net owned fund), 45-IB (liquid assets), 45-IC (reserve fund). Quote a section only if you are sure of it.
  • In reserve fund sums, write the three lines: net profit, 20% as minimum, and the conclusion on dividend. This earns method marks even if arithmetic slips.
  • For bank versus NBFC questions, give four points: demand deposits, cheque-based payment services, deposit insurance and the governing law.
  • In case-based MCQs, check registration first. Many scenarios are built around a company that lends or takes deposits without a certificate.
  • Do not state net owned fund figures, penalty amounts or deposit ceilings unless the question gives them.

Practice questions from Laws and Regulations related to Banking Sector

Regulation of Non-Banking Financial Institutions (Chapter IIID) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Regulation of Non-Banking Financial Institutions (Chapter IIID): frequently asked questions

What is the reserve fund requirement for an NBFC?

Under section 45-IC, an NBFC must create a reserve fund and transfer at least 20% of its net profit to it every year. The transfer comes out of the profit disclosed in the profit and loss account and must be made before any dividend is declared. Withdrawals are allowed only for purposes the RBI specifies, and each one must be reported to the RBI within 21 days.

Can an NBFC start business without RBI registration?

No. Section 45-IA says an NBFC must hold a certificate of registration from the RBI and the net owned fund the RBI specifies. The RBI can also cancel the certificate if the company fails to meet the conditions.

What is the difference between a bank and an NBFC?

A bank is a banking company under the Banking Regulation Act, 1949 and can accept demand deposits and run cheque-based payment services. An NBFC cannot do either, is regulated under Chapter IIIB of the RBI Act, and its depositors do not get deposit insurance cover. Both lend and invest, which is why students confuse them.

Does the six-month moratorium under section 45 of the Banking Regulation Act apply to NBFCs?

No. That section deals with banking companies. The RBI applies to the Central Government, which may order a moratorium for a fixed period that can be extended, but the total cannot exceed six months. For NBFCs, rely on the RBI's powers under the RBI Act.