RBI clarifications on computation of Tier 1 capital

– Siddharth Pandey, Assistant Manager | finserv@vinodkothari.com

Over time, RBI has received multiple representations from NBFCs seeking a review of the provisions and clarity on certain aspects for the computation of Owned Funds and Tier I capital. In response, RBI has reviewed the relevant directions and guidelines and has now proposed a set of clarifications and revisions aimed at aligning capital computation with the latest available financial position. 

RBI had issued Draft Amendment Directions vide its press release dated January 13, 2026, on ‘Clarification on Owned Fund / Tier 1 Capital computation for NBFCs / ARCs and applicability to “Credit / Investment Concentration” Norms’ proposing amendments to various relevant Master Directions. The said proposals have now been notified by the Reserve Bank of India through its press release dated March 10, 2026. 

Tier 1 is the core component of an NBFC’s regulatory capital. The same is arrived at by deducting exposure taken in group companies and other NBFCs (to the extent the same exceeds 10% of the owned funds) from the owned funds. NBFCs are required to maintain 15% of their risk-weighted assets as capital, in the form of Tier 1 and Tier 2, on an ongoing basis. In addition to maintaining the capital adequacy, Tier 1 capital also serves as an important benchmark to compute the maximum exposure an NBFC can take in a single borrower/group of borrowers. 

Analysis of the proposed changes

Owned Fund forms a key component of regulatory capital and includes free reserves, which, in simple terms, represent accumulated profits retained by an NBFC and available for unrestricted use. By including adjusted quarterly profits in the Owned Fund, NBFCs will be allowed to factor in profits earned during the current financial year without having to wait for completion of the year-end audit.

However, crucial points that comes to light on the reading of the above mentioned amendments are:

1. Inclusion of quarterly profits has been specifically included in the computation of owned funds for the purpose of determining the capital adequacy. 
2. Tier 1 capital for the purpose of concentration risk management is to be seen from the last available financial statements (audited or subject to limited review). Here, the definition of Tier 1 capital has to be referred from the capital adequacy directions; further, the same shall be based on the latest audited financial statements.

Accordingly, based on the above, it can be said that while determining Tier 1 capital for calculating the maximum exposure an NBFC can take, both adjusted quarterly profits as well as any capital raised during the year will be considered. However, for the purpose of capital adequacy, only adjusted quarterly profits have been included. There is no clarity being provided for the inclusion of capital raised during the quarter for capital adequacy computation. This creates a distinction between the two provisions with respect to the computation of Tier 1 capital. There is therefore a requirement to provide further clarity on the same since there seems to be no proper rationale for such divergence. 

It is also pertinent to note that the amendments are introduced in the definition of owned funds and thus affects the Tier 1 capital of an NBFC. However, the minimum net owned funds (NOF) that NBFCs are required to maintain is governed by section 45-IA(7)(i) of the RBI Act, 1934. These amendments therefore do not have any impact on the NOF computation. 

What was proposed and what has been notified?

While the final notification broadly retains the approach proposed in the draft amendment directions, RBI has also replaced the definitions of “Owned Fund” and “Tier 1 Capital” in the Concentration Risk Management Directions, 2025 by linking them directly to the definitions contained in the Prudential Norms on Capital Adequacy Directions, 2025. 

Further, an additional procedural requirement has been introduced for recognising capital augmentation while computing exposure limits. Specifically, the amended definition of Tier 1 capital provides that,

“2) Paragraph 4 (8) shall be replaced by:

“Tier 1 capital” shall have the same meaning as given in Chapter II of the Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Directions, 2025. However, for the purpose of concentration norms, the NBFC shall obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to the Department of Supervision of the RBI before reckoning the additions to capital funds.”

This clarification further reinforces the distinction noted earlier in the draft amendments. Accordingly, even though an NBFC may raise fresh capital during the year (for instance, through issuance of shares or infusion of additional equity), such capital cannot immediately be used for expanding exposure limits under the concentration norms. Before counting the increased capital, the NBFC must:

• Complete the capital augmentation process (actually receive the funds).
• Obtain a certificate from its external auditor confirming that the capital increase has been completed.
• Submit that certificate to the RBI’s Department of Supervision.

Only after abiding by this process can the NBFC include the additional capital in Tier 1 capital for calculating concentration limits.

Key Changes Notified

1. Amendment to the computation of Owned Funds 

RBI vide amendment in the Prudential Norms on Capital Adequacy directions has allowed NBFCs to consider the quarterly profits as a part of the owned funds computation, subject to certain adjustments. 

Earlier, as per the RBI Circular dated April 19, 2022, RBI permitted the inclusion of current-year profits in CET 1 capital, which was applicable only to NBFCs classified in the Upper Layer. Thus, other NBFCs were not specifically allowed to consider such quarterly profits as a part of their owned funds. 

The inclusion of quarterly profits as a part of the owned funds and consequently in Tier 1 capital is subject to certain conditions (adjusted quarterly profits):

• The quarterly financial statements are subjected to limited review by the statutory auditors, and
• The profits included are reduced by the average dividend paid during the preceding three financial years.
• Further, any losses incurred during the year should also be fully reduced from the owned funds. 

Illustration:

In a simple illustration, an NBFC-ML earns a profit of ₹ 4 crores up to Q3 of FY 25-26. Let’s assume the average dividend paid during the last three years is ₹3 crore per annum.

Position under the Existing Norms:

Only audited, year-end profits could be considered as a component of the Owned Fund for capital computation. Thus ₹4 crore profits earned during the current year (up to December 2025) could not be included in free reserves and consequently under Owned Funds.

Proposed amendment:

Under the draft amendment, adjusted quarterly profits are permitted to be included in free reserves and Owned Fund, computed as per the below formula:

EPt = NPt – 0.25 *D*tWhere:EPt = Eligible profit up to quarter ‘t’ of the current financial year, t varies from 1 to 4NPt = Net profit up to quarter ‘t’D = average dividend paid during the last three years

In our example,

NPt = ₹4 crores (profit up to Q3)

D = ₹3 crore (average dividend of last three years)

t = 3 (up to December)

EP = 4−(0.25×3×3) = 1.75

Hence, ₹1.75 crore can be taken as an eligible profit for capital computation. 

2. Amendments to Tier I Capital for credit/investment concentration norms

To give effect to the proposed revisions in the computation of Tier 1 capital, consequential amendments have been done in the Master Direction – RBI (NBFC – Concentration Risk Management) Directions, 2025, vide the RBI (NBFC – Concentration Risk Management) Second Amendment Directions, 2026. These amendments modify the manner of determining Tier I capital solely for the purpose of credit and investment concentration norms. In this regard, the following insertion has been proposed:

“The applicable Tier 1 Capital for compliance with the norms stated in paragraphs 13 and 14 above, shall be determined based on the NBFC’s latest available financial statements (audited or subject to limited review).”

“Tier 1 Capital shall be as defined in paragraph 10 of the RBI (NBFC – Prudential Norms on Capital Adequacy) Directions, 2025.”

Our Resources:

1. Like banks, NBFC-UL to maintain CET-1 capita
2. Harmonising computation for concentration limits across NBFC
3. Should OCI be included as a part of Tier I capital for financial institutions?