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NBFCs Cannot Treat Bank FDs as Financial Assets

Current · Source: Reserve Bank of India · RBI/2011-12/446 · issued 15 Mar 2012 · ~2 min read
Quick answerRBI clarifies that fixed deposits with banks are not financial assets for NBFCs. Interest from FDs cannot count as income from financial assets. NBFCs must commence business within six months of getting CoR, or the registration is automatically withdrawn.
The rule, in the simplest words
How it plays out — a real example

Rahul, an NBFC compliance officer in Indore, ensures that his NBFC starts lending to gold merchants within six months of receiving the CoR. He also verifies that the interest earned from bank fixed deposits is not counted as income from financial assets, and the company's auditors confirm that the NBFC is actively conducting gold-loan activities.

What changed

RBI observed that some NBFCs obtained registration, parked funds in bank FDs, and did not start NBFI activities for years. The circular clarifies that FDs are not financial assets under Section 45I(c) of the RBI Act, and interest from them is not income from financial assets. It also reiterates that NBFCs must commence business within six months of receiving CoR, or the CoR stands withdrawn automatically.

What it means for you

NBFCs can no longer use bank FDs as a substitute for genuine lending or investment activities to justify holding a CoR. Auditors must not certify NBFI activity if the company only earns interest from FDs. This tightens the entry barrier and ensures that only active NBFCs retain registration, reducing regulatory arbitrage.

What you must do

Who it affects

All Non-Banking Financial Companies (excluding Residuary Non-Banking Companies), Auditors of NBFCs, NBFCs that have obtained CoR but not yet commenced business

❓ Common questions

Can an NBFC treat fixed deposits with banks as financial assets?

No. RBI clarifies that bank FDs are not financial assets under Section 45I(c) of the RBI Act. Interest from such deposits cannot be treated as income from financial assets.

What happens if an NBFC does not start business within six months of getting CoR?

The CoR will stand withdrawn automatically. The NBFC must commence NBFI business within six months of the date of issue of the CoR.

Can there be a change in ownership of an NBFC before it starts business?

No. There can be no change in ownership prior to commencement of business and regularization of its CoR.

📜 Read the original circular — full text as issued by RBI
RBI/2011-12/446 DNBS (PD)CC.No.259 /03.02.59/2011-12 March 15, 2012 All Non Banking Financial Companies (excluding Residuary Non Banking Companies) Dear Sir, Non- Reckoning Fixed Deposits with Banks as Financial Assets In terms of Section 45IA (1) of the RBI Act 1934, no non-banking financial company shall commence business or carry on the business of a non-banking financial institution without (a) obtaining a certificate of registration (CoR) from the Reserve Bank and (b) having a net owned fund of twenty five lakh rupees, which was increased to Rs. 200 lakh with effect from April 21, 1999. 2. It has, however, come to the notice of the Reserve Bank that some NBFCs obtain registration from the Bank, park their funds in fixed deposits with commercial banks but do not commence NBFI activities for several years thereafter. The Auditors of the companies have in these cases also certified that the companies are conducting NBFI activities, justifying the continued holding of the CoR issued by the Bank. 3. It is clarified, that the Reserve Bank issues a Certificate of Registration for the specific purpose of conducting NBFI activities. Investments in fixed deposits cannot be treated as financial assets and receipt of interest income on fixed deposits with banks cannot be treated as income from financial assets as these are not covered under the activities mentioned in the definition of “financial Institution” in Section 45I(c) of the RBI Act 1934. Besides, bank deposits constitute near money and can be used only for temporary parking of idle funds, and/or in the above cases, till commencement of NBFI business. 4. In addition, the NBFC which is in receipt of a CoR from the Bank must necessarily commence NBFC business within six months of obtaining CoR. If the business of NBFC is not commenced by the company within the period of six months from the date of issue of CoR, the CoR will stand withdrawn automatically. Further, there can be no change in ownership of the NBFC prior to commencement of business and regularization of its CoR. Yours sincerely (Uma Subramaniam) Chief General Manager-in-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2011-12/446 · issued 15 Mar 2012. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
⚙️ Operations
  • If your NBFC has not commenced NBFI business within six months of CoR issuance, initiate business operations immediately or risk automatic withdrawal of registration.
📜 Compliance
  • Review your NBFC's asset composition to ensure fixed deposits with banks are not classified as financial assets for regulatory purposes.
  • Instruct auditors to verify that the company is conducting actual NBFI activities, not just parking funds in FDs, before certifying compliance.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (All Non-Banking Financial Companies (excluding Residuary Non-Banking Companies), Auditors of NBFCs, NBFCs that have obtained CoR but not yet commenced business), your first concrete step on “NBFCs Cannot Treat Bank FDs as Financial Assets” is: “Review your NBFC's asset composition to ensure fixed deposits with banks are not classified as financial assets for regulatory purposes.” (RBI issued this 15 Mar 2012).

  1. Circular: RBI/2011-12/446 -- NBFCs Cannot Treat Bank FDs as Financial Assets
  2. Issued: 15 Mar 2012
  3. Action required: Review your NBFC's asset composition to ensure fixed deposits with banks are not classified as financial assets for regulatory purposes.
  4. Action required: If your NBFC has not commenced NBFI business within six months of CoR issuance, initiate business operations immediately or risk automatic withdrawal of registration.
  5. Action required: Instruct auditors to verify that the company is conducting actual NBFI activities, not just parking funds in FDs, before certifying compliance.
  6. Owner: ____________ Target date: ____________
  7. Board/committee approval needed? Y / N
  8. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=7063&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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