On 29 April 2026, the Reserve Bank of India (“RBI“) issued the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Amendment Directions, 2026 (“Amendment Directions”), which come into effect from 1 July 2026. These directions recalibrate the registration regime for non-banking financial companies (“NBFCs”) by creating a formal path for qualifying entities to surrender their certificate of registration (“CoR”) with the RBI, or in the case of new companies, to avoid registration altogether.The impetus for the reform was straightforward: for years, many purely passive investment vehicles, family offices and group treasury companies had been required to register as NBFCs and comply with prudential norms, even though they neither raised money from the public nor dealt with external customers. The RBI’s Scale Based Regulation (“SBR”) had already recognised this by creating a Type I NBFC category for companies that do not access public funds and have no customer interface, giving them lighter compliance obligations. Even so, registration remained mandatory and Type I entities were still required to hold a CoR and maintain a statutory reserve fund under Section 45-IC of the RBI Act, a burden that industry consistently argued was disproportionate for captive vehicles funded entirely from owned capital.This article explains the new framework, examines the definitions of public funds and customer interface that will determine eligibility, and discusses the practical considerations for companies contemplating deregistration. While the reform is a stride in the ease-of-doing-business agenda, the conditions attached to the exemption are stringent and will limit its application to a narrower set of entities than may initially be expected.
New Categories and Eligibility Conditions
The Amendment Directions reorganise NBFCs into three mutually exclusive categories:
1. Type I NBFC: a company that does not access public funds, has no customer interface and holds a CoR issued specifically in that capacity. These entities remain registered and benefit from lighter prudential requirements under the SBR framework.
2. Type II NBFC: every other registered NBFC, covering companies that raise public funds or interact with customers, such as lending companies, investment companies accessing bank borrowings, and NBFCs that provide guarantees or other financial services to customers.
3. Unregistered Type I NBFC: the new addition under the 2026 amendments. This is a company that meets the substantive Type I conditions but is exempt from the registration requirement under Section 45-IA and from the reserve fund obligation under Section 45-IC of the RBI Act.
To qualify as an Unregistered Type I NBFC, the company must satisfy four conditions:
1. No public funds: The RBI’s frequently asked questions (“FAQ”) clarify that public funds include public deposits, inter-corporate deposits, bank borrowings, commercial paper and debentures. The Amendment Directions expand this further to capture indirect funding: money channelled through group or associate entities that themselves have access to public funds is also treated as public funds. The FAQ further clarifies that amounts received from the NBFC’s own directors or shareholders are treated as public funds. The practical consequence is that equity is the only unambiguously clean source of capital; loans or advances from promoters, even if interest-free, may disqualify the entity.
2. No customer interface: Customer interface means any interaction with customers in the course of business, whether through an account relationship, a lending relationship, or any other product or service. The RBI’s position is that lending or providing guarantees to any entity, including those within the group, constitutes a customer interface, as does placing inter-corporate deposits within the group. Any negotiated investment, such as subscribing to privately placed debentures, may take on the character of a lending relationship and therefore create a customer interface.
3. Asset size below Rs. 1,000 crore: The company’s total assets as per the latest audited balance sheet must be less than Rs. 1,000 crore. Where a corporate group has multiple Unregistered Type I NBFCs, the assets of all such entities are aggregated, and if the combined total reaches or exceeds Rs. 1,000 crore, each entity in the group must register as a Type I NBFC.
4. Conscious and long-term business model. The company must demonstrate, as a matter of conscious business strategy, that it intends to operate without public funds and without a customer interface on a long-term basis. This condition is deliberately subjective and grants the RBI discretion to deny deregistration if it concludes that the arrangement is temporary or artificial. Each year, the company’s board must pass a resolution at the beginning of the financial year confirming that it will not access public funds and will not have a customer interface during that year, and the company must disclose its status as an Unregistered Type I NBFC in the notes to its financial statements.
Companies structured to satisfy these conditions from the outset may operate without registering at all. Existing Type I NBFCs and other registered NBFCs that currently meet the criteria may surrender their CoR during the initial deregistration window, which runs from 1 July 2026 to 31 December 2026.
