Definition of NBFC & The 50-50 Principal Business Test
1. Legal Definition under Section 45-I(f) of the RBI Act, 1934
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, or chit business.
Exclusions: It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or the providing of any services, or sale/purchase/construction of immovable property.
The 50-50 Principal Business Criteria (Twin Test)
To determine whether a corporate entity's principal business is financial in nature (mandating registration with RBI as an NBFC), the RBI applies the objective 50-50 Twin Criteria:
Criterion 1: Asset Test
The company's Financial Assets must constitute more than 50% of its total assets (net of intangible assets).
Criterion 2: Income Test
The company's Income from Financial Assets must constitute more than 50% of its gross total income.
Both criteria are CUMULATIVE! A company that satisfies both the asset test and income test is treated as conducting financial business as its principal business, and MUST mandatorily obtain a Certificate of Registration (CoR) from the RBI under Section 45-IA!
2. Net Owned Fund (NOF) Requirement & Calculation Formula
Under Section 45-IA of the RBI Act, 1934, no NBFC can commence or carry on financial business without: (a) Obtaining a Certificate of Registration (CoR); and (b) Having a minimum prescribed Net Owned Fund (NOF).
Under the RBI Scale Based Regulation (SBR) framework, the minimum Net Owned Fund requirement for NBFC-ICC, NBFC-MFI, and NBFC-Factor has been enhanced from ₹ 2 Crores to ₹ 10 Crores (phased glide path: ₹ 5 Crores by March 31, 2025 and ₹ 10 Crores by March 31, 2027). For NBFC-P2P, NBFC-AA, and NBFCs without public funds, it remains ₹ 2 Crores.
Step-by-Step Statutory Formula for Computing NOF:
| Step | Component Description | Exact Statutory Inclusions & Deductions |
|---|---|---|
| Step 1 | Owned Fund (OF) |
Paid-up Equity Capital + Free Reserves + Balance in Share Premium Account + Capital Reserves (representing surplus arising out of sale proceeds of assets, excluding revaluation reserves) LESS: Accumulated balance of loss, Deferred revenue expenditure, and Other intangible assets. |
| Step 2 | Specified Investments & Exposures (SIE) |
Sum total of:
|
| Step 3 | Excess over 10% of Owned Fund | Amount by which the Specified Investments & Exposures (Step 2) exceeds 10% of the Owned Fund (Step 1). |
| Step 4 | Net Owned Fund (NOF) | NOF = Owned Fund (Step 1) − Excess over 10% (Step 3) |
Scale Based Regulation (SBR): The 4-Layer Architecture
1. Why Scale Based Regulation? (Regulatory Alignment with Banks)
Historically, NBFC regulations were based on whether an entity was deposit-taking (NBFC-D) or non-deposit-taking (NBFC-ND), and asset size ≥ ₹ 500 Crores (Systemically Important - ND-SI).
To eliminate regulatory arbitrage and address systemic interconnectedness, the RBI introduced the Scale Based Regulation (SBR) Framework (effective October 2022). Regulation is now tailored progressively across four distinct horizontal layers based on asset size, activity, and systemic risk:
| SBR Layer | Qualifying NBFC Categories & Asset Size Thresholds | Regulatory Stringency & Key Governance Mandates |
|---|---|---|
| 1. Base Layer (NBFC-BL) |
• Non-deposit taking NBFCs with asset size < ₹ 1,000 Crores • NBFC-Peer to Peer Lending (P2P) • NBFC-Account Aggregator (AA) • Non-Operative Financial Holding Companies (NOFHC) • Type I NBFCs (no public funds, no customer interface) |
• Principal business 50-50 compliance • Minimum NOF glide path to ₹ 10 Cr • Leverage Ratio ≤ 7 • 90-day NPA overdue norm alignment • Simpler governance standards |
| 2. Middle Layer (NBFC-ML) |
• ALL Deposit-Taking NBFCs (NBFC-D), irrespective of asset size! • Non-deposit taking NBFCs with asset size ≥ ₹ 1,000 Crores • Standalone Primary Dealers (SPDs) • Infrastructure Debt Fund NBFCs (IDF-NBFC) • Core Investment Companies (CICs) • Housing Finance Companies (HFCs) |
