A Non-Banking Financial Company (NBFC) is a financial institution that provides services such as loans, asset financing, and investments without operating as a bank. Regulated by the RBI, NBFCs expand access to credit for individuals and businesses while following rules that differ from those applicable to banks.
Quick overview
- NBFC stands for Non-Banking Financial Company. These entities provide loans, investments, and other financial services to individuals and businesses.
- India has several categories, including Investment and, credit companies, housing finance companies, infrastructure finance companies and microfinance institutions.
- NBFCs complement traditional banking by serving diverse credit needs, but they cannot accept demand deposits or perform certain banking functions in the same capacity as banks.
Access to credit is the backbone of economic growth, powering everything from a family’s first home loan to a business’s working capital expansion. Yet, traditional banks don’t always have the flexibility to cater to every unique financing need. This is where Non-Banking Financial Companies (NBFCs) step in.
By offering agile, specialized credit solutions across underserved markets and niche sectors, NBFCs bridge critical funding gaps. Understanding how NBFCs operate, the services they provide, and how they differ from banks helps explain their growing role in India’s financial system.
What is an NBFC? Meaning and Definition
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 or the Companies Act, 2013, that carries out financial activities as its principal business. These activities include providing loans and advances, investing in shares, stocks, bonds, and other marketable securities, and offering services such as leasing and hire-purchase.
Although NBFCs provide several financial services similar to banks, they do not hold a banking license. As a result, they cannot perform certain core banking functions, such as issuing cheques drawn on themselves or participating in payment and settlement systems in the same capacity as banks.
When Does a Company Qualify as an NBFC?
Not every company offering financial services qualifies as an NBFC; the RBI assesses whether financial activity forms its principal business. Companies primarily engaged in agriculture, industry, non-financial services, trading in goods, or dealing in immovable property generally fall outside this definition.
To determine whether financial activity constitutes a company’s principal business, the RBI uses the following two criteria:
- Financial assets exceed 50% of total assets: More than 50% of the company’s total assets (netted off by intangible assets) must comprise financial assets, such as loans and investments.
- Financial income exceeds 50% of gross income: More than half of the company’s gross income must come from financial activities.
A company must satisfy both conditions for its financial activity to qualify as its principal business under this test.
Role and Importance of NBFCs in India
Non-Banking Financial Companies (NBFCs) play an important role in India’s financial system by extending credit beyond traditional banking channels. They serve borrowers with diverse financial needs, support business expansion, and improve access to formal financial services. Their contribution extends from financing household purchases to funding businesses and infrastructure projects.
1. Extending credit to underserved segments
NBFCs expand credit access among small businesses, self-employed individuals, and borrowers in underserved markets. By serving customers who face barriers to conventional bank financing, they support financial inclusion and widen access to formal credit.
2. Specialized lending
NBFCs offer financing tailored to specific sectors and borrowing needs, including housing, infrastructure, microfinance, and vehicle purchases. This specialization helps address credit requirements that differ across industries and borrower segments.
3. Investment and wealth management
Certain NBFCs provide investment management, and related financial services. These services help individuals and businesses manage their financial resources and access a broader range of financial products.
4. Supporting MSME growth and capital formation
NBFCs finance micro, small, and medium enterprises (MSMEs) for working capital, equipment purchases, and business expansion. This funding helps businesses increase operational capacity, invest in productive assets, and generate employment.
5. Strengthening financial intermediation
NBFCs complement banks by directing credit towards households, businesses, and specialized sectors. By connecting financing needs with available capital, they strengthen credit delivery and support economic activity.
The role of NBFCs, however, comes with regulatory responsibilities and requires oversight to maintain stability and protect the interests of borrowers and other stakeholders.
How Are NBFCs Regulated in India?
The Reserve Bank of India (RBI) regulates Non-Banking Financial Companies (NBFCs) through a framework covering registration, capital requirements, and oversight. Requirements vary depending on an NBFC’s category, size, and activities.
