Banking and Insurance - Laws and Practice · Overview of Indian Banking System

RBI Regulation of Non-Banking Financial Companies (NBFCs)

Updated 11 October 2026 · Fact-checked

The RBI regulates NBFCs under Chapter IIIB of the RBI Act, 1934. No NBFC can carry on business without a certificate of registration and the minimum net owned fund (₹25 lakh unless the RBI notifies a higher amount up to ₹100 crore). The RBI can cancel registration, and under section 45MBA it can frame resolution schemes.

Understand RBI Regulation of Non-Banking Financial Companies

A non-banking financial company (NBFC) is a company that carries on financial business such as lending, hire-purchase, leasing or investing. It is not a bank. It cannot issue cheques on its own account the way a bank does, and it is not governed by the Banking Regulation Act, 1949 as a banking company. The RBI controls NBFCs through Chapter IIIB of the RBI Act, 1934.

The entry gate is section 45-IA. No NBFC may commence or carry on the business of a non-banking financial institution without (a) a certificate of registration from the RBI and (b) the required net owned fund (NOF). The NOF is ₹25 lakh, or any other amount the RBI notifies by Gazette, not exceeding ₹100 crore. The RBI may notify different amounts for different categories of NBFCs. This is how it classifies and scales its regulation.

Before granting registration, the RBI may inspect the books and check conditions in section 45-IA(4). These include the ability to pay depositors in full, management of good character, adequate capital structure and earning prospects, public interest, and no harm to the financial sector's consolidation and monetary stability. It may grant a certificate with conditions. Think of these as a fit-and-proper test of the company, its management and its capital.

Supervision continues after registration. The RBI can cancel the certificate for stated defaults, such as ceasing business, breaching conditions, failing the capital or management tests in clauses (d) to (g) of sub-section (4), disobeying directions, not keeping proper accounts, not producing books for inspection, or being under a deposit-acceptance prohibition for at least three months. A company aggrieved by rejection or cancellation can appeal to the Central Government within 30 days of communication.

For distressed NBFCs, section 45MBA lets the RBI frame a scheme if, after inspecting the books, it is satisfied that it is in the public interest or in the interest of financial stability, to keep critical activities running. The scheme may provide for amalgamation, reconstruction, or splitting into units with viable and non-viable businesses in separate units, using temporary Bridge Institutions. It may also cut senior pay, cancel shares held by senior management or their relatives, and sell assets, without compensation.

Key rules to remember

Registration and NOF requirement (s. 45-IA(1)): No NBFC may carry on business without: (a) certificate of registration + (b) NOF of ₹25 lakh or notified amount (maximum ₹100 crore); The RBI may notify different NOF amounts for different categories of NBFCs.
Net owned fund (Explanation I to s. 45-IA): NOF = (paid-up equity capital + free reserves) − (accumulated loss + deferred revenue expenditure + other intangible assets) − (investments in shares of subsidiaries, same-group companies and other NBFCs) − (excess of book value of debentures, bonds, loans, advances and deposits with subsidiaries and same-group companies over 10% of the first figure); The 10% limit is on figure (a) in the text. Figure (a) is paid-up equity capital plus free reserves, after deducting only accumulated loss, deferred revenue expenditure and intangible assets. It is not the figure after the share-investment deduction. Only the excess over 10% of (a) is deducted.
Conditions for registration (s. 45-IA(4)): Pay depositors in full; affairs not detrimental to depositors; management not prejudicial; adequate capital structure and earning prospects; public interest; no prejudice to financial sector consolidation and monetary stability; any other condition; The RBI may satisfy itself by inspecting the books or otherwise.
Appeal (s. 45-IA(7)): Appeal to the Central Government within 30 days of communication of rejection or cancellation; The decision of the Central Government, or of the RBI if no appeal is made, is final. A hearing is required before rejecting an appeal.
Resolution schemes (s. 45MBA): Amalgamation | Reconstruction | Splitting into units with Bridge Institutions; Trigger: public interest or financial stability, after inspection of books, to continue activities critical to the financial system.
Management consequences under s. 45MBA(2) and (3): Pay cut + cancellation of shares of senior management or relatives + sale of assets; no compensation for pay cut or cancelled shares; Applies to CEO, MD, chairman or senior management and, for shares, their relatives.

How to solve RBI Regulation of Non-Banking Financial Companies questions

Most questions give you an NBFC fact pattern. Use the provision-facts-conclusion format.

1Identify the stage: entry (registration), continuing supervision, cancellation, appeal, or resolution.
2Name the law: RBI Act, 1934, Chapter IIIB. Quote section 45-IA for registration, cancellation and appeal, and section 45MBA for resolution.
3State the rule in plain words with its conditions, for example the NOF of ₹25 lakh or the notified amount.
4Apply the facts: compute NOF if figures are given, check the listed conditions or grounds, and check any time limits.
5Check procedural safeguards: opportunity to comply before cancellation on certain grounds, reasonable hearing, and the 30-day appeal.
6Conclude clearly: whether the NBFC may operate, whether cancellation is valid, or what the RBI may include in a scheme.
7Add one practical point, such as filing the registration application in the RBI's form or informing the RBI after meeting the NOF.

Quickest way: Stage-and-section map

When to use it: Short-answer or case questions when time is tight.

Label the stage: Register, Run, Remove, Appeal or Resolve.
Match the section: Register, Remove and Appeal go to 45-IA; Resolve goes to 45MBA.
Write the rule in one or two lines and apply the facts.
End with a one-line conclusion naming the authority: RBI or Central Government.