• CRAR minimum 15% (Tier 1 min 10%) • Mandatory Chief Risk Officer (CRO) • Mandatory Chief Compliance Officer (CCO) • Internal Capital Adequacy Assessment (ICAAP) • Stricter Large Exposure Framework (LEF) |
| 3. Upper Layer (NBFC-UL) |
• NBFCs identified by RBI based on a quantitative parametric scoring model (Asset size, Interconnectedness, Complexity, Nature of activity) • The Top 10 eligible NBFCs in terms of asset size are automatically included in the Upper Layer! |
• Bank-like regulatory oversight • Mandatory Common Equity Tier 1 (CET1) min 9% • Mandatory public listing on stock exchanges within 3 years of classification • Standard asset provisioning aligned to banks |
| 4. Top Layer (NBFC-TL) |
• Currently Empty Layer: Populated by RBI only if an Upper Layer NBFC demonstrates extreme systemic risk potential capable of causing systemic contagion. | • Higher, customized capital surcharges and intrusive supervisory monitoring by RBI. |
2. Fundamental Differences Between Banks and NBFCs
Although both banks and NBFCs engage in financial intermediation, they differ across critical legal boundaries:
| Comparison Dimension | Commercial Banks | Non-Banking Financial Companies (NBFCs) |
|---|---|---|
| Demand Deposits | Can accept demand deposits (Savings and Current accounts repayable on demand). | STRICTLY PROHIBITED: NBFCs cannot accept demand deposits. Only eligible NBFC-D can accept term deposits for 12 to 60 months. |
| Payment & Settlement | Form an integral part of the national Payment and Settlement System; can issue cheques drawn on themselves. | CANNOT issue cheques drawn on themselves and do not form part of the Payment and Settlement System. |
| Deposit Insurance (DICGC) | Deposit insurance facility of DICGC (up to ₹ 5 Lakhs per depositor) is available. | DICGC deposit insurance is NOT available to depositors of NBFCs! |
| Statutory Liquidity (CRR) | Subject to Cash Reserve Ratio (CRR) maintenance under Section 42 of RBI Act. | Not required to maintain CRR with RBI (though required to maintain liquid assets against public deposits). |
3. Comprehensive Types of NBFCs in the Financial System
1. Investment & Credit Company (ICC)
Lending asset finance and acquiring securities as principal business (merger of former AFC, Investment Co, and Loan Co).
2. Infrastructure Finance Company (IFC)
Deploys at least 75% of total assets in infrastructure loans; min NOF ₹ 300 Cr; min credit rating 'A'; CRAR 15%.
3. Core Investment Company (CIC-ND-SI)
Holds at least 90% of net assets in equity/debt of group companies (min 60% in equity shares); asset size ≥ ₹ 100 Cr.
4. NBFC - Micro Finance Institution (MFI)
Deploys at least 75% of total assets in microfinance loans to low-income households (annual income ≤ ₹ 3 Lakhs) without collateral.
5. Peer to Peer Lending (NBFC-P2P)
Online marketplace platform connecting verified borrowers and lenders; no balance sheet lending; min NOF ₹ 2 Crores.
6. Account Aggregator (NBFC-AA)
Data consolidator providing consolidated financial information of customers across financial entities based on explicit customer consent.
Prudential Norms: Capital Requirements, Income Recognition & Provisioning
1. Capital Adequacy Requirements (CRAR & Leverage Ratio)
Under the Scale Based Regulation (SBR) framework, NBFCs must maintain adequate capital buffers calibrated to their layer and risk profile:
Middle & Upper Layer: CRAR Norms
NBFC-ML and NBFC-UL must maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15% on an ongoing basis:
- Tier 1 Capital: Must not be less than 10% (minimum loss-absorbing core capital).
- Tier 2 Capital: Cannot exceed 100% of Tier 1 Capital. Includes revaluation reserves (at 55% discount) and general provisions up to 1.25% of risk-weighted assets.
- Upper Layer CET1: NBFC-UL must maintain Common Equity Tier 1 (CET1) of at least 9%.
