NBFCs That Do Not Require RBI Registration in India

NBFCs that do not require RBI registration in India

1. The starting point: when is registration required?

A company is treated as an NBFC if it satisfies the principal business criteria (commonly referred to as the “50-50 test”) and carries on the business of a non-banking financial institution. If it qualifies as an NBFC, it ordinarily requires a Certificate of Registration (CoR) under section 45IA of the RBI Act, 1934. The RBI’s consolidated framework for this is set out in the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025.

However, there are important registration exemptions which are coming into effect from April 01, 2026 and the most commercially relevant analysis often turns on two concepts: public funds and customer interface.

2. The most important exemption in practice: NBFCs without public funds and customer interface (Type I / “Unregistered Type I”)

2.1 Why this category matters

The RBI has introduced a clearer framework for NBFCs that operate without public funds and without customer interface. Under the draft amendment directions (effective April 1, 2026), such NBFCs with asset size below ₹1,000 crore are proposed to be exempt from registration under section 45IA, subject to conditions and ongoing disclosures.

This means that, in practice, a company may be carrying on NBFC activity (meeting principal business criteria) but may still not require registration if it meets the strict “no public funds + no customer interface” model and stays below the asset threshold.

2.2 “Public funds” — meaning and why it is the first tripwire

Under the 2025 Directions, public funds are defined widely and include:

• public deposits,

• inter-corporate deposits,

• bank finance, and

• all funds received from outside sources, including instruments such as commercial papers and debentures.

A narrow carve-out exists for instruments compulsorily convertible into equity within five years.

Practical implication: many promoters assume “we do not take deposits” equals “we do not have public funds”. That is incorrect. Bank borrowings, inter-corporate deposits, debentures, CPs, and even certain structured outside liabilities can push the entity into “public funds”, making it ineligible for this exemption.

The FAQs in the draft amendment are even more explicit on grey areas: loans from directors and/or shareholders are treated as public funds because they are outside liabilities.

2.3 “Customer interface” — meaning and why it is the second tripwire

The 2025 Directions define customer interface as interaction between the NBFC and its customers while carrying on its business.

The draft amendment FAQ clarifies that customer interface is broad and can arise through:

• an account-based relationship,

• a lending relationship, or

• interaction as part of the NBFC’s business,

and any customer-oriented activity like lending or providing guarantees, including to group entities, shareholders, directors, etc., constitutes customer interface. A limited carve-out is indicated for employee loans given under employment terms and not on commercial terms.

Practical implication: even if an entity “lends only within the group”, it can still be treated as having customer interface. Guarantees and other non-fund based exposures also create customer interface risk.

2.4 The nuance you flagged: indirect public funds through associates or group entities

A frequent structuring mistake is to keep the NBFC “clean” on paper while group entities raise borrowings and downstream funds are routed internally.

The draft amendment introduces an explanation that indirect receipt of public funds means funds received through associates and group entities which have access to public funds.

What this means in structuring terms:

• If a group/associate entity raises bank finance or other outside liabilities, and the “exempt” NBFC receives funds through that route, the RBI can treat it as indirect public funds.

• This can defeat the exemption, even if the exempt entity has not itself borrowed from a bank or issued any instrument.

  
  

2.5 Typical companies that may fit this bucket (if structured conservatively)

Subject to careful fact testing, companies that may be able to rely on the “no public funds + no customer interface” model include:

• pure investment holding / treasury entities deploying only owned funds into permitted investments, with no lending or guarantees;

• entities used for internal capital allocation that do not raise outside liabilities and do not deal with any customers;

• entities that do not distribute financial products (mutual funds, insurance, credit cards, PoP for NPS, etc.), because such activities necessarily involve customer interface.

  
  

Note: under the draft framework, these entities are expected to operate this as a conscious and durable business model, supported by annual board resolutions and financial statement disclosures.

3. Other RBI-recognised categories that are exempt from NBFC registration (or certain RBI Act provisions)

Separate from the “Type I / Unregistered Type I” concept, the 2025 Directions also list several categories that are exempt from section 45IA registration (and in some cases, from additional provisions). Key categories include:

3.1 Entities exempt from sections 45-IA, 45-IB and 45-IC (selected examples)

• Section 8 / Section 25 companies providing only microfinance loans, subject to conditions including asset size below ₹100 crore and not accepting public deposits.

