NBFC-MFI Licence in India: Qualifying Assets and RBI Norms

A Non-Banking Financial Company-Microfinance Institution (NBFC-MFI) is a distinct RBI-regulated lending category built around collateral-free credit to low-income households. It sits under the Reserve Bank of India Act, 1934 and the Master Direction (Regulatory Framework for Microfinance Loans) Directions, 2022, as amended. Getting the licence right means clearing four separate gates: the entity structure and net owned funds test, the qualifying asset composition test, the capital adequacy and provisioning framework, and the RBI approval process itself. Each gate has its own failure points, and most delays in practice come from promoters treating qualifying assets as a one-time registration hurdle rather than an ongoing quarterly obligation layered with capital, disclosure and lender-concentration discipline.

What is the qualifying asset norm for an NBFC-MFI?

An NBFC-MFI must hold at least 60% of its total assets, net of intangible assets, as qualifying assets on an ongoing basis. This threshold was reduced from 75% by RBI’s amendment to paragraph 8.1 of the Master Direction, effective June 2025. A breach for four consecutive quarters obliges the NBFC-MFI to file a remediation plan with the Reserve Bank of India (RBI).

What counts as a qualifying asset for an NBFC-MFI

A qualifying asset is now defined by reference to the “microfinance loan” definition itself, not by a separate technical test. A loan qualifies if it meets all of the following, drawn from the Master Direction (Regulatory Framework for Microfinance Loans) Directions, 2022:

• It is collateral-free, regardless of end use or disbursal mode (physical or digital)
• It is extended to a household with annual income up to ₹3,00,000 (household means an individual family unit, that is husband, wife, and unmarried children)
• The tenure, amount and repayment frequency are consistent with the borrower’s household cash flows, as assessed under the lender’s board-approved policy
• Total monthly repayment obligations of the household across all loans, collateralised and collateral-free, do not exceed 50% of monthly household income

Loans that fail any one condition, for instance a collateralised loan or one to a household above the income threshold, do not count toward the 60% ratio even if they sit on the NBFC-MFI’s book and are otherwise performing.

Qualifying asset composition at a glance

A practical trap: direct assignment (DA) sale portfolios are eligible qualifying assets while they sit on the NBFC-MFI’s book, but once sold down they leave the balance sheet and no longer count. NBFC-MFIs that run active co-lending or DA programmes to manage liquidity often see their qualifying asset ratio swing quarter to quarter for this reason alone, not because of a genuine drift away from microfinance lending.

Net owned funds and entity eligibility for an NBFC-MFI

Before qualifying assets become relevant, the entity has to clear the basic eligibility bar under the Reserve Bank of India Act, 1934 and RBI’s Non-Banking Financial Company-Micro Finance Institutions (Reserve Bank) Directions, 2011 (as read with the 2022 Master Direction).

• Minimum Net Owned Funds (NOF): ₹5 crore for a standard NBFC-MFI, reduced to ₹2 crore for entities registered in the North Eastern region
• Incorporation: Must be a company incorporated under the Companies Act, 2013 (or the erstwhile Companies Act, 1956)
• Non-deposit taking status: An NBFC-MFI cannot accept public deposits
• Fit and proper criteria: Directors and promoters must meet RBI’s fit and proper test, verified through background checks and declarations at the time of application
• 50-50 principal business test: As with any NBFC, more than 50% of total assets must be financial assets and more than 50% of gross income must come from those assets, before the microfinance-specific 60% test even applies

An entity that clears the general NBFC 50-50 test but does not carry 60% qualifying assets is not disqualified from operating. It simply cannot hold the NBFC-MFI classification and will be regulated as a standard NBFC-ICC, subject to the lower 25% ceiling on microfinance-type lending that applies to non-MFI NBFCs.

Capital adequacy and provisioning norms for NBFC-MFIs

Qualifying assets tell RBI what an NBFC-MFI lends against. Capital adequacy tells RBI whether it can absorb losses on that book. Both are tested together, and a lender can pass one while quietly drifting on the other.