Base Layer: Leverage Ratio Ceiling
NBFCs in the Base Layer (NBFC-BL) are not subject to the 15% CRAR requirement. Instead, they are governed by a statutory Leverage Ratio:
- Leverage Ratio Formula: Total Outside Liabilities divided by Owned Fund.
- Ceiling: The Leverage Ratio must NOT exceed 7 at any point in time!
- Perpetual Debt Restriction: NBFCs-BL are not eligible to include perpetual debt instruments in their Tier 1 capital.
2. Income Recognition & Harmonized 90-Day NPA Criteria
Under SBR, the criteria for classification of assets as Non-Performing Assets (NPAs) across all categories of NBFCs (including Base Layer) has been strictly aligned to the 90-day overdue norm:
| Facility / Advance Type | RBI SBR Non-Performing Asset (NPA) Trigger Point |
|---|---|
| Term Loans & Demand Loans | An asset in respect of which interest or installment of principal has remained overdue for more than 90 days. |
| Lease Rentals & Hire Purchase | Lease rental or hire purchase instalment has remained overdue for more than 90 days. |
| Bills Purchased & Discounted | The bill remains overdue and unpaid for more than 90 days. |
| Income Recognition Rule | Income from NPAs CANNOT be recognized on an accrual basis! It can be recognized strictly on actual cash realization. Any unrealized interest already accrued in previous quarters must be immediately reversed from the Profit & Loss account! |
3. RBI Prudential Provisioning Matrix for NBFCs
NBFCs must maintain provisions against their loan portfolio in accordance with the following regulatory schedule:
| Asset Classification | Overdue Period / Status | Secured Portion Provision | Unsecured Portion Provision |
|---|---|---|---|
| Standard Assets | Regular servicing / Overdue ≤ 90 days | 0.40% general provision on total standard advances. | |
| Sub-Standard Assets | NPA for a period ≤ 12 months | 15% general provision on total sub-standard portfolio. | |
| Doubtful Assets – D1 | Sub-standard for > 12 months (up to 1 yr) | 25% of secured portion | 100% of unsecured portion |
| Doubtful Assets – D2 | Doubtful from 1 to 3 years | 40% of secured portion | 100% of unsecured portion |
| Doubtful Assets – D3 | Doubtful for more than 3 years | 100% of secured portion | 100% of unsecured portion |
| Loss Assets | Identified as uncollectible | 100% PROVISION on entire outstanding balance! | |
Audit Procedures, Checklists & Fraud Classification
1. Master Audit Checklist for NBFCs
The statutory auditor must execute the following structured verification procedures:
| Audit Focus Area | Specific Verification Procedures & Auditor Responsibilities |
|---|---|
| 1. CoR & Principal Business | Inspect the original Certificate of Registration (CoR) issued by RBI under Section 45-IA. Re-compute the 50-50 Principal Business Test based on audited financial statements. Verify that the company is entitled to continue holding the CoR. |
| 2. NOF Computation | Independently re-perform the calculation of Net Owned Funds (NOF) using the statutory formula. Check that NOF meets the prescribed regulatory floor (₹ 2 Cr / ₹ 10 Cr). |
| 3. Lending & Credit Operations | Verify loan agreements, board/committee sanction resolutions, borrower KYC documents, CIBIL/credit bureau reports, and title search reports for mortgaged properties. |
| 4. Security Perfection | Verify registration of charges with the Registrar of Companies (ROC) within 30 days, registration with CERSAI, and hypothecation endorsement on the Vahan portal for vehicle financing. |
| 5. Public Deposits (NBFC-D) | Verify compliance with ceiling on public deposits (up to 1.5 times NOF for rated companies); verify tenure (12 to 60 months only); verify investment in approved liquid assets (15% of public deposits in unencumbered government securities held in designated custodial account). |
2. Classification of Frauds by NBFCs & Reporting to RBI
In accordance with RBI Master Directions on Monitoring and Reporting of Frauds in NBFCs:
- Classification: Frauds are categorized into: (a) Misappropriation and criminal breach of trust; (b) Fraudulent encashment / manipulation of books; (c) Unauthorized credit facilities granted for illegal gratification; (d) Cheating and forgery; (e) Fraudulent foreign exchange transactions.
