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Non-systematically Important Non-deposit Taking Nbfc

Author: Gaurav Shanker, Managing Partner And Garv Dhyani, Associate |


Non-Banking Financial Companies (“NBFC”) are broadly categorised under the following three categories. These three categories are taken together to frame policies and framework that govern the operations and future of the respective NBFC.

  1. Systematically important or non-systematically important NBFC: a NBFC which has total assets of INR 500 crore and above, as shown in the last audited balance sheet, is considered as systematically important;
  2. Deposit taking or non-deposit taking NBFC: deposits are defined under the Reserve Bank of India Act, 1934 (“Act”) as acceptance of money other than that raised by way of share capital, money received from banks and other financial institutions, money received as security deposit, earnest money and advance against goods or services and subscription to chits. Per se NBFCs cannot accept deposits from public, however, certain specialised NBFCs have been granted RBI’s permission to accept public deposit; and
  3. Activity based classification: such as-
  • an infrastructure finance company,
  • a hire purchase finance company,
  • an investment and credit company,
  • a housing finance company,
  • a systematically important core investment company,
  • a factor company,
  • a mutual benefit financial company,
  • a micro finance institution, etc.

In this article, we will limit our purview to ‘non-systematically important non-deposit taking NBFC – investment and credit company’ (“NBFC-ICC”) and understand the policy framework and other statutory conditions necessitated in ‘Master Direction – Non-banking Financial Company – Non-Systematically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016’1, updated till 2nd August 2019 (“Regulations”). The Regulations are applicable to every (i) non-systematically important NBFC not accepting or holding public deposits, (ii) NBFC-factor registered with RBI and having an asset size of below INR 500 crore, (iii) NBFC-MFI (micro finance company), and (iv) NBFC-IFC (infrastructure finance company) registered with RBI and having an asset size of below INR 500 crore (“Applicable NBFC(s)”).


In terms of section 45-IA of the Reserve Bank of India Act, 1934 (“Act”), any NBFC cannot commence or carry on its business without (i) obtaining a certificate of registration, and (ii) having net owned funds (“NOF”) of INR 25 lakh or such amount, not exceeding INR 200 lakh, as the RBI may specify. In a notification, subject to specific thresholds, RBI has raised NOF threshold to INR 2 crores for all NBFCs. Further, under the said Regulations, RBI has prescribed INR 200 lakh as minimum requirement of NOF for a NBFC to commence or carry on the business of non-banking financial institution, except wherever otherwise a specific requirement as to NOF is prescribed by RBI. Thus, for NBFC-ICC, a minimum of INR 200 lakh NOF is required.

While calculating NOF, the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company is taken after deducting accumulated balance of loss, deferred revenue expenditure and other intangible assets. This aggregate is further reduced by the (i) investment of such company in shares of its subsidiaries, companies in the same group and other NBFC, and (ii) book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to and deposits with subsidiaries of such company and companies in the same group, to the extent such amount exceeds ten percent of (i).


The Regulations provide and prescribe various prudential norms for NBFCs falling within the scope of the Regulations. The following is a list of highlighted/significant regulations. Remaining prudential regulations can be read under Section II of the Regulations.

  1. Leverage Ratio: it is defined as the total outside liabilities/owned funds1. For an Applicable NBFC (except NBFC-MFI and NBFC-IFC), the leverage ratio shall not be more than 7% at any point of time after 31st March 2015. For NBFCs primarily engaged in lending against gold jewellery, they shall maintain a minimum Tier I capital2 of 12%.
  2. Income recognition: only recognised accounting principles will be followed. Further, income, including interest, discount, hire charges, lease rentals or any other charges on non-performing assets (“NPA”) shall be recognised only when it is actually raised.
  3. Investments Policy: Board of Directors of every applicable NBFC shall frame investment policy for the company and shall implement the same. Investments shall be classified into current and long term on the basis of criteria provided under the said investment policy.
  4. Demand/call loans Policy: Board of Directors of every Applicable NBFC shall formulate a demand/call policy and shall implement it. This provision is only applicable for NBFC granting or intending to grant demand or call loans.
  5. Asset Classification: Every Applicable NBFC, other than NBFC-MFI, shall classify its lease or hire purchase assets, loans and advances and other forms of credit into standard assets, sub-standard assets, doubtful assets and loss assets. This shall be done after taking into account the degree of well-defined credit weaknesses and extend of dependence on collateral security for realisation.
  6. Disclosure in Balance Sheet: Every Applicable NBFC shall separately disclose in its balance sheet the provisions made as per the Regulations without netting them from the income or against the value of assets.
  7. No Applicable NBFC shall lend against its own shares.

The Regulations also provide fair practices code for NBFCs covered by the regulations with regards to loans and their processing, loan appraisal, disbursement of loans, responsibility of board of directors, grievance redressal officer, etc. However, these regulations are not applicable for NBFCs with zero customer interface1 and who do not accept public deposits.


For any takeover or acquisition of control, any change in the management and any change in the shareholding of the Applicable NBFC, prior written permission of the RBI is required. However, if the NBFC has approval of the competent court for change in the shareholding, then, prior approval of the RBI is not required. Further, NBFCs shall continue to inform the RBI regarding any change in their directors or management.

Further, a public notice of at least 30 days shall be given before effecting the sale of, transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. The public notice must be given after obtaining above-mentioned permission of the RBI.


All NBFC must adhere to the reporting requirements prescribed by Department of Non-Banking Supervision of RBI under ‘Non-Banking Financial Company Returns (Reserve bank) Directions, 2016


  1. The Act mandates that every NBFC has to invest and continue to invest in India in unencumbered approved securities, valued at a price not exceeding the current market price of such securities, an amount which shall not be less than 5% and not exceeding 25%, as prescribed by RBI.
  2. Every NBFC shall create a reserve fund and transfer therein a sum not less than 20% of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. Appropriation can only be made for the purpose as may be specified by the RBI and such appropriation shall be communicated to RBI within 21 days from the date of withdrawal.