The Non-Banking Financial Company (NBFC) sector is a key component of India’s financial ecosystem, complementing banks by extending credit access, promoting financial inclusion, and supporting investment growth. Regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934, NBFCs serve sectors often overlooked by traditional banks, such as MSMEs and rural borrowers. However, obtaining an NBFC registration is not a procedural formality but a compliance-intensive process requiring adherence to strict legal and prudential norms.

The RBI evaluates each applicant’s financial strength, promoter integrity, governance structure, and operational soundness before granting a Certificate of Registration (CoR). Under the Non-Banking Financial Company (Scale Based Regulation) Directions, 2023, RBI has reinforced standards relating to capital adequacy, risk management, and transparency. Many applications are rejected due to non-compliance with these conditions, including inadequate Net Owned Fund (NOF), unclear fund sources, or failure to meet the principal business criteria. 

In this article, CA Manish Mishra talks about What are the common Rejection Grounds in NBFC Registration.

Legal Framework Governing NBFC Registration

The process of NBFC registration is firmly rooted in the Reserve Bank of India Act, 1934 and supplemented by several regulatory directions issued by the Reserve Bank of India (RBI). These laws ensure that only credible, financially sound, and well-governed entities can operate as Non-Banking Financial Companies in India. The legal framework emphasizes financial prudence, promoter integrity, and compliance with national financial policies.

Statutory Basis: Section 45-IA of the RBI Act, 1934

Section 45-IA(1) of the RBI Act, 1934 makes it mandatory for any company intending to carry on the business of a non-banking financial institution to first obtain a Certificate of Registration (CoR) from RBI and maintain a minimum Net Owned Fund (NOF) of ₹2 crore (or more for certain categories like Infrastructure Finance or Microfinance NBFCs).
Under Section 45-IA(4), RBI has absolute discretion to reject applications if the applicant fails to meet these requirements or if the registration is deemed against public interest. Additionally, the company must be duly incorporated under the Companies Act, 2013 (or earlier under the 1956 Act). These statutory provisions ensure that only legally established and adequately capitalized companies can function as NBFCs.

Regulatory Directions

Beyond the Act, RBI issues specific regulatory frameworks to govern different types of NBFCs. The most significant among these are:

• RBI (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 – Introduces a layered regulatory approach (Base, Middle, Upper, and Top layers) focusing on governance, risk management, and capital adequacy.

• RBI Master Directions for NBFC Registration – Outlines the application process, required documents, eligibility, and ongoing compliance conditions.

• RBI Master Direction on Core Investment Companies (CICs) – Governs companies engaged in group-level investments, ensuring they are not used for regulatory arbitrage.

• NBFC–P2P Lending Platform Directions, 2017 (amended February 2025) – Regulates fintech-based peer-to-peer lending entities with updated requirements on transparency, fund handling, and borrower-lender disclosure.

Together, these directions define category-specific norms for entities such as NBFC-ICC, NBFC-MFI, NBFC-Factor, NBFC-P2P, NBFC-AA, and others, ensuring consistency, financial stability, and consumer protection within the Indian financial system.

Common Rejection Grounds in NBFC Registration

The Reserve Bank of India (RBI) has set stringent eligibility and compliance standards for Non-Banking Financial Companies (NBFCs) to ensure financial discipline, governance integrity, and systemic stability. Many applications are rejected not due to lack of intent but because of gaps in compliance, financial structure, or documentation. Below is a detailed explanation of the most frequent rejection grounds.

Inadequate Net Owned Fund (NOF)

Minimum Capital Requirement

Under Section 45-IA(1)(b) of the RBI Act, 1934, a company must have a minimum Net Owned Fund (NOF) of ₹2 crore (higher for categories such as IFCs, IDFs, and HFCs). RBI thoroughly examines the applicant’s audited balance sheets, capital sources, and composition of share capital to confirm genuine capitalization.

Common Issues

Common discrepancies include:

• Temporary capital infusions or circular funding.

• Preference shares counted toward NOF without approval.

• Unsecured loans or layered investments used as capital.

• Absence of bank confirmation for paid-up capital.

Such irregularities lead to rejection under Section 45-IA(4)(a) for failure to maintain genuine capital.