Ongoing Obligations and Supervisory Oversight
Companies seeking to surrender their CoR must apply through the PRAVAAH portal and submit the original CoR, audited financial statements for the last three years, a statement on the status of public funds and customer interface over that period, a statutory auditor’s certificate confirming the current absence of both, and a board resolution with specific undertakings including a commitment to seek Type II NBFC registration before ever accessing public funds or taking on a customer interface. The RBI will grant deregistration only after satisfying itself that the applicant operates with a conscious and long-term business model; the process is therefore not a self-certification exercise but requires the regulator’s active satisfaction with the nature and durability of the entity’s business model.
It may be noted that the deregistration is not a clean exit from the RBI’s supervisory perimeter. Unregistered Type I NBFCs remain subject to other provisions of Chapter IIIB of the RBI Act. The exemption under the Amendment Directions is, in the RBI’s own words, only from the obligations under Sections 45-IA and 45-IC of the RBI Act; the broader supervisory jurisdiction of the RBI is expressly retained.
On overseas investment, Unregistered Type I NBFCs are prohibited from investing in the non-financial sector abroad. Any investment in the financial services sector overseas requires the entity to first register as a Type I NBFC and obtain prior RBI approval.
The amendments also introduce a direct compliance channel through statutory auditors. Auditors of Unregistered Type I NBFCs must submit an Exception Report to the RBI if they detect any violation of the conditions relating to public funds, customer interface, or other exemption requirements. This mechanism places auditors at the front line of regulatory enforcement, and any breach of the conditions is likely to come to the regulator’s attention without delay.
New Companies
A new company set up to carry on financial-services business will be classified as a Non-Banking Financial Company (NBFC) if it meets the principal business criteria (the “50:50 test”), and an NBFC ordinarily requires a Certificate of Registration (CoR) from the RBI under Section 45-IA of the RBI Act, 1934. However, pursuant to the Amendment Directions, such companies will not be required to obtain a CoR so long as it qualifies throughout as an “Unregistered Type I NBFC” i.e., it neither avails public funds (directly or indirectly) nor has any customer interface, and its asset size stays below ₹1,000 crore.
To retain the exemption, (a) the company must operate this way as a conscious and long term business model, (b) its Board must pass an annual resolution confirming it will not avail public funds or have customer interface during the year, and (c) it must disclose this status (and the status of public funds and customer interface) in the notes to its accounts. As a guardrail, the said directions provide that the Statutory Auditor of the company must file an exception report with the RBI on any breach of these conditions by the said company.
Practical Implications
The Amendment Directions represent a practical recalibration of the regulatory framework. Requiring passive investment entities with no public exposure and no customer-facing activity to carry full NBFC registration was regulatory overreach, and it is to the RBI’s credit that it has now addressed this. Family offices, investment holding companies and group treasury entities that have long carried NBFC compliance obligations despite posing minimal systemic risk will certainly benefit from this change.
At the same time, as regards the broad definitions of public funds and customer interface, the RBI’s retained discretion in evaluating deregistration applications, the group aggregation rule, and the continued applicability of Chapter IIIB of the RBI Act will mean that it is not a simple checkbox exercise. Funds from any outside source, whether from group companies carrying borrowings or any external lender, are treated as public funds, and indirect access through associates or group entities is equally disqualifying. Any loan, guarantee or inter-corporate deposit to any entity, including within the group, constitutes a customer interface. Now these two positions together confine the exemption to companies funded solely by equity and limited to holding investments without any lending or guarantee activity.
Entities considering deregistration should begin with a careful audit of their last three years of financials against the public funds and customer interface definitions. Any director or shareholder loans, intra-group lending, and indirect access to public funds through group entities need to be identified and addressed. Applications should be accompanied by well-reasoned documentation that demonstrates the long-term business model, not merely technical compliance as of a particular date.
The overseas investment restrictions discussed above add a further dimension. An NBFC holding or contemplating foreign subsidiaries, joint ventures or portfolio investments in financial services abroad cannot deregister without forfeiting that flexibility; it must retain its CoR or face re-registration before pursuing the investment. Groups should therefore factor their cross-border investment strategy into the deregistration decision.
Conclusion
For those who do not qualify, or who choose to retain their CoR for commercial or strategic reasons, continuing as a registered Type I NBFC remains a valid option and carries with it the lighter regulatory regime under the SBR framework.
As applications start flowing through PRAVAAH from 1 July 2026 and the RBI begins to process them, the practical standards the RBI applies will become clearer. We will continue to track how this framework evolves, so watch this space for more.
(Views are personal)
