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Corporate Financial Reporting · NBFCs - Provisioning Norms, Accounting and Reporting

NBFC Meaning, Classification and RBI Regulatory Framework

Updated 11 October 2026

An NBFC is a company registered under the Companies Act that mainly lends, invests or deals in financial assets but is not a bank. The RBI regulates NBFCs under its Scale Based Regulation, which sorts them into Base, Middle, Upper and Top layers by size and risk. To answer questions, state the definition, then the type, then the layer.

Understand NBFC Meaning, Classification and Regulatory Framework

A Non-Banking Financial Company (NBFC) is a company incorporated under the Companies Act that carries on the business of loans and advances, or of acquiring shares, stocks, bonds, debentures or securities issued by government or local authorities, or other marketable securities. Hire purchase and leasing are also covered. Insurance business is excluded, so insurance companies fall outside the NBFC definition. Chit-fund business is dealt with separately. Chit funds are governed by the Chit Funds Act, 1982, which State Governments administer, and they are not treated as NBFCs under the current RBI classification. The RBI Act, 1934 governs the registration and regulation of NBFCs.

To avoid mistaking other businesses for NBFCs, remember the principal business test. An entity is an NBFC only if financial activity is its principal business. The RBI applies this through its principal business criteria, often called the 50-50 test: financial assets are more than 50% of total assets (net of intangible assets), and income from financial assets is more than 50% of gross income. This is the RBI's criteria for deciding principal business, not a separate formula in the Act. The test is a necessary condition, not a sufficient one. The entity must also be a company engaged in financial activity and must hold a Certificate of Registration. Companies whose principal business is agricultural operations, industrial activity, trading in goods (other than securities) or the purchase, sale or construction of immovable property are not NBFCs. A company needs a Certificate of Registration (CoR) from the RBI to start NBFC business, and it must meet the minimum Net Owned Fund (NOF) the RBI prescribes. Check the current figure in the latest RBI directions.

The key difference from a bank is this. An NBFC cannot accept demand deposits. It is not part of the payment and settlement system, so it cannot issue cheques drawn on itself. Deposit insurance from DICGC is not available to NBFC depositors. Banks can do all three. NBFCs can still lend, invest, and (if permitted) take term deposits.

NBFCs are classified in several ways. By deposits: NBFC-D accepts public deposits, NBFC-ND does not. By size: NBFC-ND-SI is a non-deposit-taking NBFC that is systemically important because of its large asset size. Under the RBI's Scale Based Regulation framework, NBFCs fall into four layers.

  • Base Layer (NBFC-BL) covers non-deposit-taking NBFCs below the RBI's asset-size threshold, plus NBFC-P2P, NBFC-AA and Non-Operative Financial Holding Companies (NOFHC).
  • Middle Layer (NBFC-ML) covers all deposit-taking NBFCs and non-deposit-taking NBFCs at or above the asset-size threshold. It also includes other types such as Standalone Primary Dealers.
  • Upper Layer (NBFC-UL) covers the top ten eligible NBFCs by asset size, whatever their score. It also covers other NBFCs the RBI identifies through its parametric scoring methodology.
  • The Top Layer stays empty unless the RBI sees extreme risk in the Upper Layer.

By activity, NBFCs include types such as Investment and Credit Company, Infrastructure Finance Company, Core Investment Company, Infrastructure Debt Fund, Micro Finance Institution, Factor and Mortgage Guarantee Company. Do not memorise thresholds from old notes. Asset-size limits and layer criteria have been revised, so use the latest RBI master directions.

Key rules to remember

Principal business test
Financial assets > 50% of total assets (net of intangible assets) AND income from financial assets > 50% of gross income
Both conditions must hold, but they are only a necessary condition. The entity must also be a company engaged in financial activity and hold a CoR from the RBI to be treated as an NBFC.
Deposit-based classification
NBFC-D = accepts public deposits; NBFC-ND = does not accept public deposits
NBFC-ND-SI is the non-deposit-taking NBFC with large asset size.
Scale Based Regulation layers
Base Layer < Middle Layer < Upper Layer < Top Layer (in regulatory intensity)
All NBFC-D fall in Middle Layer at minimum. The Upper Layer includes the top ten eligible NBFCs by asset size. Top Layer is normally empty.
Bank vs NBFC: three key gaps
NBFC: no demand deposits, no cheques on itself, no DICGC cover
Banks have all three features.
Entry condition
Registration (CoR) from RBI + minimum NOF
Check the current NOF figure in RBI directions before quoting a number.

How to solve NBFC Meaning, Classification and Regulatory Framework questions

Use the same sequence for definition, classification and difference questions. It keeps your answer complete and easy to mark.

  1. 1Read what is asked: define, classify, compare or apply to a case.
  2. 2Define the NBFC: company under the Companies Act, financial activity as principal business, regulated under the RBI Act, 1934.
  3. 3Apply the 50-50 principal business test if the question gives asset and income figures.
  4. 4Classify by deposits: NBFC-D or NBFC-ND, and say whether it is systemically important.
  5. 5Place it in a Scale Based Regulation layer: Base, Middle, Upper or Top, with the reason.
  6. 6State the registration need: CoR and minimum NOF.
  7. 7If asked for a comparison, give at least three bank vs NBFC differences.
  8. 8Close with a one-line conclusion on the regulatory consequence.