Common mistakes in RBI Regulation of Non-Banking Financial Companies

Saying an NBFC needs a banking licence under section 22 of the Banking Regulation Act.
Students mix bank and NBFC regimes.
Fix: An NBFC needs a certificate of registration under section 45-IA of the RBI Act, not a bank licence.
Stating the NOF as fixed at ₹25 lakh always.
Students remember only the base figure.
Fix: Say ₹25 lakh or such other amount, not exceeding ₹100 crore, as the RBI notifies, possibly different for different categories.
Ignoring the deductions in computing NOF.
Students stop at capital plus reserves.
Fix: Deduct accumulated loss, deferred revenue expenditure, intangibles, investments in group and NBFC shares, and the excess over 10% of loans and deposits with group entities.
Saying the RBI can cancel registration without a hearing.
Students overlook the provisos.
Fix: A reasonable opportunity of being heard is needed before cancellation. For some grounds, the company must also get time to comply, unless delay would harm public interest or depositors.
Saying the appeal goes to the High Court or tribunal, or that the time limit is 60 days.
Confusion with other statutes.
Fix: Under section 45-IA(7) the appeal is to the Central Government within 30 days.
Saying section 45MBA allows only amalgamation, or that affected officers get compensation.
Incomplete recall of the section.
Fix: Remember all three: amalgamation, reconstruction, splitting with Bridge Institutions. Pay cuts and share cancellation carry no compensation.

Worked examples

Example 1

Sunrise Finance Ltd, an NBFC, has paid-up equity capital of ₹10 crore and free reserves of ₹4 crore. Its accumulated loss is ₹1 crore and intangible assets are ₹50 lakh. It holds shares of ₹1 crore in a subsidiary and has lent ₹2.5 crore to the same subsidiary. Compute its net owned fund under section 45-IA.

Show the solution

Aggregate of paid-up equity capital and free reserves = ₹10 crore + ₹4 crore = ₹14 crore.
Deduct accumulated loss ₹1 crore and intangibles ₹0.5 crore: ₹14 crore − ₹1.5 crore = ₹12.5 crore. This is figure (a): capital plus free reserves after the first-stage deductions only.
Deduct investment in shares of the subsidiary: ₹12.5 crore − ₹1 crore = ₹11.5 crore.
Ten per cent of (a) = 10% of ₹12.5 crore = ₹1.25 crore. The loan to the subsidiary is ₹2.5 crore. Excess = ₹2.5 crore − ₹1.25 crore = ₹1.25 crore.
Deduct the excess: ₹11.5 crore − ₹1.25 crore = ₹10.25 crore.

Answer: The net owned fund is ₹10.25 crore, well above the ₹25 lakh minimum, unless the RBI has notified a higher amount for its category.

Example 2

The RBI cancels the certificate of registration of Bharat Leasing Ltd for failing to submit its books for inspection when demanded. The company wants to challenge the order. Advise on the grounds and remedy.

Show the solution

Provision: section 45-IA(6)(iv)(c) allows cancellation if an NBFC fails to submit or offer for inspection its books of account and documents when demanded by an inspecting authority of the RBI.
Facts: the ground relied upon is valid in law if the demand was made by an inspecting authority and the company did not comply.
Safeguard: the second proviso requires that the company be given a reasonable opportunity of being heard before the order. The company should check whether this was given. The first proviso (time to take steps to comply) applies only to cancellation under clause (ii) or clause (iii), so it does not apply to clause (iv)(c).
Remedy: under section 45-IA(7) the company may appeal to the Central Government within 30 days of the cancellation being communicated to it.
Practical step: file the appeal within time with the order, grounds and supporting documents, and offer the books for inspection.

Answer: Cancellation is within the RBI's power on this ground. The company can succeed only if no hearing was given or the facts are wrong. Its remedy is an appeal to the Central Government within 30 days, and that decision (or the RBI's order if no appeal) is final.

Exam tips

Quote section 45-IA for registration, NOF, cancellation and appeal, and 45MBA for resolution. Do not guess other section numbers.
Learn the 30-day appeal period and the Central Government as the appellate authority.
For NOF numericals, show each deduction on its own line and apply the 10% test to figure (a), which is capital plus free reserves after deducting accumulated loss, deferred revenue expenditure and intangibles.
In case questions, write provision, facts, conclusion, then add a compliance point like timely application or informing the RBI.
For a bank versus NBFC question, say that banks are licensed under the Banking Regulation Act, whereas NBFCs are registered under Chapter IIIB of the RBI Act.

Practice questions from Overview of Indian Banking System

RBI Regulation of Non-Banking Financial Companies in other exams

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

RBI Regulation of Non-Banking Financial Companies: frequently asked questions

What is section 45MBA of the RBI Act, 1934?

It lets the RBI frame a resolution scheme for an NBFC after inspecting its books, if it is in the public interest or the interest of financial stability. The scheme may provide for amalgamation, reconstruction or splitting into units with Bridge Institutions. It may also reduce senior pay, cancel shares and sell assets.

What is the minimum net owned fund for an NBFC?

Section 45-IA requires ₹25 lakh or such other amount, not exceeding ₹100 crore, as the RBI notifies. The RBI may notify different amounts for different categories of NBFCs.

Can an NBFC appeal against cancellation of its registration?

Yes. It may appeal to the Central Government within 30 days from the date the order of rejection or cancellation is communicated. The Central Government's decision is final, and a reasonable hearing must be given before an appeal is rejected.

What is the difference between a bank and an NBFC for exam purposes?

A bank is a banking company regulated under the Banking Regulation Act, 1949 and holds a licence. An NBFC is registered with the RBI under Chapter IIIB of the RBI Act, 1934. In the exam, tie each to its own Act and authority.