NBFC Capital Adequacy: Revised Treatment of Quarterly Profits
Current · Source: Reserve Bank of India · RBI/2025-26/226 · issued 10 Mar 2026 · ~2 min read
Quick answerThe RBI has amended the NBFC capital adequacy directions to clarify that free reserves now include quarterly profits, provided the statements undergo a limited audit and the profit is reduced by 25% of the average dividend paid over the past three years. Current‑year losses are fully deducted. The change is effective immediately.
The rule, in the simplest words
NBFCs can now include quarterly profits in their free reserves, but only after a limited audit and adjusting for dividend payouts.
The eligible profit is calculated using the formula EP = Net profit - 0.25 × average dividend of the last three years.
Current-year losses must be fully deducted from the Owned Fund.
How it plays out — a real example
As an NBFC compliance officer in Indore, Rohan carefully reviews the quarterly financial statements of a local NBFC. He ensures that the statements undergo a limited audit and calculates the eligible profit using the formula EP = Net profit - 0.25 × average dividend of the last three years. If the NBFC incurs losses in the current year, Rohan deducts the full amount from the Owned Fund, ensuring compliance with the RBI's capital adequacy directions.
What changed
Paragraph 9(iii) of the Master Direction now permits inclusion of quarterly profits in free reserves, subject to a limited audit and a deduction equal to one‑quarter of the three‑year average dividend. The formula EP = NP – 0.25 × D is introduced. Any loss incurred in the current financial year must be subtracted from the Owned Fund.
What it means for you
NBFCs can boost their capital buffers by counting quarterly earnings, but only after satisfying audit requirements and adjusting for dividend payouts. The new deduction method standardises the profit inclusion across the sector. Immediate compliance is required, and current‑year losses will directly erode the capital base.
What you must do
Ensure statutory auditors perform a limited review of quarterly financial statements.
Calculate eligible quarterly profit using EP = Net profit – 0.25 × average dividend of the last three years.
Deduct any loss incurred in the current year from the Owned Fund before reporting.
Update internal capital adequacy reporting templates to reflect the new profit inclusion rules.
Who it affects
All NBFCs, NBFCs with factoring operations, Regulatory reporting teams
❓ Common questions
Can we include quarterly profits without an audit?
No. The quarterly statements must undergo a limited audit or review by the statutory auditor before the profit can be counted.
How is the dividend adjustment calculated?
Take the average dividend paid over the last three financial years and multiply it by 25%; subtract this amount from the net profit of the quarter.
What happens to a loss incurred in the current year?
The entire loss is deducted from the Owned Fund, reducing the capital available for regulatory purposes.
📜 Read the original circular — full text as issued by RBI
RBI/2025-26/226
DOR.CAP.REC.No.416/21.01.002/2025-26
March 10, 2026
All Non-Banking Financial Companies (NBFCs)
Dear Sir / Madam,
Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Second Amendment Directions, 2026
The Reserve Bank had issued the Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Directions, 2025 (hereinafter referred as the 'Master Direction'), on November 28, 2025, as amended from time to time. There is a need to further amend the same to provide clarification on the components reckoned in the computation of Owned Fund.
2. Accordingly, in exercise of the powers conferred under Section 45L of the Reserve Bank of India Act, 1934 and Section 3 read with Section 31A and Section 6 of the Factoring Regulation Act, 2011, the Reserve Bank, being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the following Amendment Directions.
3. These Directions shall be called Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Second Amendment Directions, 2026.
4. These Amendment Directions shall come into force from immediate effect.
5. These Amendment Directions modify the Master Direction as under:
Paragraph 9 (iii) shall be replaced by:
"(iii) free reserves, including quarterly profits,
Inclusion of quarterly profits shall be subject to the following conditions:
(a) The financial statements shall be subjected to limited review / audit on a quarterly basis by the statutory auditors.
(b) Such profits shall be reduced by average dividend paid in the last three years and the amount which can be reckoned for inclusion would be arrived at as under:
EP t = NP t - 0.25 * D * t
Where:
EP t = Eligible profit up to quarter 't' of the current financial year, t varies from 1 to 4
NP t = Net profit up to quarter 't'
D = average dividend paid for / pertaining to the last three financial years
Losses in the current year shall be fully deducted from Owned Fund."
Yours faithfully,
Sunil T S Nair
Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2025-26/226 · issued 10 Mar 2026. The plain-English explanation above is BankPulse’s own independent summary.
Update internal capital adequacy reporting templates to reflect the new profit inclusion rules.
📜 Compliance
Ensure statutory auditors perform a limited review of quarterly financial statements.
Calculate eligible quarterly profit using EP = Net profit – 0.25 × average dividend of the last three years.
Deduct any loss incurred in the current year from the Owned Fund before reporting.
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 NBFCs, NBFCs with factoring operations, Regulatory reporting teams), your first concrete step on “NBFC Capital Adequacy: Revised Treatment of Quarterly Profits” is: “Ensure statutory auditors perform a limited review of quarterly financial statements.” (RBI issued this 10 Mar 2026).
Circular: RBI/2025-26/226 -- NBFC Capital Adequacy: Revised Treatment of Quarterly Profits
Issued: 10 Mar 2026
Action required: Ensure statutory auditors perform a limited review of quarterly financial statements.
Action required: Calculate eligible quarterly profit using EP = Net profit – 0.25 × average dividend of the last three years.
Action required: Deduct any loss incurred in the current year from the Owned Fund before reporting.
Action required: Update internal capital adequacy reporting templates to reflect the new profit inclusion rules.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
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.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13311&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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