Every NBFC-MFI, new or converting, must maintain a Capital to Risk-weighted Assets Ratio (CRAR) of at least 15% of aggregate risk-weighted assets, made up of Tier I and Tier II capital. Tier II capital cannot exceed 100% of Tier I capital at any point. This sits within the broader Scale Based Regulation (SBR) framework, under which NBFC-MFIs with asset size up to ₹1,000 crore fall in the Base Layer and those above ₹1,000 crore move into the Middle Layer, attracting additional governance requirements such as a mandatory Audit Committee, Nomination Committee and Risk Management Committee with independent director representation.

Asset classification and provisioning follow the standard NBFC income recognition and asset classification (IRAC) norms, harmonised further under RBI’s 2024-25 circular on IRAC alignment:

NPA provisioning norms for NBFC-MFI loan assets

A loan is classified NPA once principal or interest remains overdue for more than 90 days, the same threshold applied across NBFCs generally. For an NBFC-MFI, this matters twice over: a slipping CRAR restricts fresh lending and dividend payouts under RBI’s Prudential Norms on Capital Adequacy Directions, and a rising NPA stock quietly erodes the qualifying asset ratio if written-off or fully-provided loans are not cleanly removed from the qualifying asset numerator during quarterly computation.

Does a CRAR breach automatically cancel an NBFC-MFI’s registration?

No. A CRAR breach, even below the 15% floor, does not by itself trigger cancellation of the Certificate of Registration. RBI treats it as a supervisory concern first, typically restricting fresh lending, dividend distribution and branch expansion while the entity restores capital, and escalating to the Prompt Corrective Action framework only if the breach repeats or is not corrected within a reasonable timeline.

RBI approval process for an NBFC-MFI licence

Registration runs through the Reserve Bank of India’s PRAVAAH portal (Platform for Regulatory Application, Validation and Authorisation, at pravaah.rbi.org.in), and follows the same statutory gateway as any NBFC under Section 45-IA of the RBI Act, 1934. PRAVAAH became mandatory for all RBI-regulated entities from 1 May 2025 and has fully replaced the earlier COSMOS portal for registration filings; an application prepared against COSMOS-era guidance will bounce back at intake.

1. Incorporate the company under the Companies Act, 2013, with the main object clause reflecting lending or microfinance activity
2. Deploy and certify NOF: ₹5 crore (₹2 crore for North East-registered entities) parked as a fixed deposit, with a chartered accountant’s net worth certificate and a banker’s confirmation of no lien
3. Constitute a fit and proper board: directors with relevant lending or financial services experience, KYC and antecedent declarations for every director and major shareholder, and a board-approved Fair Practices Code
4. Draft the business plan: projected balance sheet, income statement, projected CRAR, and a demonstrable pathway to meeting the 60% qualifying asset composition within the first year of lending operations
5. File online on PRAVAAH: create an applicant login, select the Certificate of Registration application for NBFC-MFI, and upload the document set against the prescribed checklist to generate a Company Application Reference Number (CARN)
6. Submit physical documents in two separately paginated sets to the jurisdictional RBI regional office, along with the CARN acknowledgement
7. RBI scrutiny: the Department of Regulation reviews fit and proper status of directors, source of funds, and business viability, and typically raises one or more rounds of clarification
8. Certificate of Registration (CoR) issuance: on satisfaction, RBI issues the CoR classifying the entity as NBFC-MFI, specifying its Type I or Type II status under the Scale Based Regulation framework

A company can also apply to convert an existing NBFC-ICC registration to NBFC-MFI status once its loan book already satisfies the qualifying asset composition, supported by a statutory auditor’s certificate on the asset (loan) pattern as on the relevant balance sheet date, filed through PRAVAAH in the same manner as a fresh application. RBI’s own historical guidance placed the onus of correctly classifying eligible assets squarely on the company, not on RBI verification at filing stage, and that principle still governs today’s conversion filings.

Does NBFC-MFI registration still go through the COSMOS portal?

No. COSMOS has been discontinued for NBFC registration, including NBFC-MFI applications. Every Certificate of Registration filing, along with other RBI regulatory approvals, has moved exclusively to the PRAVAAH portal since it became mandatory on 1 May 2025.

