Choosing the right Non-Banking Financial Company (NBFC) category is a vital step for any business planning to operate in India’s financial services sector. Each NBFC type such as Investment and Credit Company, Microfinance Institution, or Infrastructure Finance Company has distinct capital requirements, regulatory obligations, and permissible activities. The classification determines how the entity will be monitored by the Reserve Bank of India (RBI), impacting its governance structure, compliance standards, and scope of operations.

The legal foundation for NBFC registration and regulation lies in Chapter III-B (Sections 45-IA to 45-IE) of the Reserve Bank of India Act, 1934, which mandates RBI approval and adherence to prudential norms. With the introduction of the Scale Based Regulation (SBR) Directions, 2023, RBI now classifies NBFCs into four layers Base, Middle, Upper, and Top based on their systemic importance and risk exposure. Therefore, selecting the right category ensures both regulatory compliance and long-term business sustainability.

In this article, CA Manish Mishra talks about How to choose the Right NBFC Category for your business.

Legal Framework Governing NBFC Classification

The legal and regulatory foundation for classifying Non-Banking Financial Companies (NBFCs) is rooted in the Reserve Bank of India Act, 1934, particularly Chapter III-B (Sections 45-IA to 45-IE), which empowers the Reserve Bank of India (RBI) to regulate and supervise all NBFC operations in India. As per Section 45-IA, no company can commence or carry on the business of a non-banking financial institution without first obtaining a Certificate of Registration (CoR) from the RBI and maintaining the prescribed minimum Net Owned Fund (NOF)—₹2 crore for general NBFCs, and higher thresholds for specific categories such as Infrastructure Finance Companies (IFCs) and Core Investment Companies (CICs).

To ensure robust supervision and prevent regulatory arbitrage, RBI has developed an elaborate system of activity-based and scale-based regulation. The key regulatory frameworks include the RBI (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023, which introduced a layered approach based on size and risk exposure; the RBI Master Direction – NBFC (Reserve Bank) Directions, 2016, which governs registration and prudential norms; the RBI Master Direction – Core Investment Companies (CICs), 2016; the NBFC–Peer-to-Peer Lending Platform Directions, 2017 (amended February 2025); and the NBFC–Account Aggregator (AA) Directions, 2016. Together, these legal instruments provide a comprehensive framework determining which category a company falls under, the capital requirements, permissible activities, governance standards, and reporting obligations applicable to it.

Key NBFC Categories and Their Legal Features

The Reserve Bank of India (RBI) recognizes various categories of Non-Banking Financial Companies (NBFCs) based on their core activities, scale of operations, and the type of financial services they provide. Each category operates under a distinct legal framework, prudential norms, and compliance requirements to ensure financial stability and consumer protection. Understanding these classifications is essential for businesses to choose the right NBFC model aligned with their objectives, funding capacity, and target clientele.

Investment and Credit Company (NBFC–ICC)

The Investment and Credit Company (NBFC–ICC) is the most common and flexible NBFC category in India. It combines the functions of three earlier types loan company, investment company, and asset finance company under one structure.
Legal Basis: RBI Master Direction Non-Banking Financial Company (Reserve Bank) Directions, 2016.
Minimum NOF Requirement: ₹2 crore.

Permitted Activities:

• Lending and financing business operations.

• Investment in shares, bonds, debentures, and other securities.

Prohibited Activities:

• Acceptance of public deposits unless explicitly permitted by RBI.

NBFC–ICCs operate under general prudential norms such as asset classification, income recognition, and provisioning standards, making them suitable for retail lenders and corporate financiers.

Microfinance NBFC (NBFC–MFI)

NBFC–MFIs are designed to promote financial inclusion by extending micro-credit to low-income households and small borrowers, particularly in rural and semi-urban areas.
Legal Basis: RBI Master Direction – Regulatory Framework for Microfinance Loans, 2022.

Key Regulatory Conditions:

• Minimum 75% of total assets must be microfinance loans.

• Borrower’s annual household income must not exceed ₹3 lakh.

• Institutions must follow fair lending practices and maintain transparent pricing and grievance redressal mechanisms.

NBFC–MFIs play a vital role in empowering small entrepreneurs but are subject to tight supervision due to their exposure to financially vulnerable groups.

Infrastructure Finance Company (NBFC–IFC)

An NBFC–IFC primarily finances large-scale infrastructure projects such as highways, ports, power, water supply, and communication networks.
Legal Basis: RBI Notification DNBR (PD) CC.No.002/03.10.001/2010-11.

Key Conditions:

• Minimum Net Owned Fund (NOF) of ₹300 crore.

