Banking and Insurance - Laws and Practice · Regulatory Framework of Banks

Regulation of Non-Banking Financial Institutions under the RBI Act

Updated 11 October 2026 · Fact-checked

Chapter IIIB of the RBI Act, 1934 lets the RBI control non-banking financial institutions. An NBFC needs a certificate of registration and minimum net owned fund. It must keep a reserve fund and liquid assets. The RBI can collect information, inspect, give directions, and cancel registration. Answer by stating the power, applying it to the facts, then concluding.

Understand Regulation of Non-Banking Financial Institutions

A non-banking financial company (NBFC) is a company that lends or accepts deposits as its principal business, or is otherwise specified by the RBI. It does financial work like a bank but is not a bank. Chapter IIIB of the RBI Act, 1934 is the statute that regulates these entities.

Start with the difference from a bank. A banking company is licensed under the Banking Regulation Act, 1949. An NBFC is registered under the RBI Act. An NBFC cannot accept demand deposits, cannot issue cheques drawn on itself, and is not part of the payment and settlement system as a bank is. Bank deposits are covered by deposit insurance; NBFC deposits are not. Banks also maintain CRR and SLR under their own law, whereas NBFCs have their own liquid asset rules.

The chapter works in four layers. First, entry control: no NBFC may commence or carry on business without a certificate of registration from the RBI and the net owned fund the RBI specifies (Section 45-IA). Second, balance sheet discipline: a reserve fund and a minimum level of liquid assets (Sections 45-IC and 45-IB). Third, directions and information: the RBI can determine policy and issue directions to NBFCs (Section 45JA), collect information and give directions on deposits (Section 45K), and call for information and issue directions to financial institutions (Section 45L). Fourth, supervision and enforcement: inspection, control over deposit-taking and advertisements, cancellation of registration, and supersession of the board in suitable cases (Section 45-IE).

The RBI decides whether a company is an NBFC by looking at its principal business, not its name. A company called an investment or finance company may still need registration if lending or deposit-taking is its main activity. The RBI also classifies NBFCs by size and activity and applies different rules to each. Treat those scale-based rules as RBI directions, not as Act text.

The contrast with banks is useful in exams. For a bank in trouble, Section 45 of the Banking Regulation Act allows a moratorium of up to six months and an RBI-prepared scheme of reconstruction or amalgamation, sanctioned by the Central Government. That is a bank-specific route. For NBFCs, the RBI relies on Chapter IIIB powers such as directions, cancellation of registration and board supersession under Section 45-IE.

Key rules to remember

Registration requirement: No NBFC may commence or carry on business without (1) a certificate of registration from the RBI and (2) the net owned fund the RBI specifies; Section 45-IA. The Act sets a statutory ceiling on the amount the RBI can specify. Quote the current figure only as an RBI notification, and only if you are sure of it.
Reserve fund: Transfer at least 20% of net profit each year, before declaring any dividend, to a reserve fund; Section 45-IC. The profit is as shown in the profit and loss account. A withdrawal from the fund may be made only for a purpose specified by the RBI, and the company must report it to the RBI within 21 days of the withdrawal.
Liquid assets: Hold in India, at the end of each quarter, assets of the type and percentage the RBI specifies, against deposits; Section 45-IB. The percentage is set by the RBI within a statutory ceiling. Do not quote a fixed figure from memory.
NBFC test: Financial institution that is a company + principal business is receiving deposits or lending (or as the RBI specifies); Section 45-I. It is a test of principal business. Applying the RBI's asset-income benchmark is a regulatory practice, not Act text.
Powers of the RBI: Policy and directions to NBFCs (45JA); information and directions on deposits (45K); information and directions to financial institutions (45L); advertisement control (45MA); deposit and asset prohibition (45MB); inspection (45N); cancellation of registration (45-IA); supersession of the board (45-IE); Learn the section numbers as labels for the powers. Cite only those you are sure of.
Appeal on cancellation: The RBI may cancel registration on the grounds listed in Section 45-IA(4). A company aggrieved by the order may appeal to the Central Government within 30 days of the order being communicated; Section 45-IA(4) lists the grounds for cancellation and Section 45-IA(6) gives the appeal. Always state the grounds and the 30-day appeal route together.

How to solve Regulation of Non-Banking Financial Institutions questions

Most questions give you a company and ask whether it is an NBFC, what it must do, or what the RBI can do. Use one fixed structure: provision, analysis, conclusion.

1Read the facts and underline the main activity of the company: lending, deposit-taking, investment, or something else.
2Decide whether it is an NBFC: is it a company, and is its principal business lending or receiving deposits, or has the RBI specified it?
3If it is a bank (licensed under the Banking Regulation Act), say Chapter IIIB does not apply as such and stop. If it is a government company, mention it only if the facts raise it.
4State the relevant requirement in plain words: registration and net owned fund, reserve fund, liquid assets, directions, or inspection.
5Apply it to the numbers or dates in the facts. Compute the 20% transfer if profit is given.
6State the RBI's power or remedy: directions, prohibition on deposits, cancellation of registration, appeal to the Central Government.
7Conclude in one clear sentence and add a compliance point: obtain registration, make the transfer, file the return.

Quickest way: Four-question check for NBFC problems

When to use it: Use this when the question is short and you have only a few minutes, or when it is part of a larger case.