Documents required for an NBFC-MFI licence application

RBI’s indicative checklist for NBFC-MFI registration is available on the RBI website and is stated to be illustrative, not exhaustive; RBI can call for further documents at its discretion during scrutiny. At a minimum, promoters should have ready:

• Certified copies of the Certificate of Incorporation and, where applicable, Certificate of Commencement of Business
• Memorandum and Articles of Association, with the microfinance and lending object clauses clearly reflected
• Audited financial statements for the last three years, or since incorporation for a newer entity
• Fixed deposit receipt and banker’s certificate of no lien evidencing the ₹5 crore (or ₹2 crore North East) NOF
• Statutory auditor’s certificate certifying the NOF computation
• Detailed profiles of directors and key managerial personnel, including qualifications, experience and other directorships
• Board Resolution authorising the application and undertaking not to commence NBFC-MFI business before registration
• A business plan of at least three to five years, with projected financials, projected CRAR, and the qualifying asset composition pathway
• Board-approved policies on credit, pricing, risk management, Fair Practices Code, grievance redressal and KYC/AML
• For a conversion from NBFC-ICC to NBFC-MFI, a statutory auditor’s certificate on the existing asset (loan) pattern as of the relevant balance sheet date
• Declaration of Self-Regulatory Organisation (MFIN or Sa-Dhan) membership or intended membership
• KYC documents (PAN, address proof) of directors and major shareholders, and source-of-funds declarations for the NOF

How long does RBI approval take for an NBFC-MFI licence?

RBI approval for a fresh Certificate of Registration typically takes 90 to 180 days from the date of a complete PRAVAAH filing, though promoters should budget 6 to 12 months end to end once company incorporation, NOF deployment, and document preparation are factored in. Delays usually stem from incomplete director KYC or an unclear business plan, not from the qualifying asset test itself at the application stage.

Pricing, disclosure and conduct norms every NBFC-MFI must follow

RBI removed the fixed interest rate margin cap on microfinance loans in April 2022, replacing it with a board-approved pricing policy discipline. This gives NBFC-MFIs pricing flexibility, paired with active supervisory scrutiny.

• Board-approved interest rate model: must delineate cost of funds, risk premium, and margin components separately, not as a blended number
• No usurious pricing: RBI reserves the right to examine rates charged and intervene where they appear excessive, even without a hard ceiling
• Standardised factsheet: every borrower must receive a simplified, standardised disclosure of all-inclusive pricing before disbursal; no charge outside the factsheet can be levied
• Public display: minimum, maximum, and average interest rates must be displayed at all branches, in literature, and on the website
• No penalty on prepayment and no security deposit or margin collected from the borrower

What is the maximum household income limit for a microfinance loan?

A loan qualifies as a microfinance loan only if extended to a household with annual income up to ₹3,00,000, applied uniformly across rural, semi-urban and urban India since April 2022 (Master Direction, Regulatory Framework for Microfinance Loans, 2022). This replaced the earlier split threshold of ₹1,25,000 for rural and ₹2,00,000 for urban households.

Key Fact Statement and borrower disclosure requirements

Since 1 October 2024, every NBFC-MFI must issue a Key Fact Statement (KFS) for new retail and MSME term loans, including microfinance loans, in the standardised format prescribed by RBI’s circular dated 15 April 2024. The KFS sits alongside, not instead of, the microfinance factsheet already required under the 2022 Master Direction, and both must reconcile on pricing figures.

• The KFS must state the loan amount, all-inclusive Annual Percentage Rate (APR), fee break-up, repayment schedule, foreclosure terms, and grievance redressal contact details
• It must be issued in a language the borrower understands, not merely offered in English with a regional-language option buried in the loan agreement
• The borrower gets three working days to consider the KFS before signing, unless they voluntarily choose to execute on the same day
• The document must name a grievance redressal or nodal officer with a phone number and email address, and the lender must acknowledge a complaint within one working day

For an NBFC-MFI running a physical field-agent model, the KFS’s language and timing requirements are frequently harder to operationalise than the pricing disclosure itself, since field disbursal in vernacular languages was not always built around a fixed three-day cooling-off window before this circular.