• At least 75% of total assets must be in infrastructure loans.

• Must maintain a minimum credit rating of ‘A’ or above.

• Compliance with Liquidity Coverage Ratio (LCR) and exposure limits is mandatory.

This category is suited for large corporations focusing on long-term project financing in sectors critical to national development.

Infrastructure Debt Fund (NBFC–IDF)

An Infrastructure Debt Fund NBFC (NBFC–IDF) is created to refinance existing infrastructure projects and attract long-term investors such as insurance and pension funds.
Legal Basis: RBI IDF–NBFC Directions, 2011.

Key Features:

• Can raise funds only through Rupee or Dollar-denominated bonds.

• Must have a sponsor NBFC–IFC as a parent entity.

• Requires prior RBI and Government approval for establishment.

NBFC–IDFs are instrumental in providing post-construction financing to infrastructure projects, thereby reducing the pressure on banks and promoting stable long-term capital inflows.

Core Investment Company (CIC)

A Core Investment Company (CIC) is primarily engaged in holding equity investments in group companies for strategic control rather than trading or financing.
Legal Basis: RBI Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016.

Key Provisions:

• Minimum NOF of ₹100 crore.

• At least 90% of net assets must be invested in group companies; 60% must be in equity shares.

• Cannot trade in securities or accept public deposits.

CICs are essential for conglomerates and holding companies managing multiple subsidiaries, ensuring financial transparency and restricting misuse of inter-corporate funding channels.

Peer-to-Peer Lending Platform (NBFC–P2P)

NBFC–P2P entities act as digital intermediaries that connect lenders and borrowers directly through online platforms, eliminating traditional banking intermediaries.
Legal Basis: NBFC–P2P Lending Platform Directions, 2017 (Amended February 2025).

Key Regulatory Requirements:

• Minimum Net Owned Fund of ₹2 crore.

• Cannot lend on their own account or accept deposits.

• Prohibited from offering credit guarantees or balance sheet lending.

• Must ensure full borrower-lender transparency and data protection compliance under fintech prudential norms.

The 2025 amendment strengthened data privacy, cybersecurity, and financial disclosure standards, ensuring safe participation for both retail and institutional investors.

Account Aggregator (NBFC–AA)

NBFC–Account Aggregators (AAs) serve as data intermediaries, enabling individuals and businesses to share their financial information securely across regulated financial entities.
Legal Basis: NBFC–Account Aggregator (Reserve Bank) Directions, 2016.

Key Features:

• Cannot undertake any lending or fund-based activity.

• Must comply with the Data Empowerment and Protection Architecture (DEPA) framework.

• Required to maintain robust IT systems and cybersecurity measures.

NBFC–AAs enhance financial transparency and data-driven innovation by empowering customers to control and share their financial data with consent, supporting India’s emerging fintech ecosystem.

How to Select the Right Category

Selecting the right Non-Banking Financial Company (NBFC) category is a critical strategic decision that determines the legal, financial, and operational direction of a business. Each NBFC type comes with different capital requirements, regulatory oversight, and business permissions under the Reserve Bank of India (RBI) framework. Therefore, choosing an appropriate category must be guided by the company’s objectives, resources, and compliance capacity.

Nature of Business Activity

The first step is to clearly define the primary business model.

• If the core objective is lending or asset financing, then the Investment and Credit Company (NBFC–ICC) is ideal.

• For providing micro-loans to low-income households, an NBFC–MFI is most suitable.

• If the company aims to finance or refinance infrastructure projects, it should choose NBFC–IFC or NBFC–IDF.

• For data aggregation or fintech operations, the NBFC–Account Aggregator (AA) category is appropriate.

Selecting a category inconsistent with the business model can lead to regulatory rejection or compliance complications post-registration.

Capital Strength

Each NBFC category has a prescribed Net Owned Fund (NOF) requirement that defines its financial eligibility.

• For general NBFCs like ICC, MFI, or P2P, the minimum NOF is ₹2 crore.

• For Core Investment Companies (CICs), it is ₹100 crore, while for Infrastructure Finance Companies (IFCs), the requirement goes up to ₹300 crore.
  Hence, promoters must evaluate their capital base before selecting a category, as insufficient funds may lead to rejection under Section 45-IA(4) of the RBI Act.

Target Audience

The intended customer base also influences category selection.

• NBFC–MFIs focus on rural and semi-urban borrowers, fostering financial inclusion.

• NBFC–ICCs cater to retail borrowers, SMEs, and corporate clients.

• NBFC–P2Ps serve digital lenders and borrowers through online platforms.
  Choosing the right target audience ensures the company aligns with RBI’s priority sectors and avoids regulatory mismatch.