- Reporting in Form FMR-1: All individual fraud cases involving an amount of ₹ 1 Lakh and above must be reported to the RBI in Form FMR-1 within three (3) weeks of detection.
- Frauds ≥ ₹ 1 Crore: In addition to FMR-1, a flash report must be sent to the RBI within 48 hours, and statutory auditors must report under Section 143(12) of Companies Act in Form ADT-4 to the Central Government.
Exam Case Scenario (TYU 1)
Delta Ltd. has Total Assets of ₹ 100 Crores, consisting of: (a) Factory Land & Building: ₹ 40 Crores; (b) Plant & Machinery: ₹ 8 Crores; (c) Trade Receivables from manufacturing sales: ₹ 2 Crores; (d) Loans and Advances granted to third parties: ₹ 35 Crores; (e) Investments in corporate debentures and shares: ₹ 15 Crores.
During the year, its Gross Income was ₹ 20 Crores, consisting of: (a) Revenue from sale of manufactured goods: ₹ 9 Crores; (b) Interest earned on loans: ₹ 7 Crores; (c) Dividend and capital gains on debentures/shares: ₹ 4 Crores.
Evaluate whether Delta Ltd.'s principal business is financial in nature, and whether it is mandatorily required to obtain a Certificate of Registration (CoR) from the RBI under Section 45-IA.
ICAI Model Evaluation:
Apply the cumulative 50-50 Twin Criteria:
-
1. Financial Assets Test:
- Financial Assets = Loans & Advances (₹ 35 Cr) + Investments in shares/debentures (₹ 15 Cr) = ₹ 50 Crores.
- Total Assets = ₹ 100 Crores.
- Percentage of Financial Assets = (50 / 100) × 100 = 50%.
- Evaluation: The statutory rule requires Financial Assets to be MORE THAN 50% (> 50.00%) of total assets! Here, financial assets are exactly 50.00%, NOT more than 50%!
-
2. Financial Income Test:
- Financial Income = Interest on loans (₹ 7 Cr) + Dividend/Gains (₹ 4 Cr) = ₹ 11 Crores.
- Gross Total Income = ₹ 20 Crores.
- Percentage of Financial Income = (11 / 20) × 100 = 55% (> 50%).
- Conclusion: Although Delta Ltd. satisfies the Income Test (55% > 50%), it FAILS the Asset Test because financial assets are exactly 50% (not strictly > 50%). Since both tests are cumulative, Delta Ltd. does NOT meet the 50-50 principal business criteria and is NOT required to register as an NBFC with the RBI!
Auditor's Duties: RBI Directions 2016 & CARO 2020 Clause 3(xvi)
1. Non-Banking Financial Companies Auditor's Report (Reserve Bank) Directions, 2016
The statutory auditor of every NBFC has dual reporting responsibilities: (1) The independent auditor's report to shareholders under Section 143; and (2) A Separate Report to the Board of Directors pursuant to the NBFC Auditor's Report (Reserve Bank) Directions, 2016.
| Category of NBFC | Mandatory Inquiries & Statements in Report to the Board of Directors |
|---|---|
| Matters for ALL NBFCs |
|
| Additional Matters for Deposit-Taking NBFCs (NBFC-D) |
|
| Additional Matters for Non-Deposit NBFCs (NBFC-ND) |
|
2. Exception Reporting Directly to the Reserve Bank of India
Where in the case of any NBFC, the statement regarding any of the items specified in the report to the Board of Directors is unfavorable or qualified, or in the opinion of the auditor the company has not complied with:
- The provisions of the RBI Act, 1934 (Sections 45-IA, 45-IB, 45-IC); OR
- Any Master Direction or Prudential Regulation issued by the RBI;
It shall be the statutory obligation of the auditor to report the fact immediately in writing to the Regional Office of the Reserve Bank of India under whose jurisdiction the registered office of the company is located!
Timing: The auditor cannot wait for the shareholders' meeting or formal presentation of the accounts. The exception report must be submitted to the RBI immediately!