Failure to Meet Principal Business Criteria

The 50–50 Test

For NBFC classification, the company must meet the principal business test, requiring:

• Financial assets ≥ 50% of total assets; and

• Income from financial assets ≥ 50% of total income.

Ground for Rejection

If non-financial activities such as trading or real estate dominate the business, the RBI classifies the company as non-financial and rejects the application.

Improper Memorandum of Association (MoA)

RBI Expectation

The main object clause of the MoA must clearly mention NBFC-related activities—financing, lending, or investment—as the primary objective.

Common Deficiencies

• Listing financial services as ancillary instead of main objects.

• Inclusion of unrelated business lines like import-export or trading.

Such inconsistencies result in rejection during RBI scrutiny under Section 45-IA(4).

Unfit Promoters and Directors

Fit and Proper Criteria

According to Para 11 of the Scale Based Regulation (SBR) Directions, 2023, promoters and directors must possess:

• Proven integrity and financial credibility;

• No criminal or fraud history; and

• Experience in financial management.

Reasons for Rejection

Applications are rejected if promoters:

• Have pending criminal or tax cases;

• Are subject to SEBI or MCA regulatory action; or

• Misstate or conceal material facts in affidavits.

RBI may reject such cases under Section 45-IA(4)(b), citing public interest concerns.

Unclear Source of Funds

Regulatory Scrutiny

RBI mandates clear proof of legitimate, traceable funding for capital contributions. Funds must not originate from:

• Layered corporate structures;

• Offshore entities in high-risk jurisdictions; or

• Undisclosed shareholders.

Legal Context

Violations of Anti-Money Laundering (AML) and Know Your Customer (KYC) norms under the Prevention of Money Laundering Act, 2002 (PMLA) trigger automatic rejection to prevent financial misuse.

Weak Governance and Risk Management Framework

RBI’s Expectation

Under the SBR Directions, 2023, NBFCs are categorized into Base, Middle, Upper, and Top Layers. Applicants must demonstrate readiness in:

• Board independence and oversight;

• Internal audit and risk control;

• Cybersecurity and IT frameworks.

Common Failures

Applications lacking independent directors, compliance officers, or adequate risk policies are rejected for failure to ensure prudential standards.

Procedural and Documentation Defects

Common Lapses

• Incomplete application forms or missing annexures.

• Discrepancies between MCA and RBI data.

• Use of outdated financial statements.

• Ignoring RBI clarification requests.

Relevant Provisions

Applications not meeting RBI’s prescribed filing format under Para 4 of the NBFC Registration Master Direction are liable to be returned or rejected.

Group-Level and Related Entity Issues

RBI’s Consolidated Supervision Approach

As per Para 8 of the SBR Directions, 2023, RBI evaluates group companies to prevent regulatory arbitrage and inter-company funding risks.

Common Concerns

• Existing NBFCs in the group with CoR cancellations;

• Cross-holdings breaching exposure limits;

• Entities under investigation or insolvency.

RBI may reject such applications to preserve systemic integrity.

Category-Specific Non-Compliance

Peer-to-Peer (P2P) Lending Platforms

Under the NBFC–P2P Lending Platform Directions, 2017 (amended February 2025):

• P2Ps cannot accept public deposits or provide guarantees;

• Must comply with exposure and borrower-lender transparency norms.

Core Investment Companies (CICs)

Companies qualifying as CICs but applying under general NBFC categories face rejection for misclassification.

Microfinance and Account Aggregator NBFCs

Failure to adhere to category-specific prudential, governance, and capital norms leads to rejection under their respective Master Directions.

Appellate Remedies against Rejection

When the Reserve Bank of India (RBI) rejects or cancels an NBFC registration application, the applicant company is not left without recourse. The Reserve Bank of India Act, 1934 provides a statutory appellate mechanism that ensures procedural fairness and upholds the principles of natural justice. However, the scope of these remedies is limited, as the RBI’s discretion in licensing financial entities is guided by public interest and systemic stability.

Appeal to Central Government

Under Section 45-IA(7) of the RBI Act, 1934, a company whose application for registration has been rejected or whose Certificate of Registration (CoR) has been cancelled may file an appeal to the Central Government within 30 days from the date of communication of the order.