Regulatory Appetite

Under the Scale Based Regulation (SBR) Directions, 2023, NBFCs are categorized into Base, Middle, Upper, and Top Layers based on size and risk exposure.

• Companies in higher layers face stricter capital, liquidity, and governance norms.
  Promoters must assess their ability to comply with such regulatory intensity. Smaller entities may start as Base Layer NBFCs and gradually expand operations.

Technology Dependence

With the RBI promoting digital transformation in financial services, technology-oriented entities can consider:

• NBFC–P2P, for peer-to-peer lending platforms.

• NBFC–AA, for secure financial data aggregation and consent-based information sharing.
  These models suit fintech startups leveraging digital infrastructure and cybersecurity frameworks.

Legal Due Diligence

Before applying, promoters must conduct comprehensive legal due diligence to ensure the company’s Memorandum of Association (MoA) explicitly defines its financial objectives.
The MoA must align with the chosen NBFC category mentioning terms like “lending,” “investment,” “financial services,” or “data aggregation.”
Failure to align business objects with the intended category may lead to rejection or return of application under Section 45-IA(4) of the RBI Act, 1934.

Compliance and Reporting Requirements

Every Non-Banking Financial Company (NBFC), regardless of its category or scale, operates under a strict compliance and reporting regime established by the Reserve Bank of India (RBI). These regulations are designed to ensure transparency, protect stakeholders, and maintain the stability of the financial system. Compliance obligations vary according to the NBFC’s classification under the Scale Based Regulation (SBR) Directions, 2023, but several core requirements remain uniform across all categories.

Prudential Norms on Income Recognition, Asset Classification, and Provisioning (IRACP)

NBFCs must comply with the Prudential Norms on Income Recognition, Asset Classification, and Provisioning (IRACP) to maintain financial discipline. These norms define how income from non-performing assets (NPAs) is recognized, how assets are classified (standard, sub-standard, doubtful, or loss), and the provisioning percentage to be maintained for credit losses. Failure to comply may lead to supervisory penalties or even cancellation of the Certificate of Registration (CoR) under Section 45-IA(6) of the RBI Act, 1934.

Periodic Returns and Reporting Obligations

All NBFCs are required to file periodic returns such as DNBS02, DNBS03, and DNBS04 through the RBI COSMOS portal.

• These returns capture key financial indicators like capital adequacy, asset quality, exposure limits, and liquidity position.

• Timely submission of returns is mandatory under the RBI Master Direction – NBFC (Reserve Bank) Directions, 2016.

Failure to submit or misreporting data attracts penal consequences under Section 58B of the RBI Act.

Statutory Audit and Auditors’ Certificates

Each NBFC must conduct an annual statutory audit by an independent Chartered Accountant in accordance with the Companies Act, 2013 and RBI norms.
In addition, NBFCs are required to submit a Statutory Auditors’ Certificate (SAC) annually, confirming compliance with RBI registration conditions and prudential norms. This certification serves as a third-party assurance mechanism to verify regulatory adherence.

Anti-Money Laundering (AML) and KYC Compliance

NBFCs are considered “reporting entities” under the Prevention of Money Laundering Act (PMLA), 2002 and must comply with RBI’s Master Direction on KYC, 2016.
Key obligations include:

• Customer due diligence before account opening.

• Maintenance of records for at least five years.

• Reporting suspicious transactions to the Financial Intelligence Unit (FIU–IND).

Non-compliance can result in severe penalties or revocation of registration under Section 45-IA(4)(b).

Enhanced Governance under SBR Directions, 2023

Entities categorized under the Middle, Upper, and Top Layers of the SBR Framework (2023) are subject to additional governance standards, including:

• Board-approved risk management and internal control frameworks.

• Appointment of independent directors and a Chief Compliance Officer (CCO).

• Quarterly disclosures on financial performance and governance compliance.

• Implementation of IT and cybersecurity policies for digital and fintech NBFCs.

Recent Updates and Regulatory Developments

The SBR Framework (2023) transformed the NBFC regulatory landscape by shifting from uniform regulation to scale-based supervision. It introduced enhanced governance norms for Upper Layer NBFCs and mandatory internal control frameworks.
In February 2025, the P2P Lending Guidelines were revised to include stricter data protection measures, net worth verification, and borrower transparency requirements. The RBI has also increased scrutiny of group-level exposures and capital adequacy, cancelling CoRs of non-compliant entities to ensure systemic safety.