Lender concentration and household indebtedness discipline

RBI’s own Master Direction caps a household’s total loan repayment obligation at 50% of monthly income across all loans. On top of this, the sector’s Self-Regulatory Organisations (SROs), Microfinance Institutions Network (MFIN) and Sa-Dhan, have layered their own membership-level discipline following RBI’s supervisory concerns raised through 2024:

• Member NBFC-MFIs restrict lending so that a single borrower does not have active microfinance loans with more than three lenders at a time (tightened from four)
• Total microfinance indebtedness of a single borrower, across all member lenders, is capped at around ₹2,00,000, monitored through credit bureau reporting
• Members are expected to check bureau data before every disbursal, not only at onboarding, to catch a borrower’s cumulative exposure across NBFC-MFIs, banks, and small finance banks

These SRO caps are industry self-regulation, not a direct RBI Master Direction requirement, but RBI treats SRO code-of-conduct compliance as a live supervisory expectation for NBFC-MFI membership, and breaches surface during inspection even though the caps themselves are not codified in the 2022 Master Direction.

Priority sector lending status and bank funding access

Bank lending to NBFC-MFIs that meet the qualifying asset and pricing conduct norms qualifies for Priority Sector Lending (PSL) classification under RBI’s PSL guidelines, provided the on-lending terms to the ultimate borrower also satisfy the microfinance loan definition. This is one of the more commercially significant, and least discussed, consequences of the qualifying asset test: an NBFC-MFI that drifts below 60% risks not just its own classification, but its funding banks’ ability to count that exposure toward their own PSL targets.

This is also why the 2025 reduction from 75% to 60% mattered beyond compliance relief. A tighter 75% floor left NBFC-MFIs with almost no room to diversify into slightly larger MSME-adjacent tickets for graduating borrowers without breaching the ratio and, in turn, jeopardising bank funding lines that depend on the loan book qualifying for PSL treatment.

When RBI restricts or cancels an NBFC-MFI’s licence

RBI’s enforcement toolkit against an NBFC-MFI escalates in stages, and full cancellation of the Certificate of Registration is the last resort rather than the first response.

• Supervisory advisory or warning: issued for early-stage governance or disclosure gaps identified during inspection
• Restriction on sanction and disbursal: RBI can bar an NBFC-MFI from sanctioning or disbursing fresh loans, as it did with two microfinance-focused NBFCs in October 2024 for charging excessive interest spreads and failing household income assessment norms
• Business restrictions under Prompt Corrective Action: triggered by a sustained CRAR or asset quality breach, restricting dividends, branch expansion, or fresh lending until capital is restored
• Cancellation of Certificate of Registration: reserved for serious or repeated non-compliance, false information at the time of registration, a fundamental failure to meet NOF, qualifying asset, or fit-and-proper conditions on an ongoing basis, failure to commence business within six months of the CoR, or ceasing operations for six months, exercised by RBI under Section 45-IA read with its supervisory powers under Sections 45K to 45N of the RBI Act, 1934, and following a show cause process with a right of appeal to the Central Government within thirty days

An NBFC-MFI cannot simply wind down or exit either. Surrender of the Certificate of Registration itself needs RBI’s prior approval through the PRAVAAH portal, supported by the original certificate, audited financials, and a statutory auditor’s certificate, and is treated as complete only once RBI confirms it.

Operating microfinance lending as principal business without a valid Certificate of Registration is a criminal offence under Section 45-IA, attracting imprisonment of up to five years and substantial fines, independent of any civil supervisory action described above.

Common mistakes that cost NBFC-MFI promoters time and money

Treating 60% as a one-time registration number. The ratio is tested on an ongoing basis, not just at the time of CoR issuance. A business plan projecting 65% qualifying assets in year one, without a monitoring mechanism for quarters two through four, is the single most common reason NBFC-MFIs slip into breach within eighteen months of launch.