Registration Requirements
Under Section 45-IA of the RBI Act, no company can carry on NBFC business without a Certificate of Registration (CoR) from the RBI and the minimum Net Owned Fund (NOF). The baseline NOF for new registrations since 1 October 2022 is ₹ 10 crore. However, several categories have different thresholds:
| Category | Minimum NOF |
| Other NBFCs (e.g., Investment and Credit Companies) | ₹10 crore |
| Infrastructure Finance Company (IFC) | ₹300 crore |
| Infrastructure Debt Fund NBFC (IDF-NBFC) | ₹300 crore |
| Mortgage Guarantee Company | ₹100 crore |
| Housing Finance Company | ₹20 crore |
| Standalone Primary Dealer | ₹150 crore (core activities only); ₹250 crore (with non-core activities) |
| NBFC-Account Aggregator, NBFC-P2P | ₹2 crore |
Some activities need extra permission. For example, to issue credit cards, an NBFC needs prior RBI approval and a minimum NOF of ₹100 crore.
Capital and Risk Management
NBFCs must maintain a minimum capital adequacy ratio (CRAR) of 15% of risk-weighted assets. They must also follow RBI rules on asset classification and provisioning, and loans generally become non-performing assets (NPAs) when repayments are overdue for more than 90 days.
Exposure Limits
The RBI sets limits on how much an NBFC can lend to a single borrower or a group of connected borrowers. These limits help manage concentration risk and reduce the impact of defaults by large borrowers.
Regulatory Exemptions
Not every financial entity falls under the same RBI registration requirements. Certain entities, such as insurance companies, chit companies, merchant banks, stockbrokers, and AIFs, may qualify for exemptions or operate under separate regulatory frameworks, depending on their activities and applicable rules. Therefore, regulatory requirements depend on the entity’s classification and the governing framework.
How Are NBFCs Classified in India?
The RBI classifies NBFCs in three ways: by the type of liabilities they accept, their position under the Scale-Based Regulation (SBR) framework, and the activities they undertake.
Classification by Liabilities
Based on their liabilities, NBFCs fall into two categories:
- Deposit-taking NBFCs: NBFCs authorized to accept public deposits.
- Non-deposit-taking NBFCs: NBFCs that do not accept public deposits.
Classification Under the Scale-Based Regulation Framework
Under the SBR framework, the RBI groups NBFCs into four layers based on their size, activities, and regulatory requirements.
- Base layer (NBFC-BL): Includes non-deposit-taking NBFCs with assets below ₹1,000 crore, along with specific categories regardless of asset size: NBFC-P2P platforms, NBFC-Account Aggregators, and Non-Operative Financial Holding Companies (NOFHCs).
- Middle layer (NBFC-ML): Includes all deposit-taking NBFCs (regardless of asset size), non-deposit-taking NBFCs with assets of ₹1,000 crore or more, and specialized categories including Housing Finance Companies (HFCs), Core Investment Companies (CICs), Infrastructure Debt Funds (IDF-NBFCs), Infrastructure Finance Companies (IFCs), and Standalone Primary Dealers (SPDs).
- Upper layer (NBFC-UL): Includes NBFCs the RBI identifies for enhanced regulatory oversight based on prescribed parameters.
- Top layer (NBFC-TL): The RBI may place an NBFC in this layer if it poses extreme systemic risk.
The SBR framework allows the RBI to apply regulatory requirements in proportion to the risks posed by different NBFCs.
Classification by Business Activity
The RBI also recognizes several types of NBFCs based on the financial activities they undertake:
- Investment and Credit Companies (ICCs): Provide loans, finance assets and invest in securities.
- Housing Finance Companies (HFCs): Provide housing finance and meet prescribed asset-allocation criteria.
- Infrastructure Finance Companies (IFCs): Deploy at least 75% of their total assets towards infrastructure lending.
- Infrastructure Debt Funds (IDF-NBFCs): Refinance eligible infrastructure projects that have completed at least one year of satisfactory commercial operations and finance eligible Toll-Operate-Transfer projects as direct lenders.
- Core Investment Companies (CICs): Hold investments in group companies and meet specific asset-allocation and other eligibility requirements.
- Microfinance Institutions (NBFC-MFIs): Focus on collateral-free microfinance loans to eligible low-income households.
- NBFC-Factors: Specialize in factoring, with factoring assets and income meeting prescribed thresholds.
- Mortgage Guarantee Companies (MGCs): Provide mortgage guarantees covering eligible housing loan repayments and accrued interest.