Conclusion

Choosing the right Non-Banking Financial Company (NBFC) category is not just a regulatory requirement but a strategic compliance decision that directly impacts a company’s operational flexibility, reporting responsibilities, and long-term viability. Each NBFC category whether an Investment and Credit Company (ICC), Microfinance Institution (MFI), Core Investment Company (CIC), Infrastructure Finance Company (IFC), or Peer-to-Peer (P2P) platform is governed by distinct provisions under the RBI Act, 1934 and corresponding Master Directions, defining its permissible activities and prudential norms.

For successful registration, businesses must ensure that their capital structure, promoters’ credentials, and business objectives align with the targeted NBFC category. Conducting comprehensive due diligence, maintaining transparent sources of funds, and complying with the Scale Based Regulation (SBR) Directions, 2023 are essential for securing RBI approval. Ultimately, selecting the correct NBFC category builds a foundation for sustainable growth, regulatory credibility, and operational integrity in India’s dynamic financial ecosystem.

Frequently Asked Questions (FAQs)

Q1. What are the main laws governing NBFC classification in India?

Ans. NBFCs are primarily governed by Chapter III-B (Sections 45-IA to 45-IE) of the Reserve Bank of India Act, 1934, and the RBI (Non-Banking Financial Company Scale Based Regulation) Directions, 2023. These are supported by category-specific Master Directions such as those for Core Investment Companies (CICs), P2P Lending Platforms, and Account Aggregators (AAs).

Q2. What are the major categories of NBFCs in India?

Ans. NBFCs are classified into activity-based categories such as:

• NBFC–Investment and Credit Company (ICC)

• NBFC–Microfinance Institution (MFI)

• NBFC–Infrastructure Finance Company (IFC)

• NBFC–Infrastructure Debt Fund (IDF)

• Core Investment Company (CIC)

• NBFC–Peer-to-Peer (P2P)

• NBFC–Account Aggregator (AA)

Q3. How do I decide which NBFC category is suitable for my business?

Ans. The right category depends on your business model, target market, capital availability, and operational objectives. For example, if you plan to lend to small borrowers, NBFC–MFI fits best; for infrastructure funding, NBFC–IFC is ideal; while for fintech platforms, NBFC–P2P or NBFC–AA may be appropriate.

Q4. What is the minimum capital requirement for NBFC registration?

Ans. Under Section 45-IA(1)(b) of the RBI Act, the minimum Net Owned Fund (NOF) is ₹2 crore for general NBFCs (ICC, MFI, P2P). However, specialized categories like IFC and CIC require higher capital ₹300 crore and ₹100 crore respectively.

Q5. What are the recent changes under the Scale Based Regulation (SBR) Framework, 2023?

Ans. The SBR framework introduced four regulatory layers Base, Middle, Upper, and Top based on the NBFC’s size, activity, and systemic risk. Each layer is subject to specific capital, disclosure, and governance norms, aligning India’s NBFC sector with international prudential standards.

Q6. Can one NBFC operate in multiple business categories?

Ans. Generally, an NBFC must operate within its approved category. If it wishes to expand into other activities, it must amend its Memorandum of Association (MoA) and obtain RBI’s prior approval to avoid regulatory breaches or misclassification under Section 45-IA(4).

Q7. What is the significance of the “Fit and Proper” criteria for NBFC promoters?

Ans. RBI assesses the integrity, reputation, financial soundness, and regulatory history of promoters and directors under Para 11 of the SBR Directions, 2023. Any promoter with pending criminal cases, fraud history, or regulatory violations may lead to rejection of the registration application.

Q8. What are the RBI’s revised guidelines for P2P Lending Platforms (2025)?

Ans. The amended NBFC–P2P Directions (February 2025) focus on borrower-lender transparency, data protection, and promoter net worth verification. P2Ps are prohibited from balance sheet lending, accepting public deposits, or providing guarantees.

Q9. What compliance obligations apply after NBFC registration?

Ans. All NBFCs must comply with:

• KYC/AML norms under the PMLA, 2002

• Prudential Norms on IRACP

• Periodic returns through the COSMOS portal

• Statutory Audit and Board-approved Risk Management Policies
  Higher-layer NBFCs also face enhanced disclosure and corporate governance requirements.

Q10. What are common mistakes applicants make while choosing an NBFC category?

Ans. Frequent errors include:

• Selecting the wrong NBFC type inconsistent with their MoA.

• Inadequate Net Owned Fund or unclear fund source.

• Lack of understanding of category-specific restrictions.

• Weak governance and compliance documentation.

A proper legal feasibility study and compliance audit before applying helps avoid rejection under Section 45-IA(4) of the RBI Act.