Affluence Advisory
Quick Summary
As a practitioner in the financial services sector, we have often encountered questions around the capital adequacy and activity thresholds that govern Non-Banking Financial Companies (NBFCs) in India. Two of the most critical metrics-Net Owned Funds (NOF) and Principal Business Criteria (PBC)-form
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FAQ :
Net Owned Funds (NOF) represent the core capital base of an NBFC, calculated as Paid-up Equity Capital + Free Reserves - Accumulated Losses - Deferred Revenue Expenditure. It ensures firms have sufficient capital before extending credit.
Initially set at Rs 2 crore in 1998, the NOF requirement increased to Rs 10 crore for new NBFCs in 2015-2016. Under the Scale-Based Regulation, lending-focused NBFCs are on a glide path to reach Rs 10 crore by 2027, with interim targets set by October 2023.
The Principal Business Criteria (PBC) test determines if lending and other financial services constitute a substantial portion of a company's business, classifying it as an NBFC under RBI rules.
For companies with assets of Rs 1000 crore or more, PBC is met if financial assets are 50% or more of total assets and financial income is 50% or more of gross income. For companies below Rs 1000 crore, these thresholds increase to 75%.
Higher NOF mandates require better capital planning, while stringent PBC thresholds encourage a focus on core lending and investment activities, discouraging excessive diversification.
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