Definition
Net Worth (Banking & NBFC)
Net worth, or owned funds, is a lender's paid-up capital plus free reserves less specified deductions, the regulatory base for its capital and exposure limits.
For banks and NBFCs, the RBI defines net worth (owned funds) precisely, since it caps how large a single-borrower or group exposure a lender can take. NBFCs must also maintain a minimum net owned fund to be registered.
Net worth differs from book accounting equity because regulators deduct items like accumulated losses, certain intangible assets and investments in group entities. A strong, clean net worth lets a lender grow its book and underpins its capital adequacy.
Related terms
- Capital Adequacy Ratio (CAR / CRAR)The Capital Adequacy Ratio, also called CRAR, is the ratio of a bank's capital to its risk-weighted assets, measuring its ability to absorb losses.
- Tier 1 CapitalTier 1 capital is a bank's core, going-concern capital, made up mainly of equity and reserves plus eligible additional Tier 1 instruments, that absorbs losses while the bank operates.
- Non-Banking Financial Company (NBFC)An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
- Single Borrower Exposure LimitThe single borrower exposure limit caps how much a bank can lend to one borrower or group as a percentage of its capital, to prevent concentration risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.