The appeal must clearly specify the grounds of challenge, such as misapplication of law, factual errors, or procedural lapses in RBI’s decision. The Central Government, after reviewing the appeal, may confirm, modify, or set aside the RBI’s order. However, in practice, the appellate authority generally upholds RBI’s decision unless the applicant proves that the rejection was arbitrary, biased, or procedurally flawed.

The appeal process ensures an additional layer of accountability while balancing RBI’s regulatory autonomy and the applicant’s right to due process.

Principle of Natural Justice

Before rejecting an NBFC registration application, the RBI is legally obligated to follow the principles of natural justice, which include:

• Right to Notice: The applicant must be informed of the deficiencies or reasons for potential rejection.

• Right to Be Heard: The applicant must be given an opportunity to provide clarifications, submit missing documents, or justify its eligibility.

This procedural safeguard ensures transparency and fairness in regulatory decision-making. However, appeals or representations generally succeed only when there is a procedural irregularity (e.g., rejection without notice or opportunity to respond) or violation of natural justice principles (e.g., bias, non-disclosure of reasons).

In most cases, the RBI’s decisions are upheld, given its technical expertise and statutory authority to determine the suitability of entities operating in the financial sector. Therefore, applicants must focus on pre-emptive compliance ensuring that all eligibility, financial, and governance criteria are met before submitting the application to minimize the risk of rejection and subsequent appeals.

Recent Regulatory Developments

The Reserve Bank of India (RBI) has progressively strengthened the regulatory framework for Non-Banking Financial Companies (NBFCs) to enhance governance, transparency, and systemic resilience. In recent years, multiple reforms have been introduced to ensure that NBFCs operate with the same prudential discipline as banks, particularly those with large market exposure and customer reach. The following key developments highlight RBI’s evolving supervisory approach toward NBFC regulation and licensing.

Scale Based Regulation (SBR) Framework, 2023

The Scale Based Regulation (SBR) Framework, notified in October 2023, introduced a risk-based and layered supervisory structure for NBFCs. This framework categorizes NBFCs into four layers Base, Middle, Upper, and Top depending on their size, activity, and systemic significance.

Each layer is subjected to progressively stringent governance, disclosure, and capital adequacy norms.

• Upper Layer NBFCs now face enhanced regulatory scrutiny similar to commercial banks, including higher capital adequacy ratios (CRAR), stricter liquidity coverage requirements (LCR), and board-level governance mandates.

• NBFCs are also required to strengthen risk management policies, IT infrastructure, and disclosure mechanisms to maintain market transparency.

The SBR framework aligns India’s NBFC regulations with international best practices, emphasizing the “proportionate regulation” principle stronger oversight for systemically important NBFCs and lighter compliance for smaller ones.

Revised Peer-to-Peer (P2P) Lending Guidelines (February 2025)

In February 2025, RBI amended the NBFC–P2P Lending Platform Directions, 2017 to reflect the rapid growth of digital lending and fintech intermediaries. The updated guidelines focus on borrower-lender transparency, data security, and financial integrity across digital platforms.

Key highlights include:

• Mandatory verification of promoter net worth and financial fitness before granting registration.

• Strengthened data protection and cybersecurity compliance for all digital NBFCs.

• Prohibition on credit guarantees, balance sheet lending, and any form of public fund acceptance by P2P entities.

• Compulsory reporting of loan performance data to credit bureaus for transparency.

These reforms aim to mitigate digital lending risks while encouraging responsible innovation in India’s fast-expanding fintech sector.

Supervisory Action and Enforcement

In continuation of its regulatory tightening, the RBI has intensified its supervisory vigilance over both existing and applicant NBFCs. Over the past few years, the central bank has cancelled multiple Certificates of Registration (CoRs) for persistent non-compliance, poor asset quality, fraudulent funding sources, and governance lapses.

This enforcement trend underscores RBI’s zero-tolerance approach toward regulatory breaches and its commitment to maintaining systemic stability. The Bank now regularly conducts off-site monitoring, thematic inspections, and forensic audits to ensure transparency and accountability in NBFC operations.