3. Reporting Under CARO 2020 – Clause 3(xvi) (The 4 Sub-Clauses)
Clause 3(xvi) of CARO 2020 imposes specific, detailed reporting duties on statutory auditors of all companies regarding NBFC activities:
| CARO Sub-Clause | Statutory Reporting Mandate | Auditor's Specific Verification Focus |
|---|---|---|
| Clause 3(xvi)(a) | Whether the company is required to be registered under Section 45-IA of the RBI Act, 1934 and if so, whether the registration has been obtained. | Examine 50-50 test. If financial assets > 50% and financial income > 50%, verify whether Certificate of Registration (CoR) is obtained from RBI. |
| Clause 3(xvi)(b) | Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from the RBI. | Detect unauthorized shadow banking. If an unregistered commercial company conducts substantial lending/investing as principal business, report the breach. |
| Clause 3(xvi)(c) | Whether the company is a Core Investment Company (CIC) as defined in the regulations by the RBI, and if so, whether it continues to fulfill the criteria of a CIC, and in case of an exempted/unregistered CIC, whether it continues to fulfill such criteria. | Verify 90% net assets invested in group companies and 60% in equity shares; verify whether asset size ≥ ₹ 100 Cr and public funds are accessed. |
| Clause 3(xvi)(d) | Whether the Group has more than one CIC as part of the Group, and if yes, indicate the number of CICs which are part of the Group. | Inquire with management, review group corporate structure charts, and state the exact aggregate count of CICs functioning in the corporate group. |
Exam Case Scenario (TYU 2 & TYK 7)
During the statutory audit of Zen Finance Ltd., a non-deposit taking NBFC in the Base Layer, the auditor noticed that the company failed to maintain the required minimum Net Owned Fund (NOF) of ₹ 2 Crores as of March 31, 2026 due to operating losses. Furthermore, the company failed to create general provision of 0.40% on standard assets.
The management requested the auditor to state these observations in the separate report to the Board of Directors, but insisted that there is no need to inform the Reserve Bank of India since Zen Finance Ltd. does not accept public deposits. Evaluate the validity of management's contention and explain the auditor's statutory reporting duties.
ICAI Model Evaluation:
- Management's contention is completely invalid and contrary to law: The obligation to report non-compliances to the RBI applies to ALL NBFCs, whether deposit-taking or non-deposit-taking!
- Mandatory Exception Reporting: Under paragraph 5 of the NBFC Auditor's Report (Reserve Bank) Directions, 2016, if any statement in the report to the Board is unfavorable or qualified, or if the company has failed to comply with NOF requirements or prudential provisioning norms, the auditor has a strict statutory duty to report the matter immediately in writing to the RBI!
- Direct Communication: The auditor must send an Exception Report directly to the Regional Office of the Department of Supervision, RBI, detailing the shortfall in NOF and non-provisioning on standard assets.
Ind AS Schedule III (Division III), ECL vs. IRAC Prudential Floor
1. Ind AS Financial Statements Presentation (Division III of Schedule III)
All NBFCs covered under the Ind AS roadmap must prepare their Balance Sheet, Statement of Profit and Loss, and Statement of Changes in Equity in accordance with Division III of Schedule III to the Companies Act, 2013:
Unlike commercial companies under Division II (which classify assets and liabilities into Current and Non-Current), NBFCs under Division III present items in the Balance Sheet in the Order of Liquidity!
Balance Sheet is divided into Financial Assets (Cash, Bank balances, Derivative financial instruments, Receivables, Loans, Investments) and Non-Financial Assets (Inventories, Current tax assets, PPE, Intangible assets). Similarly, liabilities are split into Financial Liabilities and Non-Financial Liabilities.
2. Ind AS 109 Expected Credit Loss (ECL) vs. RBI IRAC Prudential Floor
Under Ind AS 109 (Financial Instruments), NBFCs compute impairment allowances using the forward-looking Expected Credit Loss (ECL) model across three credit quality stages:
Stage 1: Performing
Overdue ≤ 30 days. No significant increase in credit risk since origination. Provision = 12-Month Expected Credit Loss.
Stage 2: Under-Performing (SICR)
Overdue 31 to 90 days. Significant Increase in Credit Risk (SICR). Provision = Lifetime Expected Credit Loss.