Is it a company, and is its principal business lending or deposit-taking? If yes, it is an NBFC.
Does it hold an RBI certificate of registration and the required net owned fund? If not, it is carrying on business illegally.
Has it met its balance sheet duties: 20% reserve fund and liquid assets?
What can the RBI do next: direct, inspect, prohibit deposits, cancel registration? Name the power and state the appeal route if relevant.

Common mistakes in Regulation of Non-Banking Financial Institutions

Treating an NBFC as a bank because it lends money.
Both do financial intermediation, so the line between them blurs.
Fix: Write the three core differences: no demand deposits, no cheques drawn on itself, and registration under the RBI Act rather than a licence under the Banking Regulation Act.
Applying the Banking Regulation Act, 1949 to NBFCs, for example the Section 45 moratorium.
Students mix the Banking Regulation Act and RBI Act chapters.
Fix: Section 45 of the Banking Regulation Act applies to banking companies. For NBFCs, cite Chapter IIIB powers.
Deciding NBFC status by the company's name or object clause.
Students assume a 'finance' or 'investment' name settles the matter.
Fix: Apply the principal business test using the actual activities and income described in the facts.
Computing the reserve fund transfer on the wrong figure or after paying the dividend.
Students forget the order of events.
Fix: The transfer of at least 20% of net profit must be made before any dividend is declared. Use net profit as per the profit and loss account.
Quoting exact net owned fund or liquid asset percentages as fixed law.
Students memorise figures from RBI circulars and treat them as permanent.
Fix: Say the amount or percentage is as specified by the RBI from time to time, within the limits in the Act, and cite a figure only when the question gives it.
Forgetting the right of appeal after cancellation of registration.
Students stop at the RBI's power and ignore the remedy.
Fix: Add that the aggrieved company can appeal to the Central Government within 30 days of the order being communicated to it (Section 45-IA(6)).

Worked examples

Example 1

Sunrise Credit Ltd, a company, lends money to small traders as its main business. It has not applied to the RBI for registration and says it is not a bank, so the RBI has no say. Advise.

Show the solution

Provision: Chapter IIIB of the RBI Act regulates non-banking financial companies. Section 45-IA prohibits carrying on business without a certificate of registration and the specified net owned fund.
Analysis: Sunrise is a company. Its principal business is lending. It therefore falls within the definition of an NBFC in Section 45-I. Not being a bank does not take it outside the Act; the Act applies precisely to entities that are not banks.
Analysis: It holds no certificate of registration, so it is carrying on business in breach of Section 45-IA.
Conclusion and action: It must apply to the RBI for registration, show the required net owned fund, and comply with the other requirements such as the reserve fund and RBI directions. Until then it risks action by the RBI, including prohibition and penalties under the Act.

Answer: Sunrise is an NBFC, because it is a company whose principal business is lending. It must obtain a certificate of registration and meet the net owned fund requirement. Its claim that it is not a bank is no defence.

Example 2

An NBFC has net profit of ₹4,60,00,000 for the year. Its board wants to declare a dividend of ₹2,00,00,000 and transfer ₹60,00,000 to the reserve fund. Is this compliant with Section 45-IC?

Show the solution

Provision: Section 45-IC requires a transfer of not less than 20% of net profit to a reserve fund, before any dividend is declared.
Compute the minimum transfer: 20% × ₹4,60,00,000 = ₹92,00,000.
Compare: the board proposes ₹60,00,000, which is less than ₹92,00,000. The shortfall is ₹92,00,000 − ₹60,00,000 = ₹32,00,000.
Conclusion: The proposal is not compliant. The transfer must be at least ₹92,00,000 before the dividend is declared. The board can then consider a dividend from the remaining profit, subject to other legal requirements.

Answer: Not compliant. The minimum transfer is ₹92,00,000, but only ₹60,00,000 is proposed, so the transfer falls short by ₹32,00,000.

Exam tips

Treat questions as case problems: name the provision, apply it to the facts, then conclude. Do not just list the sections.
When asked for the difference between a bank and an NBFC, give four or five points in a short table-like list: licence or registration, demand deposits, cheques, payment system, deposit insurance.
Learn the section labels (45-IA, 45-IB, 45-IC, 45JA, 45K, 45L, 45MA, 45N) with one line on each power. Cite only the ones you are sure of.
Use the phrase 'as specified by the RBI' for amounts and percentages, and add figures only when the question supplies them.
In drafting-type parts, add a compliance step: apply for registration, file returns, make the reserve fund transfer, and keep records for inspection.

Practice questions from Regulatory Framework of Banks

Regulation of Non-Banking Financial Institutions 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: frequently asked questions

What is Chapter IIIB of the RBI Act, 1934?

It is the chapter that gives the RBI power to regulate non-banking financial institutions and companies. It covers definitions, registration, reserve fund, liquid assets, directions, inspection, and control over deposit-taking.

Is registration with the RBI compulsory for every NBFC?

Yes, as a rule. Section 45-IA bars an NBFC from commencing or carrying on business without a certificate of registration and the net owned fund the RBI specifies. The RBI has the power to exempt certain categories by notification.

What is the main difference between a bank and an NBFC?

A bank is licensed under the Banking Regulation Act, 1949, accepts demand deposits, issues cheques drawn on itself and is part of the payment and settlement system. An NBFC is registered under the RBI Act and cannot do these things. Its deposits are also not covered by deposit insurance.

Can the RBI cancel the registration of an NBFC?

Yes. The RBI may cancel the certificate of registration on the grounds listed in Section 45-IA(4). The company can appeal to the Central Government within 30 days of the order being communicated to it.