• Securitisation and Reconstruction Companies (SARFAESI registered).

• Nidhi companies, mutual benefit companies, and chit companies (as defined).

• SEBI-registered merchant banking companies, subject to conditions (including that they do not carry on other financial activity referred to in section 45I(c) and do not accept/hold public deposits).

  
  

3.2 Entities exempt from section 45-IA (registration) specifically

• Unregistered Core Investment Companies (CICs) (as stated in the CIC directions) are exempt from registration under section 45IA.

• Core Investment Companies (CICs) meeting capital and leverage requirements are exempt from section 45IA(1)(b).

• AIF companies (Alternative Investment Funds holding SEBI registration), subject to conditions including not holding/accepting public deposits, are exempt from sections 45-IA and 45-IC.

  
  

Important distinction: these exemptions are category-based and condition-based. A company cannot “elect” into them. It must genuinely fall within the defined regulated class (SEBI-registered AIF, SEBI merchant banker, SARFAESI ARC, etc.).

4. Compliance reality check: common reasons entities lose exemption status

1. Outside liabilities creep in (director/shareholder loans, inter-corporate deposits, structured borrowings). This can become “public funds”.

2. Intra-group lending or guarantees are treated as customer interface, unless a narrow employee-loan carve-out applies.

3. Indirect public funds routed from an associate/group entity that has access to public funds can disqualify the structure.

4. Distribution models (mutual funds, insurance agency, credit card distribution, PoP for NPS, etc.) create customer interaction and can breach the “no customer interface” condition.

   
   

5. Key takeaways for structuring: “exemption” is a business model, not a label

If the aim is to remain outside registration, the entity should be designed to show:

• no public funds (including no indirect public funds), and

• no customer interface (including no group lending/guarantees that create a customer relationship), on a durable and board-governed basis, with consistent financial statement disclosures.

  
  

6. How to deregister an existing NBFC Type I?

From April 1, 2026, the RBI’s draft amendment directions propose that an NBFC which does not avail public funds and does not have any customer interface, and has an asset size of less than ₹1,000 crore, will be eligible to be treated as an “Unregistered Type I NBFC”, i.e., exempt from the registration requirement under section 45IA of the RBI Act, 1934. Existing eligible NBFCs, including those already holding a CoR as a Type I NBFC as on April 1, 2026, may apply to the RBI for deregistration within six months, i.e., by September 30, 2026.

The application for deregistration is required to be filed through PRAVAAH, on the company’s letterhead, and must be supported by prescribed documents. These include submission of the original Certificate of Registration (to be provided physically to the RBI), the audited financial statements for the last three financial years, and a clear statement on the status of public funds and customer interface for each of the last three financial years. The RBI also requires a statutory auditor’s certificate confirming that, as on the date of application, the company does not have public funds and does not have customer interface.

In addition, the company must pass a board resolution confirming that it does not have public funds and customer interface as on date, and that it does not intend to access public funds or have customer interface in the future. The board resolution must also record that if the company intends to access public funds and/or have customer interface in future, it will obtain registration as a Type II NBFC, and that if its asset size reaches ₹1,000 crore or above, it will obtain registration as a Type I NBFC. The board must also provide an undertaking that the company will disclose its status as an Unregistered Type I NBFC, and disclose the status of public funds and customer interface, in the notes to accounts forming part of its financial statements.

The RBI will consider deregistration requests based on its satisfaction that the NBFC is operating with a conscious and durable business model of not availing public funds and not having customer interface. Importantly, the exemption is only from the registration requirement under section 45IA. The entity remains subject to other applicable provisions of the RBI Act, 1934, and the RBI retains powers to issue directions and take action if risks are observed or conditions are violated.

Prior internal due diligence and preparation is advised.

Disclaimer

The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.

For further queries or details, you may contact:

Mr. Anuroop Omkar

Managing Partner

AK & Partners

info@akandpartners.in