Stage 3: Credit-Impaired
Overdue > 90 days. Default occurred / objective evidence of impairment. Provision = Lifetime Expected Credit Loss.
The RBI Prudential Floor & Impairment Reserve
To prevent under-provisioning under statistical ECL models, the RBI mandates that NBFCs must simultaneously compute provisions required under RBI Prudential IRAC Norms:
- Comparison: Compare aggregate Ind AS 109 Impairment Allowance (ECL) against aggregate RBI IRAC Provisioning requirement.
- Where Ind AS 109 ECL < RBI IRAC Provision: The shortfall must be transferred from Retained Earnings to a separate "Impairment Reserve" under Equity! No dividend can be paid out of this reserve.
- Where Ind AS 109 ECL ≥ RBI IRAC Provision: No transfer to Impairment Reserve is needed! The higher Ind AS ECL provision stands in the financial statements.
Exam Case Scenario (TYU 3 & TYK 9)
Omega Capital Ltd., an NBFC in the Middle Layer adopting Ind AS, has computed an Expected Credit Loss (ECL) allowance of ₹ 18 Crores under Ind AS 109 as of March 31, 2026. The statutory auditor, during the course of the audit, independently computed the provision required under the RBI Prudential IRAC Norms, which amounted to ₹ 22 Crores.
The management contends that since Ind AS is notified under the Companies Act, 2013 and prevails over RBI guidelines, only the Ind AS 109 provision of ₹ 18 Crores needs to be recognized in the accounts, and no further action is required. Advise the auditor and evaluate management's contention.
ICAI Model Evaluation:
- Management's contention is erroneous: While the accounting provision recognized in the Statement of Profit and Loss must follow Ind AS 109 (₹ 18 Crores), the company is bound by the RBI Prudential Floor Rule.
- Computation of Shortfall:
- Provision required under RBI IRAC Norms = ₹ 22 Crores.
- Impairment allowance computed under Ind AS 109 = ₹ 18 Crores.
- Shortfall in Provision = ₹ 22 Crores − ₹ 18 Crores = ₹ 4 Crores.
- Creation of Impairment Reserve: Omega Capital Ltd. MUST transfer the shortfall of ₹ 4 Crores from Retained Earnings to a separate "Impairment Reserve" under Equity in the Balance Sheet!
- Dividend Restriction: No amount can be distributed as dividend or capitalized from this Impairment Reserve. If management refuses to create this Impairment Reserve, the auditor must issue a qualified audit opinion!
Test Your Knowledge (TYK 1 to 15 – Full Detailed Solutions)
The following section provides comprehensive, 100% complete answers to all 15 Test Your Knowledge questions from the official ICAI Study Material for Chapter 14 (Unit 2):
ICAI Model Answer:
Definition under Section 45-I(f): A Non-Banking Financial Company is a financial institution which is a company engaged in lending, investments in shares/securities, hire-purchase, leasing, insurance, or chit business, but excludes entities whose principal business is agriculture, industrial activity, trading in goods, or construction of immovable properties. It must satisfy the 50-50 Principal Business Test (financial assets > 50% and financial income > 50%).
Five Prominent Types of NBFCs:
- 1. Investment and Credit Company (ICC): Carries on asset finance and lending as its principal business (consolidated AFC, Investment Co, and Loan Co).
- 2. Infrastructure Finance Company (IFC): Deploys at least 75% of total assets in infrastructure loans; min NOF ₹ 300 Cr; min credit rating 'A'; CRAR 15%.
- 3. Core Investment Company (CIC): Holds at least 90% of net assets in equity/debt of group companies (min 60% in equity shares); asset size ≥ ₹ 100 Cr.
- 4. NBFC - Micro Finance Institution (NBFC-MFI): Non-deposit taking NBFC deploying at least 75% of assets in microfinance loans to low-income households (income ≤ ₹ 3 Lakhs) without collateral.
- 5. Peer-to-Peer Lending Platform (NBFC-P2P): Operates an online marketplace connecting borrowers and lenders; no balance sheet lending or credit guarantees.
