PBC for NBFC

The Reserve Bank of India has provided various guidelines to be followed by NBFCs. Primarily, an NBFC is such a company whose principal business is financial activities and this criterion must be fulfilled for a company to obtain a Certificate of Registration from RBI.

What companies can be registered as NBFC?

The company registered under the Companies Act, 2013 whose principal business is Financial activity such as chit fund business, insurance business, loans and advances, acquisition of shares or other types of securities, leasing, etc. is a Non-Banking Financial Company (NBFC).

What do the words “Principal Business of Financial Activity” represent?

As per the provisions of RBI, the company is said to be involved in financial activities when:

• The financial assets of the company are more than 50 percent of the total assets; and 
• More than 50 percent of the gross income is earned from financial assets.

The company must fulfill both the criteria (the 50-50 rule) as mentioned above, which will make the company eligible to be considered as NBFC.

What does the Principal Business Criteria (PBC) signify?

The company is said to be an NBFC when it fulfills the above-mentioned conditions of financial assets and income (i.e., the 50-50 rule described above). However, many NBFCs are also engaged in other non-financial activities along with their primary business of providing financial services as a method of business expansion. This type of functioning can endanger the financial segment of the NBFCs.

For a company to be considered as a financial institution, it has to perform its financial activities as its core business activity. Where systemically important financial entities are holding financial assets in large numbers, it can also impact the financial sector. Therefore, it must be covered under RBI regulations to ensure proper monitoring of such entities.

For such a purpose, RBI proposed the PBC rule, which provides the conditions for a company to qualify as an NBFC.

What are the conditions covered under the Principal Business Criteria (PBC)?

• In the case of a non-deposit accepting company:
  • The financial assets aggregate Rupees 25 crores and comprise 75% and above of its total assets (net of intangible assets); and 
  • The financial income comprises 75% or above of its gross income.
• where a Company has an asset size of Rs.1000 crore or above, 
  • The financial assets comprise 50% of the total assets; or 
  • The financial income is a minimum of 50% of the gross income.

What if the company qualifies for the PBC Criteria?

When the company fulfills the above-mentioned conditions of PBC, such companies are required to get registered with RBI and will be regulated as a financial institution by RBI.

In order to get registered with RBI, the company needs to file an application for registration along with all the mandatory documents as specified under RBI regulations which also includes a certificate from the auditor, to certify that the company is engaged in NBFC activities.

It must be considered at all times that no company can commence or continue NBFC activities without getting itself registered with RBI. If so done, the company will have to face severe liabilities as per the rules of RBI.