Ignoring the DA and co-lending drag on the ratio. Direct assignment sales are eligible qualifying assets only while retained on the books. NBFC-MFIs that sell down 10 to 15% of their loan book each quarter to manage liquidity need a buffer well above 60%, closer to 65 to 68%, to avoid a technical breach purely from balance sheet timing.

Under-provisioning the liquidity buffer. NBFC-MFIs typically hold 10 to 15% of total assets in cash and liquid investments for asset-liability management. Under the earlier 75% threshold this left almost no room for portfolio diversification; the revised 60% norm still requires deliberate capital allocation planning, not an assumption that the lower number solves liquidity pressure automatically.

Missing the household-level indebtedness check. RBI requires assessment of total household repayment obligations, not just the NBFC-MFI’s own exposure. Lenders that check only their own book against the 50% cap, without pulling a comprehensive credit bureau report covering all household debt, expose themselves to conduct-norm violations during RBI inspection, and to breaches of the tighter SRO-level lender-count and total-indebtedness caps.

Treating KFS as a paperwork add-on rather than a workflow change. The three-working-day consideration window and vernacular-language requirement change the disbursal timeline itself. NBFC-MFIs that bolt the KFS onto an existing same-day disbursal process, without rebuilding the sequencing, generate the exact audit findings RBI has flagged since the October 2024 KFS rollout.

Filing an incomplete PRAVAAH application. Missing fit and proper declarations or an unclear source-of-funds trail for NOF is the leading cause of registration delays beyond the typical 90 to 180 day window, independent of qualifying asset compliance. Applicants still referencing the discontinued COSMOS portal in their internal process documents are a recurring, avoidable source of intake delay.

Missing the change of control approval before a fundraise closes. Any acquisition or transfer of 26% or more of an NBFC-MFI’s paid-up equity, or a change affecting 30% or more of its directors, needs RBI’s prior written approval. NBFC-MFIs raising a priced round without building this approval into the closing timeline routinely find the transaction stuck for want of a filing that should have started months earlier.

Frequently asked questions on NBFC-MFI licensing

Q: What is the minimum Net Owned Funds required for an NBFC-MFI?
A: ₹5 crore for a standard NBFC-MFI, reduced to ₹2 crore for entities registered in India’s North Eastern region, per RBI’s Non-Banking Financial Company-Micro Finance Institutions (Reserve Bank) Directions, 2011.

Q: What happens if an NBFC-MFI breaches the 60% qualifying asset norm?
A: A breach sustained for four consecutive quarters requires the NBFC-MFI to approach RBI with a remediation plan. RBI reviews the plan and takes a view on the corrective timeline; it does not automatically trigger cancellation of the Certificate of Registration.

Q: How is the RBI approval process for an NBFC-MFI different from a standard NBFC?
A: The statutory gateway, Section 45-IA of the RBI Act, 1934, and the PRAVAAH filing process are identical. The difference lies in the business plan, which must demonstrate a credible path to the 60% qualifying asset composition and projected CRAR, and in the underlying loan product design meeting the microfinance loan definition.

Q: Can an existing NBFC-ICC convert to NBFC-MFI status?
A: Yes, provided its loan book already meets the qualifying asset composition, supported by a statutory auditor’s certificate on the asset pattern as of a specified date. The classification change is then reflected in the amended Certificate of Registration.

Q: Is there a cap on interest rates an NBFC-MFI can charge?
A: There is no fixed regulatory margin cap since April 2022. NBFC-MFIs must instead follow a board-approved interest rate model with a well-documented cost of funds, risk premium, and margin split, and RBI actively supervises against usurious pricing.

Q: What is the minimum CRAR an NBFC-MFI must maintain?
A: 15% of aggregate risk-weighted assets, comprising Tier I and Tier II capital, with Tier II capped at 100% of Tier I. This applies on a continuous basis, not only at financial year end.

Q: What documentation does RBI ask for during NBFC-MFI due diligence?
A: Incorporation documents, NOF deployment proof with a chartered accountant’s certificate, director and promoter KYC and fit-and-proper declarations, and a business plan with projected financials, filed through PRAVAAH and followed by physical submission to the regional RBI office.