ICAI Model Answer:
| Comparison Head | Commercial Banks | Non-Banking Financial Companies (NBFCs) |
|---|---|---|
| Demand Deposits | Can accept demand deposits (savings and current accounts). | Cannot accept demand deposits; only term deposits for 12 to 60 months. |
| Payment & Settlement | Integral part of clearing and settlement; issue cheques on self. | Cannot issue cheques drawn on themselves. |
| Deposit Insurance | Covered by DICGC up to ₹ 5 Lakhs per depositor. | No DICGC deposit insurance available. |
| Cash Reserve Ratio | Mandatory CRR maintenance with RBI under Sec 42 of RBI Act. | Not required to maintain CRR balances with the RBI. |
ICAI Model Answer:
- Base Layer (NBFC-BL): Governed by a Leverage Ratio ceiling of ≤ 7 (Total Outside Liabilities / Owned Fund). Not subject to CRAR. Not eligible to include perpetual debt in Tier 1.
- Middle Layer (NBFC-ML): Mandatory CRAR of at least 15% (Tier 1 minimum 10%). Tier 2 capital capped at 100% of Tier 1.
- Upper Layer (NBFC-UL): In addition to 15% CRAR, must maintain a minimum Common Equity Tier 1 (CET1) ratio of 9%.
ICAI Model Answer:
The auditor must check:
- Certificate of Registration (CoR) issued by RBI under Section 45-IA.
- Compliance with 50-50 Principal Business criteria as of the balance sheet date.
- Net Owned Fund (NOF) calculation and compliance with minimum statutory capital.
- Credit appraisal, board sanction limits, borrower KYC, and CIBIL checks.
- Security perfection: ROC charge filing, CERSAI registration, Vahan hypothecation.
- Compliance with public deposit ceiling, credit rating, and 15% liquid asset maintenance (NBFC-D).
- Harmonized 90-day NPA classification, interest derecognition, and mandatory provisioning.
ICAI Model Answer:
- Under SBR, the NPA overdue threshold across all NBFCs (including Base Layer) is strictly harmonized to more than 90 days for loans, lease rentals, and hire purchase installments.
- Income on NPAs cannot be recognized on accrual basis; it is recognized strictly on actual cash realization.
- All unrealized interest income previously accrued on an account that turns into an NPA during the year must be immediately reversed from the Profit & Loss account!
ICAI Model Answer:
Refer Section 6: The statutory auditor must submit a separate report to the Board of Directors covering: (a) Holding valid CoR; (b) Entitlement to hold CoR based on 50-50 test; (c) Compliance with NOF; (d) Non-acceptance of public deposits and passing board resolution (NBFC-ND); and (e) Compliance with prudential norms on CRAR, income recognition, and provisioning.
ICAI Model Answer:
Under Paragraph 5 of the Directions, if any statement in the report to the Board is unfavorable or qualified, or if the NBFC has failed to comply with NOF requirements or prudential norms, the auditor has a strict statutory duty to report the fact immediately in writing to the Regional Office of the RBI. The auditor cannot withhold this report until the AGM or publication of accounts.
ICAI Model Answer:
- 3(xvi)(a): Whether the company is required to be registered under Section 45-IA of RBI Act and if registration has been obtained.
- 3(xvi)(b): Whether the company has conducted non-banking financial or housing finance activities without a valid Certificate of Registration.
- 3(xvi)(c): Whether the company is a Core Investment Company (CIC) and continues to fulfill the criteria, including exempted/unregistered CICs.
- 3(xvi)(d): Whether the Group has more than one CIC as part of the Group, indicating the exact count of CICs in the group.
ICAI Model Answer:
- Aggregate value of loans sanctioned to related parties during the year.
- Aggregate value of outstanding loans to related parties as on March 31.
- Percentage of related party loans to total loans and advances of the NBFC.
- Aggregate value of outstanding related party loans categorized as SMA and NPA.
- Amount of provisions held in respect of loans to related parties.
ICAI Model Answer:
Refer Section 1: Owned Fund = (Paid-up equity + Free reserves + Share premium + Capital reserves) − (Accumulated losses + Deferred revenue exp + Intangible assets). From Owned Fund, deduct the amount by which Specified Group Investments & Exposures (shares, debentures, loans to subsidiaries/group companies) exceeds 10% of Owned Fund.
