Demystifying Net Owned Fund (NOF) Requirement For NBFCs In India

Every Non-Banking Finance Company ("NBFC") is required to have a Net Owned Fund ("NOF") as prescribed by the Reserve Bank of India ("RBI") from time to time to commence the business of a Non-Banking Financial Institution. Prior to 2021, the minimum NOF requirement was INR 2 crore. However, in October 2021, RBI, vide its notification, now Master Direction – Reserve Bank of India (Non-Banking Financial Company– Scale Based Regulation) Directions, 2023 updated as on November 10, 2023, introduced 'scale-based regulation' for the NBFC sector as part of efforts to establish a robust and resilient financial system¹. The Scale-Based Regulation ("SBR") tailors the regulation and supervision of NBFCs according to their size, activities, and perceived level of risk.

RBI has defined NOF under the explanation to Section 45-IA of the Reserve Bank of India Act, 1934, as the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting it from the accumulated balance of loss, deferred revenue expenditure and other intangible assets; which is further subtracted by the amounts representing investments of such companies in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances².

As discussed above, the SBR is applicable to NBFCs based on the type of activities they undertake, their asset size, and their perceived level of risk. Hence, NBFCs now fall into different brackets of required NOF. The regulatory minimum stipulated NOF requirement for NBFC-ICC (investment and credit company), NBFC-MFI (microfinance institution) and NBFC-factors has been increased to INR 10 crore in contrast to the earlier limit of INR 2 crore, INR 5 crore and INR 5 crore respectively.

Further, NBFC-P2P (peer-to-peer lending platform), NBFC-AA (account aggregators) and NBFCs with no public funds and no customer interface shall continue to have the regulatory minimum NOF limit of INR 2 crore as before. Lastly, for NBFC-IFC (infrastructure finance companies) and IDF-NBFC (infrastructure debt fund), the NOF shall be INR 300 crore.

The SBR framework also lays down a glide path for existing NBFCs to achieve the new required NOF. The glide path is as follows:

Footnotes

1. Master Direction – Reserve Bank of India (Non-Banking Financial Company– Scale Based Regulation) Directions, 2023, October 19, 2023

2. The Reserve Bank of India Act, 1934, Section 45-IA.

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