Q: How long does the full NBFC-MFI registration take end to end?
A: RBI’s own scrutiny window typically runs 90 to 180 days from a complete filing. Including incorporation, NOF deployment, and documentation preparation, promoters should plan for 6 to 12 months overall.

Q: What is the household repayment obligation cap under microfinance lending norms?
A: A household’s total monthly repayment obligations, across all loans, collateralised and collateral-free, cannot exceed 50% of monthly household income, tested using credit bureau data and the lender’s own household income assessment.

Q: What is a Key Fact Statement and does it apply to microfinance loans?
A: The KFS is a standardised, borrower-facing summary of loan cost and terms, mandatory since 1 October 2024 for retail and MSME term loans, including microfinance loans. It sits alongside the microfinance factsheet already required under the 2022 Master Direction.

Q: How many NBFC-MFIs can lend to the same borrower?
A: RBI’s own Master Direction does not fix a lender count, but member NBFC-MFIs of MFIN and Sa-Dhan follow a self-regulatory cap limiting active microfinance loans to three lenders per borrower and total microfinance indebtedness to around ₹2,00,000, monitored through credit bureau checks.

Q: Are NGO-run microfinance operations regulated the same way as NBFC-MFIs?
A: No. NGO-MFIs operating under the Societies Registration Act or a trust structure fall outside RBI’s NBFC-MFI licensing framework entirely. Only companies holding an RBI Certificate of Registration as NBFC-MFI are subject to the qualifying asset, capital, and pricing norms discussed here.

Q: Does the 60% qualifying asset norm apply to banks and small finance banks doing microfinance lending?
A: No. The 60% threshold is specific to the NBFC-MFI classification. Banks, small finance banks, and non-MFI NBFCs follow the same underlying microfinance loan definition and household indebtedness cap, but non-MFI NBFCs are instead capped at 25% of total assets for microfinance-type lending, without needing to cross a minimum threshold.

Q: What documents does an NBFC-MFI need for RBI registration?
A: Incorporation and constitutional documents, three years of audited financials, NOF evidencing with an auditor’s certificate and no-lien confirmation, director profiles and KYC, a board resolution, a multi-year business plan, board-approved credit and grievance policies, and, for conversions, a statutory auditor’s certificate on existing asset composition. RBI’s published checklist is indicative, not exhaustive, and it can call for more.

Q: Does an NBFC-MFI need RBI approval before a change in shareholding or a fundraise?
A: Yes. Any acquisition or transfer of 26% or more of paid-up equity, or a change affecting 30% or more of the board, requires RBI’s prior written approval, filed through PRAVAAH, before the transaction can be treated as complete.

Q: Can RBI restrict an NBFC-MFI from disbursing loans without cancelling its licence?
A: Yes. RBI has barred NBFC-MFIs from sanctioning and disbursing fresh loans for specific violations such as usurious pricing or inadequate household income assessment, while leaving the Certificate of Registration intact, reserving full cancellation for more serious or repeated non-compliance.

Q: What penalty applies for operating microfinance lending without an NBFC-MFI or NBFC registration?
A: Carrying on NBFC business, including microfinance lending as principal business, without a Certificate of Registration under Section 45-IA of the RBI Act, 1934, is a criminal offence, attracting imprisonment of up to five years and substantial fines.

Ready to structure your NBFC-MFI application or fix a qualifying asset breach before it reaches RBI’s four-quarter threshold? Book a 30-minute call with our team to walk through your entity’s loan book and registration timeline.

Regulatory references:

• Reserve Bank of India Act, 1934, Section 45-IA (registration requirement) and Sections 45K to 45N (supervisory powers)
• Master Direction, Non-Banking Financial Company-Micro Finance Institutions (Reserve Bank) Directions, 2011
• Master Direction, Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, as amended (paragraph 8.1 qualifying asset norm, revised June 2025)
• RBI circular dated 15 April 2024 on Key Fact Statement for retail and MSME loans, effective 1 October 2024
• RBI Prudential Norms on Capital Adequacy Directions, and Scale Based Regulation framework for NBFCs

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