A Quick Guide to Net Owned Funds for Financial Institution

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A Quick Guide to Net Owned Funds for Financial Institution

If you're involved in the financial sector, especially in Non-Banking Financial Companies (NBFCs) or Nidhi companies, you might have come across the term Net Owned Funds (NOF). But what exactly does it mean, why is it important, and how is it calculated?

In this guide, we’ll break down everything you need to know about net owned funds, including its role in NBFCs and Nidhi companies, the calculation formula, and the minimum requirements set by the Reserve Bank of India (RBI).

What is Net Owned Funds?

Net Owned Funds (NOF) represent the actual funds that a financial institution owns and controls after accounting for its liabilities and intangible assets. It is an essential financial metric used to evaluate the stability and credibility of an organization.

In simple terms, NOF tells us how much capital a company has that is genuinely owned, without relying on external borrowings. This is important because regulators like the RBI use NOF to determine whether an institution is financially stable enough to conduct lending and investment activities.

Why Are Net Owned Funds Important?

For any financial institution, especially NBFCs and Nidhi companies, having sufficient NOF is crucial for:

Regulatory Compliance: The RBI and Ministry of Corporate Affairs (MCA) set minimum NOF requirements to ensure that only financially stable entities operate in the lending and borrowing sector.

Financial Stability: NOF reflects an institution’s capacity to absorb losses and continue operations.

Risk Management: A higher NOF means a company can handle financial downturns without excessive reliance on external funding.

Business Expansion: Institutions with strong NOF can expand their operations, secure licenses, and attract investors.

Net Owned Funds for NBFCs

NBFCs are required to maintain a minimum NOF to operate in India. The RBI mandates that all NBFCs must have at least ₹10 crore in net owned funds to function legally.

However, for certain categories of NBFCs, the minimum NOF requirement is even higher. For example:

• Infrastructure Finance Companies (IFCs): ₹300 crore

• Asset Reconstruction Companies (ARCs): ₹300 crore

• Housing Finance Companies (HFCs): ₹25 crore

Having adequate net owned funds ensures that an NBFC can manage its financial activities responsibly and reduce risks associated with lending and borrowing.

Net Owned Funds For Nidhi Companies

A Nidhi Company is a type of NBFC that focuses on borrowing and lending money among its members. Unlike regular NBFCs, Nidhi companies do not deal with external investors or businesses.

To ensure financial stability, the Indian government mandates that a Nidhi company must maintain a minimum net owned fund (NOF) of ₹20 lakh. Additionally, a Nidhi company must comply with these financial conditions:

• Maintain a NOF-to-deposit ratio of 1:20, meaning it cannot accept deposits more than 20 times its NOF.

• It shall only declare a dividend of up to 25% in a given FY (in accordance with Rule 18 of the Nidhi (Amendment) Rules, 2022). 

• It shall use the NOF only for purpose of conducting business of the Nidhi company 

Maintaining the required net owned funds ensures that Nidhi companies can serve their members efficiently and avoid financial instability.

How to Calculate Net Owned Funds?

To calculate NOF, we use the following formula:

Applicant companies should calculate their Net Owned Funds (NOF)  as per the following.

1. Owned Funds :- (Paid-up Equity Capital + Free reserves + Credit balance in Profit & Loss A/c) minus (Accumulated balance of loss, Deferred revenue expenditure and Other intangible assets)

2. Net Owned Funds :- Owned funds minus the amount of investments in shares of its subsidiaries, companies in the same group, all (other) non-banking financial companies as also the book value of debentures, bonds, outstanding loans and advances made to and deposits with its subsidiaries and companies in the same group in excess of 10 per cent of the Owned funds.

Breakdown of the Net owned Fund Formula:

• Paid-up Equity Capital: The total capital that shareholders have invested in the company.

• Free Reserves: Profits and surplus funds that the company has retained after paying expenses and taxes.

• Accumulated Losses: Any financial losses the company has incurred over time.

• Deferred Revenue Expenditure: Expenses paid in advance that have not yet provided financial benefits.

• Intangible Assets: Non-physical assets like patents, trademarks, goodwill, etc.

By subtracting the accumulated losses, deferred revenue expenditure, and intangible assets from the equity capital and free reserves, we get the company’s actual net owned funds.

Minimum Net Owned Fund Requirements

1. What is the Minimum Net Owned Fund for NBFC?

The minimum NOF required for an NBFC to operate in India is ₹10 crore, as per RBI regulations.

For specific types of NBFCs, the requirement may be higher:

Maintaining the minimum NOF is essential for securing an NBFC license and conducting financial activities.

2. What is the Minimum Capital Requirement for NBFC as per RBI?

According to the current RBI rules, all NBFCs are required to maintain a minimum capital ratio consisting of Tier I and Tier II capital, which shall not be less than 15 per cent of its total risk weighted assets on-balance sheet and risk adjusted value of off-balance sheet items. The minimum capital requirement ensures that NBFCs have enough financial strength to handle risks associated with lending.

Conclusion

Understanding net owned funds is essential for anyone involved in the NBFC or Nidhi company sector. Whether you’re an entrepreneur starting a financial business or an investor evaluating financial institutions, NOF plays a crucial role in determining an entity’s stability and credibility.

Key Takeaways:

• Net Owned Funds (NOF) represent the actual capital owned by a company after deducting liabilities.

• NBFCs require a minimum NOF of ₹10 crore, while Nidhi companies must maintain ₹20 lakh.

• The NOF formula helps assess a company’s financial health and compliance with RBI regulations.

• A strong NOF ensures financial stability, regulatory approval, and risk management.

By maintaining the required net owned funds, financial institutions can operate smoothly, attract investors, and comply with regulations.

FAQs

Q1. What is Capital-to-Risk Weighted Assets Ratio (CRAR)?

Ans. The Capital-to-Risk Weighted Assets Ratio (CRAR) is a financial ratio that measures a bank's capital relative to its risk. 

Q2. What are the NBFCs?

Ans.  NBFCs are financial institutions that provide financial and banking services without fitting the definition of a bank. These institutions are supervised and governed by the Reserve Bank of India (RBI).

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