Non-Banking Financial Companies (NBFCs) are financial institutions that offer banking-like services such as loans, credit, investments, and asset financing but do not hold a banking license. They play a critical role in India’s financial system by reaching segments of the population and sectors often underserved by traditional banks. NBFCs are registered under the Companies Act, 2013 and regulated mainly by the Reserve Bank of India (RBI) under the RBI Act, 1934.
What are NBFCs?
As per Section 45-I(f) of the RBI Act, 1934, an NBFC is a company engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures, or securities, leasing, hire purchase, insurance, chit funds, or any similar financial activity. However, they do not include institutions engaged in agricultural activities, industrial production, purchase/sale of goods, or immovable property transactions.
To operate as an NBFC, a company must:
- Obtain a Certificate of Registration (CoR) from RBI.
- Maintain a minimum Net Owned Fund (NOF) of ₹200 lakhs.
Importance of NBFCs in the Financial System
NBFCs have emerged as key players in promoting financial inclusion by providing credit to small businesses, infrastructure projects, and individuals without formal banking access. They complement banks by diversifying financial products and catering to niche markets like vehicle loans, gold loans, microfinance, and housing finance. Their flexibility, quick disbursal of loans, and sector-focused approach make them vital for sustaining India’s inclusive economic growth.
Objectives of Studying NBFCs
For exam aspirants, especially those preparing for LIC AAO, SBI RBI Grade B, IBPS, and SEBI exams, understanding NBFCs is essential. Key learning objectives include:
- Knowing the definition and scope of NBFCs under the RBI Act.
- Understanding their role in economic growth and financial inclusion.
- Identifying different types of NBFCs based on activity, liability, and size.
- Learning about recent regulatory changes such as the Scale-Based Regulation (SBR) framework.
- Comparing NBFCs with banks in terms of functions and limitations.
Functions of NBFCs
NBFCs perform several important functions in India’s financial ecosystem. These functions make NBFCs an essential complement to banks in expanding the reach of credit and financial services.
- Providing credit and loans to individuals, small businesses, and corporates.
- Financing infrastructure projects, housing, and vehicle purchases.
- Offering investment avenues through bonds, debentures, and securities.
- Promoting financial inclusion by serving rural and semi-urban populations.
- Supporting economic development by channeling funds into productive activities.
NBFCs vs Banks
Though NBFCs provide services similar to banks, they differ in key aspects:
- NBFCs cannot accept demand deposits like banks.
- NBFC depositors are not covered under DICGC insurance.
- NBFCs are not part of the payment settlement system.
- NBFCs are not required to maintain CRR but must hold 15% of public deposits in approved securities.
- Unlike banks, NBFCs focus more on niche markets like personal loans, gold loans, and infrastructure financing.
Exemptions From RBI Registration
Certain financial entities, though NBFC-like, are exempt from RBI registration due to regulation by other authorities. These include:
- Venture Capital Funds, Merchant Banking companies, and Stock Broking companies registered with SEBI.
- Insurance companies registered with IRDAI.
- Nidhi Companies notified under the Companies Act.
- Chit fund companies regulated under the Chit Funds Act, 1982.
- Stock Exchanges and Mutual Benefit companies.
Scale-Based Regulation (SBR) Framework
In October 2023, RBI introduced the Scale-Based Regulation (SBR) to strengthen supervision of NBFCs. This framework categorizes NBFCs into four layers based on size, risk, and activity:
Base Layer (NBFC-BL)
- Non-deposit-taking NBFCs with asset sizes below ₹1,000 crore.
- Includes NBFC-P2P, NBFC-AA, NOFHC, and NBFCs without public funds/customer interface.
Middle Layer (NBFC-ML)
- All deposit-taking NBFCs.
- Non-deposit-taking NBFCs with assets of ₹1,000 crore and above.
- Includes CICs, HFCs, NBFC-IFCs, IDF-NBFCs, and standalone primary dealers.