Quickest way: Three-question classification check

When to use it: Use it for MCQs and short case scenarios where you must name the type or layer quickly.

  1. Ask: does it take public deposits? If yes, it is NBFC-D and at least Middle Layer.
  2. Ask: is it large or highly connected? If yes, it is systemically important and likely Middle or Upper Layer.
  3. Ask: does the 50-50 test hold? If not, it is not an NBFC at all.
  4. Match the answer to the option that fits all three checks.

Common mistakes in NBFC Meaning, Classification and Regulatory Framework

  • Treating any company that lends money as an NBFC.

    Students remember the lending activity but forget the principal business test.

    Fix: Apply the 50-50 test. Lending that is not the principal business does not make a company an NBFC.

  • Saying NBFCs cannot accept any deposits.

    The rule on demand deposits gets stretched to all deposits.

    Fix: NBFC-Ds can accept term public deposits as permitted by the RBI. They cannot accept demand deposits.

  • Thinking NBFC-ND-SI is a deposit-taking company.

    The letters D and ND look alike.

    Fix: ND means non-deposit-taking. SI means systemically important. NBFC-ND-SI is non-deposit-taking but large.

  • Placing deposit-taking NBFCs in the Base Layer.

    Students link layers only with size.

    Fix: All NBFC-Ds sit in the Middle Layer at minimum, whatever their size.

  • Learning old asset-size thresholds as fixed numbers.

    Old notes mention limits that the RBI has since revised.

    Fix: Remember the structure and logic. Quote a figure only if the question supplies it or you know the current direction.

  • Saying NBFC deposits are insured by DICGC.

    Students assume all financial institutions have deposit insurance.

    Fix: DICGC cover is a feature of banks. NBFC depositors do not have it.

Worked examples

Example 1

Sunrise Finserv Ltd is a company registered under the Companies Act. Its total assets are ₹500 crore, of which financial assets are ₹320 crore. Gross income is ₹80 crore, of which ₹52 crore comes from financial assets. It does not accept public deposits. Decide whether it is an NBFC and classify it by deposit status.

Show the solution
  1. Asset test: 320 ÷ 500 = 64%, which is more than 50%.
  2. Income test: 52 ÷ 80 = 65%, which is more than 50%.
  3. Both parts of the principal business test are met, so financial activity is its principal business.
  4. It is a company with a principal business in financial assets, so it is an NBFC. It needs a CoR from the RBI.
  5. It does not accept public deposits, so it is NBFC-ND.
  6. Whether it is NBFC-ND-SI depends on its asset size against the RBI threshold, which the question does not give.

Answer: Sunrise Finserv Ltd is an NBFC (64% asset and 65% income). It is a non-deposit-taking NBFC (NBFC-ND). It is systemically important only if its asset size meets the RBI threshold.

Example 2

Distinguish between an NBFC and a bank. Also state which layer under Scale Based Regulation a deposit-taking NBFC falls in.

Show the solution
  1. Demand deposits: a bank accepts them, an NBFC cannot.
  2. Payment system: a bank is part of it and can issue cheques on itself. An NBFC is not part of it and cannot issue cheques on itself.
  3. Deposit insurance: bank deposits have DICGC cover. NBFC deposits do not.
  4. Governing law: banks are mainly under the Banking Regulation Act, 1949. NBFCs come under Chapter III-B of the RBI Act, 1934, and the RBI's NBFC directions.
  5. Layer: every deposit-taking NBFC is placed in the Middle Layer at minimum, because public deposits raise the risk to depositors.

Answer: An NBFC cannot accept demand deposits, is outside the payment and settlement system, and has no DICGC cover. A bank has all these features. A deposit-taking NBFC falls at least in the Middle Layer.

Exam tips

  • Write definitions in three parts: Companies Act company, financial principal business, RBI regulation. This earns full marks in short answers.
  • In MCQs, expand the abbreviations first: D, ND, SI. Most wrong answers come from mixing them up.
  • Use a small table-style list of differences (deposits, cheques, DICGC, regulator) in the descriptive answer.
  • If a number appears in a case, apply the 50-50 test with the figures before concluding.
  • For thresholds, avoid quoting numbers you are unsure of. Name the layer and the reasoning instead.

Practice questions from NBFCs - Provisioning Norms, Accounting and Reporting

NBFC Meaning, Classification and Regulatory Framework: frequently asked questions

What is the difference between NBFC-D and NBFC-ND-SI?

NBFC-D accepts public deposits. NBFC-ND-SI does not accept public deposits but is systemically important because of its large asset size. Both are regulated by the RBI, and the prudential norms are stricter for larger entities.

What are the layers under RBI Scale Based Regulation?

There are four layers: Base, Middle, Upper and Top. Regulation becomes stricter as you move up. The Top Layer is empty unless the RBI sees a need to place an Upper Layer NBFC there.

Can an NBFC accept deposits like a bank?

Only as the RBI permits, and only term deposits. An NBFC cannot accept demand deposits. Its depositors also have no DICGC insurance.

Is registration with the RBI compulsory for an NBFC?

Yes. An NBFC needs a Certificate of Registration from the RBI and must meet the minimum Net Owned Fund requirement. Check the latest RBI directions for the current figure and for any exemptions.