- Standalone Primary Dealers (SPDs): Support the government securities market through activities such as participating in primary auctions and market-making.
- Non-Operative Financial Holding Companies (NOFHCs): Hold shares in a banking company and other financial services companies within a group.
- Account Aggregators (NBFC-AAs): Retrieve, organize and present customers’ financial information to authorized users. The information remains the customer’s property and cannot be used for other purposes.
- Peer-to-Peer Lending Platforms (NBFC-P2Ps): Facilitate loans between lenders and borrowers through an online platform or other permitted channels.
These classifications show that NBFCs do not operate under a single, uniform model. Their regulatory obligations and permitted activities depend on their category, size, and role within the financial system.
Services Offered by NBFCs
NBFCs offer a range of financial services to individuals, businesses, and institutions. Their offerings vary by category and specialization, with lending forming a major part of their operations.
- Personal loans: Unsecured credit for personal expenses and planned financial needs.
- Gold loans: Secured loans against pledged gold jewelry or eligible gold assets.
- Housing finance: Loans for home purchases, construction and other eligible property-related needs.
- SME and business loans: Financing for working capital, inventory, equipment purchases and business expansion.
- Vehicle and consumer durable loans: Credit for purchasing cars, two-wheelers, commercial vehicles and household appliances.
- Loans Against Property and Securities: Secured financing against eligible real estate or financial assets.
- Equipment and asset finance: Funding for machinery, commercial equipment and other productive assets used by businesses.
These services show the range of financing options NBFCs provide to different borrowers. Among them, loans form a major part of their offerings, making it useful to understand what an NBFC loan is.
What Is an NBFC Loan?
An NBFC loan is a credit provided by a Non-Banking Financial Company (NBFC) to individuals or businesses. These loans help meet various financing needs, from personal expenses to business expansion. NBFCs also serve borrowers who may face challenges of accessing conventional bank credit.
Common types of NBFC loans include personal loans, business loans, gold loans, loans against property and vehicle loans. However, eligibility, interest rates, and repayment terms may vary by lender and loan type.
Can NBFCs Issue Credit Cards?
Yes, NBFCs can issue credit cards only with prior RBI approval and subject to applicable conditions. The RBI framework requires NBFCs seeking permission to undertake credit card business to have a minimum Net Owned Fund (NOF) of ₹100 crore.
While NBFCs and banks can both provide loans and credit cards, they differ in their permitted activities, deposit-taking rules, and regulatory requirements.
NBFC vs Bank: What is the Difference?
| Basis of difference | Banks | NBFCs |
| Deposit acceptance | Banks offer demand deposits through savings and current accounts, alongside fixed and recurring deposits | NBFCs cannot accept demand deposits. Only specifically authorized NBFCs can accept eligible public deposits, subject to RBI conditions |
| Payment and settlement systems | Banks participate in the payment and settlement system and can issue cheques drawn on themselves | NBFCs do not form part of the payment and settlement system in the same capacity and cannot issue cheques drawn on themselves |
| Deposit insurance | Deposits held with DICGC-insured banks are protected up to ₹5 lakh per depositor, per bank, including principal and interest | Public deposits accepted by NBFCs are not covered by DICGC deposit insurance |
| Regulatory framework | Banks operate under the Banking Regulation Act, 1949, and applicable RBI regulations, including bank-specific prudential requirements | NBFCs operate under the RBI Act, 1934, and applicable RBI directions, including the Scale-Based Regulation framework. Requirements vary by category and regulatory layer |
| Priority Sector Lending (PSL) | Banks must meet prescribed priority sector lending targets for eligible sectors such as agriculture and MSMEs | NBFCs generally do not face the same broad PSL targets. However, eligible bank lending to NBFCs for onward lending to specified priority sectors may qualify towards a bank’s PSL targets, subject to RBI conditions |
Conclusion
A well-functioning financial system needs more than institutions that hold deposits and extend conventional loans. It also needs lenders that understand different borrower profiles, sector-specific requirements, and gaps in credit access.
NBFCs help bridge these gaps by connecting financing needs with available capital across the economy. Their contribution ultimately makes the financial system more responsive to the diverse needs of individuals and businesses.