Upper Layer (NBFC-UL)
- Top 10 large NBFCs and others identified by RBI as systemically significant.
- Subject to enhanced regulatory norms.
Top Layer (NBFC-TL)
- Ideally empty but may include NBFCs posing extreme systemic risk.
Classification of NBFCs
NBFCs are classified based on liabilities, activities, and size.
Liabilities-Based Classification
- NBFC-D (Deposit-Taking) – Accept public deposits under strict RBI norms.
- NBFC-ND (Non-Deposit Taking) – Rely on borrowings such as loans or debentures.
Activity-Based Classification
NBFCs are further divided into specialized categories based on functions:
| Type of NBFC | Activity |
| Investment & Credit Company (ICC) | Lending and investments |
| NBFC-IFC | Infrastructure finance |
| Core Investment Company (CIC) | Group company investments |
| NBFC-IDF | Infrastructure debt funding |
| NBFC-MFI | Microfinance for low-income groups |
| NBFC-Factor | Factoring of receivables |
| NBFC-NOFHC | Promoter holding companies for banks |
| Mortgage Guarantee Company (MGC) | Loan guarantees |
| NBFC-AA | Account aggregation services |
| NBFC-P2P | Peer-to-peer lending platforms |
| Housing Finance Companies (HFCs) | Housing credit |
Size-Based Classification
- Systemically Important NBFCs (NBFC-ND-SI) – Non-deposit taking NBFCs with assets above ₹500 crore.
- Smaller NBFCs below this threshold are considered less risky.
Recent Developments in NBFC Regulations
- RBI has tightened norms for capital adequacy and governance in large NBFCs.
- Microfinance guidelines (2022) ensure fair lending and protection of small borrowers.
- The SBR framework (2023) enhances risk-based regulation.
- NBFCs are increasingly subject to audit and disclosure requirements to improve transparency.
Role of NBFCs in India’s Growth
NBFCs contribute significantly to India’s economy by:
- Financing infrastructure and housing projects.
- Providing last-mile credit in rural and semi-urban areas.
- Supporting entrepreneurship and small businesses.
- Reducing dependence on traditional banks.
Their growing importance makes NBFCs a critical topic for competitive exams and future financial professionals.
FAQS
A Non-Banking Financial Company (NBFC) is a financial institution registered under the Companies Act, 2013 that provides loans, investments, and other financial services but does not have a banking license. They are regulated by the RBI under the RBI Act, 1934.
NBFCs cannot accept demand deposits, are not part of the payment settlement system, and their deposits are not insured under DICGC. However, they provide loans, credit, and financial services similar to banks.
An NBFC must have a minimum Net Owned Fund (NOF) of ₹200 lakhs and obtain a Certificate of Registration (CoR) from RBI before starting operations.
NBFCs provide loans, finance infrastructure and housing, support small businesses, offer investment services, and promote financial inclusion in rural and semi-urban areas.
Introduced in October 2023, the SBR framework classifies NBFCs into four layers—Base Layer, Middle Layer, Upper Layer, and Top Layer—based on size, activity, and risk. This ensures risk-based regulation.
NBFC-D: Deposit-taking NBFCs that can accept public deposits under RBI regulations.
NBFC-ND: Non-deposit-taking NBFCs that raise funds through borrowings, loans, or debentures.
NBFCs are categorized into types such as Investment & Credit Companies (ICC), Microfinance Institutions (MFI), Infrastructure Finance Companies (IFC), Housing Finance Companies (HFC), NBFC-Factors, NBFC-P2P, NBFC-AA, and others.
No, deposits in NBFCs are not covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), unlike banks where deposits up to ₹5 lakhs are insured.
Entities like Venture Capital Funds, Stock Broking companies, Insurance companies (regulated by IRDAI), Nidhi companies, and Chit funds are exempted since they are regulated by other authorities.
NBFCs expand credit access to underserved segments, finance infrastructure, support small borrowers, and complement banks in deepening financial inclusion and economic growth.
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