Understanding the Capital Requirements for NBFC Registration

India’s financial ecosystem is rapidly evolving, and Non-Banking Financial Companies (NBFCs) play a crucial role in extending credit to underserved sectors. These institutions bridge the gap between traditional banks and borrowers who may not qualify for bank loans. As such, NBFCs are essential for financial inclusion and economic development.

However, registering an NBFC in India involves meeting several regulatory conditions. One of the most critical among them is the capital requirement set by the Reserve Bank of India (RBI). Whether you're planning to apply for NBFC registration online or through traditional channels, understanding the financial prerequisites is essential for compliance and business success.

This blog provides a comprehensive guide to the capital requirements for NBFC registration, explores the rationale behind them, and outlines what entrepreneurs should know before starting their journey toward becoming an RBI-registered NBFC.

1. What is an NBFC?

A Non-Banking Financial Company (NBFC) is a financial institution that offers banking services such as loans, asset financing, leasing, hire purchase, and investment without holding a banking license. Unlike banks, NBFCs are not allowed to accept demand deposits, but they can accept term deposits under specific regulatory conditions.

NBFCs in India are regulated by the Reserve Bank of India under the Reserve Bank of India Act, 1934. As per RBI norms, NBFCs are classified into different types based on their activities, such as asset finance companies, investment companies, loan companies, infrastructure finance companies, microfinance institutions, and others.

2. Why Are Capital Requirements Important?

Capital adequacy is crucial for any financial institution. It acts as a buffer against financial shocks and ensures long-term stability. In the context of NBFC registration, capital requirements serve several purposes:

• Risk Mitigation: Capital acts as a cushion to absorb losses and protect depositors and investors.
• Market Confidence: A well-capitalized NBFC is more likely to gain the trust of borrowers, investors, and regulatory authorities.
• Regulatory Compliance: Capital adequacy is one of the key indicators of a financial institution’s health, and the RBI uses it to supervise and manage financial stability.

For these reasons, the RBI enforces strict capital norms for companies seeking to register as NBFC.

3. Minimum Capital Requirement for NBFC Registration

As per current RBI regulations, the minimum Net Owned Fund (NOF) required for NBFC registration is:

• ₹2 crore for a general NBFC
• ₹10 crore for NBFCs intending to operate as core investment companies or engage in specific financial services (e.g., microfinance, infrastructure finance)

The NOF requirement ensures that only financially sound entities can enter the market and offer financial services to the public.

What Constitutes Net Owned Fund (NOF)?

Net Owned Fund refers to the actual owned capital of the company minus any investments made in subsidiaries or group companies. It includes:

• Paid-up equity share capital
• Free reserves (excluding revaluation reserves)
• Share premium account
• Subtracted by accumulated losses and deferred revenue expenditure

This figure should be verified by a Chartered Accountant and reflected in the audited balance sheet submitted during the NBFC registration process.

4. Additional Capital Considerations

In addition to the base NOF requirement, there are several other capital-related obligations NBFCs must be aware of:

a. Tier-I and Tier-II Capital

NBFCs are required to maintain a certain level of Tier-I and Tier-II capital. Tier-I capital primarily consists of equity and disclosed reserves, while Tier-II includes subordinated debt, hybrid capital, and other instruments.

b. Capital Adequacy Ratio (CAR)

NBFCs must maintain a Capital Adequacy Ratio (CAR) of at least 15% of their risk-weighted assets. This ensures that the institution has sufficient capital to cover credit, market, and operational risks.

c. Liquidity Coverage Ratio (LCR)

Some categories of NBFCs, especially systemically important ones, must maintain a prescribed Liquidity Coverage Ratio. This ensures that they have enough high-quality liquid assets to survive a 30-day stress scenario.

Also Read: Documents Required for Recovery of Shares from IEPF

5. Capital Requirements Based on NBFC Type

Different types of NBFCs are subject to different capital thresholds and conditions. Here is a brief overview:

a. Asset Finance Companies (AFCs)

These NBFCs provide finance for the purchase of physical assets such as vehicles, machinery, and equipment. They require a minimum NOF of ₹2 crore but may be subject to higher thresholds depending on their scale and operations.

b. Investment Companies

These companies deal primarily in securities and other financial investments. The capital requirement here typically aligns with the ₹2 crore minimum, but compliance with investment exposure norms is also required.

c. Microfinance Institutions (NBFC-MFIs)

These institutions offer small loans to low-income individuals. The RBI has set a higher NOF requirement of ₹10 crore for NBFC-MFIs. Moreover, they must comply with lending norms, interest rate caps, and borrower assessment procedures.

d. Infrastructure Finance Companies

NBFCs engaged in infrastructure development must have a significantly higher NOF—usually upwards of ₹300 crore. These entities are also required to maintain a higher CAR of around 15% to 20%, depending on asset quality and risk exposure.

6. Raising Capital for NBFC Registration

Meeting the capital requirement is one of the most challenging aspects of becoming a registered NBFC. Here are some common ways to raise capital:

• Private Equity: Entrepreneurs can seek investment from private equity firms or angel investors.
• Promoter Contribution: Founders can inject personal capital to meet the minimum NOF.
• Loans and Debt Instruments: Subordinated debt can qualify as Tier-II capital under certain conditions.
• Public Issue of Shares: Once the NBFC is operational, it can raise funds through IPOs or rights issues.

It’s important to ensure that any capital raised is legally compliant and traceable, as the RBI scrutinizes all capital sources during the registration process.

7. Documentation Related to Capital During NBFC Registration

When applying for NBFC registration online or otherwise, you'll need to submit comprehensive documentation to prove your capital adequacy. Key documents include:

• Audited financial statements
• Bank account statements reflecting capital inflow
• Net worth certificate from a Chartered Accountant
• Declaration of capital sources
• Board resolutions confirming capital contribution

Failing to provide transparent and verifiable financial information can lead to delays or rejection of the registration application.

Also Read: Right Legal Structure for AIF Registration in India

8. Ongoing Capital Compliance for RBI Registered NBFCs

NBFCs are not only required to meet capital conditions at the time of registration but must also maintain ongoing compliance. The RBI conducts regular inspections and may take action against entities that fall below the required NOF or CAR.

NBFCs must also file quarterly and annual returns with the RBI, including detailed reports on financial position, asset quality, and capital adequacy.

9. Conclusion

Understanding and meeting capital requirements is fundamental to successful NBFC registration. Whether you are registering a microfinance company, an asset finance firm, or a core investment company, capital adequacy remains a central criterion.

By aligning your financial resources, preparing accurate documentation, and ensuring transparency, you enhance your chances of securing approval from the RBI. Moreover, well-capitalized NBFCs are more resilient, more trusted by the public, and better positioned to scale operations in India’s vibrant financial sector.

Before you proceed with NBFC registration online or through conventional methods, consider consulting a financial or legal advisor to guide you through the capital planning and documentation process. This will not only save time but also ensure regulatory compliance at every step.

FAQ

1. What is the minimum capital requirement for NBFC registration?

The minimum Net Owned Fund (NOF) required for NBFC registration is ₹2 crore for general NBFCs and ₹10 crore for specific categories like NBFC-MFIs or infrastructure finance companies.

2. Can I apply for NBFC registration online?

Yes, the RBI allows applicants to submit NBFC registration online via its official portal. However, physical document submission and verification are also part of the process.

3. What happens if an NBFC fails to maintain the required capital after registration?

If an RBI registered NBFC falls below the required NOF or Capital Adequacy Ratio, it may face penalties, restrictions, or even cancellation of its license by the RBI.