These actions signal a clear policy direction only entities with robust governance, genuine capitalization, and regulatory integrity will be allowed to operate in India’s financial sector.

Conclusion

In India, NBFC registration rejections mainly arise from non-compliance with Section 45-IA of the RBI Act, 1934, particularly due to inadequate Net Owned Fund (NOF), an improper Memorandum of Association (MoA), unfit promoters, and unclear sources of funds. Many applications also fail because they lack a defined financial structure or governance framework in line with the Scale Based Regulation (SBR) Directions, 2023. RBI ensures that only financially sound and well-governed entities qualify for a Certificate of Registration (CoR).

To avoid rejection, applicants must focus on transparent capitalization, appointing fit and proper directors, and maintaining a robust compliance and risk management system. A viable business model must meet the 50–50 principal business test and adhere to all prudential norms. Ultimately, NBFC registration is not a mere procedural step but a regulatory endorsement of credibility, granted only to those entities that reflect financial integrity, governance excellence, and regulatory preparedness.

Frequently Asked Questions (FAQs)

Q1. What are the primary reasons for rejection of NBFC registration by RBI?

Ans. The Reserve Bank of India (RBI) commonly rejects NBFC applications due to inadequate Net Owned Fund (NOF), non-fulfilment of principal business criteria, unfit promoters or directors, unclear source of funds, and deficient governance or risk-management frameworks. Procedural lapses and category misclassification also lead to rejection.

Q2. What is the legal provision governing NBFC registration approval or rejection?

Ans. NBFC registration is governed by Section 45-IA of the Reserve Bank of India Act, 1934. Under Section 45-IA(4), RBI may reject an application if the company does not satisfy prescribed conditions or if granting registration is not considered in the public interest.

Q3. How does inadequate Net Owned Fund (NOF) cause rejection?

Ans. As per Section 45-IA(1)(b), every applicant must maintain a minimum NOF of ₹2 crore (higher for specific categories). If the capital is temporarily infused, raised through loans, or lacks bank verification, RBI treats it as non-genuine and rejects the application.

Q4. What is meant by the “Principal Business Criteria,” and how does its failure lead to rejection?

Ans. RBI applies the 50-50 test at least 50% of total assets must be financial assets, and 50% of total income must come from financial activities. Failure to meet this benchmark means the company’s primary business is not financial, leading to rejection.

Q5. Can RBI reject an NBFC registration due to the company’s Memorandum of Association (MoA)?

Ans. Yes. If the main object clause of the MoA does not explicitly state financial, lending, or investment activities as the company’s primary purpose, RBI may conclude that the entity lacks NBFC intent and reject the application.

Q6. How does promoter background affect the approval process?

Ans. RBI performs a detailed fit-and-proper test under Para 11 of the Scale-Based Regulation (SBR) Directions, 2023. If promoters or directors have adverse credit histories, criminal cases, or past regulatory violations, the application is likely to be rejected.

Q7. Why is the source of funds scrutinized in NBFC registration?

Ans. RBI ensures capital is sourced from legitimate channels in compliance with KYC and Anti-Money Laundering (AML) norms under the Prevention of Money Laundering Act, 2002. Opaque funding, multi-layered structures, or funds from high-risk jurisdictions result in rejection.

Q8. What procedural or documentation issues can lead to rejection?

Ans. Incomplete forms, missing annexures, mismatched MCA details, outdated audited statements, or non-response to RBI queries are viewed as indicators of poor compliance and may lead to the application being returned or rejected.

Q9. Can an applicant appeal against RBI’s rejection of NBFC registration?

Ans. Yes. Under Section 45-IA(7) of the RBI Act, a company aggrieved by the rejection order can appeal to the Central Government within 30 days from the date of receipt of the order. The appeal must demonstrate procedural or legal irregularity.

Q10. How can applicants avoid NBFC registration rejection?

Ans. Applicants should:

• Maintain genuine and permanent NOF.

• Ensure MoA aligns with NBFC activities.

• Appoint fit and proper directors.

• Establish robust governance and risk-management frameworks.

• Submit accurate and complete documentation.
  Following these best practices increases the likelihood of RBI approval.