ICAI Model Answer:
Refer Section 5: Frauds categorized into misappropriation, fraudulent encashment, unauthorized credit facilities, forgery, and cheating. All frauds involving ₹ 1 Lakh and above must be reported to the RBI in Form FMR-1 within 3 weeks of detection. Frauds ≥ ₹ 1 Crore must also be reported to MCA under Section 143(12) in Form ADT-4.
ICAI Model Answer:
Refer Section 7: Prepared under Division III of Schedule III. Distinctive feature: presentation in the Order of Liquidity rather than Current vs. Non-Current split, dividing Balance Sheet into Financial Assets / Non-Financial Assets and Financial Liabilities / Non-Financial Liabilities.
ICAI Model Answer:
Refer Section 7: Stage 1 (Performing ≤ 30 days overdue, 12-month ECL); Stage 2 (Under-performing 31-90 days overdue, Significant Increase in Credit Risk, Lifetime ECL); Stage 3 (Credit-Impaired > 90 days overdue, Default, Lifetime ECL).
ICAI Model Answer:
Refer Section 7: Where the aggregate impairment allowance computed under Ind AS 109 (ECL) is less than the total provisioning required under RBI Prudential IRAC Norms, the shortfall must be transferred from Retained Earnings to a non-distributable "Impairment Reserve" under Equity. No dividend can be paid out of this reserve.
ICAI Model Answer:
A CIC is an NBFC that holds not less than 90% of its net assets in equity shares, preference shares, debentures, or loans of group companies, with at least 60% of net assets in equity shares of group companies. It does not trade in shares/securities (except block sale for dilution) and does not carry on any other financial activity except lending to group companies.
Master SBR 4-Layer Architecture Matrix & Exam Traps
Comparative Synthesis: The 4-Layer Scale Based Regulation (SBR)
| SBR Layer | Eligibility & Asset Size | Capital & Leverage Rules | Key Regulatory & Governance Mandates |
|---|---|---|---|
| Base Layer (NBFC-BL) |
Non-deposit NBFCs < ₹ 1,000 Cr; P2P, AA, NOFHC, Type I. | Leverage Ratio ≤ 7 (Total Outside Liabilities / Owned Fund). | 50-50 principal business test, NOF glide path to ₹ 10 Cr, 90-day NPA overdue norm. |
| Middle Layer (NBFC-ML) |
All Deposit-Taking NBFCs; Non-deposit ≥ ₹ 1,000 Cr; HFCs, CICs, SPDs, IDFs. | CRAR min 15% (Tier 1 min 10%). | Mandatory Chief Risk Officer (CRO) & CCO, ICAAP, Large Exposure Framework (LEF). |
| Upper Layer (NBFC-UL) |
Top 10 eligible NBFCs by size + Parametric scoring model entities. | CRAR min 15% + Common Equity Tier 1 (CET1) min 9%. | Bank-like supervision, mandatory listing on stock exchanges within 3 years of classification. |
| Top Layer (NBFC-TL) |
Empty layer (populated if Upper Layer NBFC poses extreme systemic risk). | Higher customized capital surcharges. | Intrusive supervisory monitoring and higher prudential buffers. |
- Trap 1 (50-50 Test Strictly Greater Than): Believing that exactly 50% financial assets qualifies. Fact: The statutory rule requires financial assets to be MORE THAN 50% (> 50.00%)! Exactly 50.00% FAILS the test!
- Trap 2 (Deposit-Taking SBR Layer): Classifying a small deposit-taking NBFC with ₹ 100 Cr assets into Base Layer. Fact: ALL deposit-taking NBFCs (NBFC-D) are mandatorily placed in the Middle Layer, regardless of asset size!
- Trap 3 (Exception Reporting to RBI): Assuming exception reporting is only for deposit-taking NBFCs. Fact: The duty to report unfavorable/qualified statements to the RBI applies to ALL NBFCs under the 2016 Directions!
- Trap 4 (Ind AS ECL vs. IRAC Floor): Overlooking the Impairment Reserve. Fact: If Ind AS 109 ECL is lower than RBI IRAC provision, the shortfall must be transferred to Impairment Reserve from retained earnings!