NBFCs in India face stringent financial regulations underpinned by the Reserve Bank of India. Central to these regulations are the NBFC principal business criteria. They require NBFCs to maintain certain thresholds of financial assets and income. Let’s see what these criteria are and what they matter for NBFCs’ existence.
What are NBFC Principal Business Criteria?
NBFC principal business criteria are a set of rules formulated and enacted by the Reserve Bank of India (RBI). They have everything to do with NBFC’s legal existence. Failing to comply with these criteria will result in instant application rejection. Here’s what RBI expects from NBFCs when it comes to meeting such criteria.
- Financial assets of an NBFC must constitute over 50% of the overall assets (excluding non-tangible assets). RBI verifies this from the last audited balance sheet.
- NBFCs’ overall income from financial assets must be 50%+ of overall gross income based on the last audited balance sheet.
These criteria are legally known as the 50-50 test for NBFCs.
NBFCs must fulfill these criteria simultaneously to maintain their legal status and operations.
Who Must Comply with NBFC Principal Business Criteria?
As per the Reserve Bank of India (RBI), the aforementioned financial assets and income test applies to companies engaged in
- Lending activities
- Investment in shares/securities
- Hire-purchase and leasing,
- or other activities cited under Section 45-I(a) of the RBI Act, 1934
Who is Exempt from NBFC Principal Business Criteria?
RBI’s 50-50 test for NBFCs does not apply to entities engaged in
- Agriculture
- Industrial manufacturing
- Trading of goods
- Construction/sale of immovable property
Even if these entities invest a certain portion of surplus funds into financial assets, they will continue to operate as non-NBFC entities; hence, this test will not apply.
What Constitutes Income from Financial Assets (Qualifying NBFC Income)
RBI[1] confirms the NBFC’s principal business criteria through the last audited balance sheet. Therefore, it is important to know what qualifies as income from an NBFC’s financial assets. The section breaks down all the income sources that the NBFC’s balance sheet should reflect:
- Earnings from loans, advances, intercorporate deposits, bills discounted, and debt instruments
- Income derived from shares and equity investments
- Profits derived from the sale, purchase, or dealing in securities or other investment commodities. These include shares, stocks, bonds, debentures, government securities, or other marketable securities.
- Income generated from lease rentals and finance charges under lease or hire-purchase agreements.
- Fees or commissions generated from factoring operations.
- Income derived from loan processing, guarantees, or underwriting services.
What Does Not Constitute Income from an NBFC’s Financial Assets?
The following are not considered income derived from NBFC’s financial assets:
- Bank Fixed Deposit (FD) Interest, as RBI sees it as “near money” or intermittent deployment of idle funds
- Income derived from raw farming, processing, or operations.
- Income generated from production activities
- Income earned from the buying and selling of physical goods,
- Fees generated from non-financial services.
- Gains or rental income from real estate
- Income fetched from insurance operations or core stockbroking tasks
NBFC principal business criteria are foundational legal requirements for NBFCs in India. NBFCs must meet them before and after registration to maintain operational transparency and financial vitality. Any non-compliance can result in severe consequences, ranging from judicial filing to steep monetary fines. Therefore, it is paramount for NBFCs to stay aligned with these rules regardless of any adversaries.
That said, if you need any professional assistance regarding NBFC compliance, feel free to partner with Advisou. As India’s most trusted compliance and licensing firm, Advisou promises a hassle-free business journey for clients pan-India, regardless of their operational footprint and industry. Contact us now to simplify your compliance and pave the foundation for seamless growth.
FAQs
Q1: What does RBI consider as evidence when conducting a 50-50 test for an NBFC?
The latest audited financial statements and a mandatory Statutory Auditor’s Certificate (SAC) are two key pieces of evidence that the RBI checks when performing the financial assets and income tests
Q2: Can an NBFC operate without passing the NBFC principal business criteria?
No, passing the financial assets and income test is one of the key legal requirements for NBFCs to operate legally in the country.
Q3: What happens if a company fails to pass the 50-50 test for an NBFC?
RBI will not grant the license or cancel the same if the NBFC is already registered.
Q4: Do NBFCs have to align with NBFC principal business criteria after registration?
Yes, since it is the main compliance anchor.
Q5: What if the NBFCs fail to keep up with such requirements at any point in time?
They must notify the RBI as soon as possible.
