Running an NBFC is not all about following operational compliance; it is also about maintaining a minimum Net Owned Fund, shortened as NOF. So, what exactly is the NOF, and what does it have to do with NBFC compliance? How does it impact NBFCs’ finances, and what would happen if they fail to maintain it? If these questions concern you, you are in the right place. So, let’s get started and delve into the NBFC net owned fund calculation.
What is an NOF?
As stated, NOF stands for Net Owned Fund, which is essentially the addition of paid-up capital and free reserves. Mathematically, the NBFC net owned fund calculation looks like this:
- NOF = Paid-up capital + Free Reserves – Accumulated losses
- NOF is a key component of the NBFC Capital Calculation.
How Do You Proceed With the NBFC Net Owned Fund Calculation?
In the formula above, paid-up capital refers to the investors’ money for which shares were issued to them.
On the other hand, the free reserves reflect the NBFCs’ earnings without debts. It could be anything from post-tax profit to an additional amount paid by shareholders for their share. Please note that loans cannot be a part of free reserves. Therefore, when calculating the NOF, it is important to keep debts and loans, or anything you owe financially, aside.
Regarding accumulated losses, they are referred to as net operational losses that the company faced over its entire service life. Until such losses are wiped out by the profit, the company should reflect the accumulated losses on the balance sheet as well as the annual return.
How does the Governing Legislation Define the NBFC net owned Fund Calculation?
In section 45-IA of the Reserve Bank of India Act, 1934, the NOF must be calculated as follows:
NOF= Paid-up capital + free reserves – (accumulated losses, intangible assets, and group company investment exposure over 10%)
What Constitutes the Paid-up Capital, Free Reserves, and Accumulated Losses?
When evaluating NOF requirements for NBFC, it is vital to know what constitutes the paid-up capital, free reserves, and accumulated losses. The table below sheds light on the same:
| Step | Core Component | Specific Line Items from the Form |
| 1 | Paid-Up Capital | • Paid-up equity capital• Ordinary Shares• Cumulative Convertible Preference Shares |
| 2 | Free Reserves & Eligible Surpluses | • Share Premium• General Reserves• Reserves under Sec 45-IC of RBI Act (Statutory)• Balance of profit and loss account (if positive) |
| 3 | Accumulated Losses | • Profit and Loss Account (Accumulated Loss) (if negative) |
| 4 | Intangible & Book Adjustments | • Deferred Tax Assets (Net)• Prepaid expenses and Other Intangible assets |
| FINAL OUTPUT | Owned Fund |
Understanding the NOF Cap for Different NBFCs
Depending on the NBFC category, the NOF requirements vary. The table below will give a clear picture of the minimum NOF cap:
| NBFC Category | Regulatory NOF Requirement | Core Governing Purpose |
| NBFC-Investment and Credit Company (ICC) | ₹10 Crore | Standard lending and asset financing floor. |
| NBFC-Micro Finance Institution (MFI) | ₹10 Crore | Micro-credit operations (₹5 Crore for North-East). |
| NBFC-Factor | ₹10 Crore | Factoring and invoice discounting operations. |
| Housing Finance Company (HFC) | ₹20 Crore | Home loan financing and mortgage lending. |
| Infrastructure Finance Company (IFC) | ₹300 Crore | Long-term core infrastructure sector funding. |
| Core Investment Company (CIC) | ₹100 Crore | Group holding company asset acquisitions. |
| NBFC-Peer to Peer Lending (P2P) | ₹2 Crore | Digital crowd-sourced lending platforms. |
| NBFC-Account Aggregator (AA) | ₹2 Crore | Financial data consent-broking digital systems. |
Drawbacks of Not Maintaining the Minimum NOF Cap
These are common repercussions of not maintaining the minimum NOF cap:
• The company may end up losing its Certificate of Registration (CoR) under Section 45-IA(6).
• The company may struggle to grant fresh loans.
• Onboarding any new customers can become legally cumbersome.
• The monetary penalty could go as high as ₹25 Lakhs.
• A daily penalty of ₹10 Lakhs may come into effect
• A legal proceeding can be filed against directors and top management for running non-compliant operations.
• The jail term will apply for continual non-compliance.
• The credit rating can go awry, denting the company’s financial credibility.
• The reputational damage, as the RBI[1] can make the non-compliant NBFC’s name public.
It is evident that NOF is an integral yet essential part of NBFC’s legal existence. Maintaining it isn’t optional; it is an absolute mandate to reflect the financial vitality, whether you run an NBFC or are about to form one.
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Also Read: RBI Account Aggregator Interoperability and Consent Rules
FAQs
Q1: Can an NBFC keep NOF details private?
No, they cannot do so, as it can lead to serious non-compliance.
Q2: How do I report NOF information to the RBI during NBFC formation?
You can share such information on the COSMOS portal. Please note that you may have to share the hard copy of the document as well at the RBI regional office.
Q3: Do I have to increase the NOF when switching from a P2P lender to an NBFC-IFC?
Yes, you must do that to align with the RBI rules.
Q4: Can I loan the NOF to any third party?
You can use a certain portion of the free reserves (such as post-tax profit) for that purpose.
Q5: Can I take loans to increase the NOF?
No, the NOF should be encumbered, meaning it should be lien-free.
Q6: Does NBFC capital calculation include subtracting future debts?
No, when proceeding with the NBFC net owned fund calculation, you must only subtract current accumulated losses
