The Reserve Bank of India (RBI) on Tuesday effectively opened the door to higher business activity for Non-Banking Financial Companies (NBFCs) and Asset Reconstruction Companies (ARCs) by allowing them to calculate quarterly profits toward their capital base/net worth.
The amendment directions aim to remove the long‑standing ambiguity regarding how NBFCs and ARCs compute their owned funds and Tier 1 capital. The move standardises the treatment of quarterly profits across the financial sector and is expected to enhance capital flexibility for these entities.
Recognising quarterly profits expands business capacity
“For years, we operated in a regulatory grey zone, relying only on audited annual numbers to avoid compliance risks. With the regulator now formally permitting quarterly profits, subject to defined checks, we gain immediate additional capital headroom that can be deployed for lending, investments, and asset reconstruction, directly boosting their ability to take on more business through the year,” said a CEO from a domestic ARC. Adding further, a senior NBFC official said, “This clarity is overdue and hugely beneficial.” He stated that the ability to recognise quarterly profits immediately expands usable capital and, with it, business capacity.
NBFCs and ARCs relied solely on audited annual financials to determine capital adequacy, largely because regulations were unclear about whether quarterly profits could be included. As the RBI stated, NBFCs (other than those in the upper layer) and ARCs traditionally reckon Tier 1 capital as on March 31 of the previous year for complying with Credit / Investment concentration norms. This created a conservative approach that often constrained business expansion, especially for ARCs seeking to scale operations in a growing distressed‑asset market.
The latest amendments now permit quarterly profits to be recognised as part of net worth, subject to strict conditions. First, quarterly financial statements must undergo a limited review or audit by statutory auditors, an assurance mechanism that the RBI defended despite industry pushback. As the regulator stated, quarterly reviews are essential to ensure profits are recognised correctly and mitigate the risk of later reversals.
Second, the recognised profit must be adjusted for dividends. The RBI has retained the formula requiring deduction of the average dividend paid over the last three financial years, rejecting proposals to shift to a variable dividend‑payout ratio. This approach, the central bank argued, maintains parity with norms applicable to banks and NBFCs in the upper layer.