Gajendra Singh Godara
Sep 24, 2025
15
mins read
Under Indian law and RBI regulations, an NBFC is formally defined by Section 45-I(c) of the RBI Act. RBI’s FAQ states:
“A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act… engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/ securities… leasing, hire-purchase, etc., as their principal business”.
The definition excludes companies whose principal business is agriculture, industry, trading of goods (other than financial securities), or providing services, or construction/sale of real estate. Notably, a company whose principal business is accepting deposits under any scheme is also a NBFC (called a Residuary Non-Banking Company).
Importantly, as RBI notes, NBFCs cannot accept demand deposits (current/savings accounts) or issue cheques like banks, and their deposits are not insured by the DICGC. These legal definitions and restrictions come from the RBI Act (1934) and RBI’s Master Directions.
Table of content
Full Form: NBFC stands for Non-Banking Financial Company. This highlights that it is a financial institution not classified as a bank.
Meaning: NBFCs perform financial intermediation similar to banks – they can lend money, buy/sell financial securities, lease equipment, factor receivables, and more. For example, NBFCs may “provide loans and credit facilities, buy bonds or shares, finance assets, provide insurance, or engage in chit transactions”. Crucially, NBFCs do not hold a banking license and thus follow different rules.
Non-Banking Financial Companies (NBFCs) in India are classified based on the types of liabilities, size, and nature of their activities:
By Liability Type:
a. Deposit-accepting NBFCs: Those which accept public deposits.
b. Non-Deposit accepting NBFCs: Those which do not accept public deposits.
By Size (Within Non-Deposit taking NBFCs):
a. Systemically Important NBFCs (NBFC-ND-SI): Non-deposit taking NBFCs with an asset size of ₹500 crore or more, as per the latest audited balance sheet.
b. Other Non-Deposit holding NBFCs (NBFC-ND): Those with assets less than ₹500 crore.
By Activity:
a. NBFCs are also categorized based on the kind of financial services they provide, such as asset financing, loan/investment companies, infrastructure finance companies, microfinance institutions, and more.
Systemically important NBFCs are those whose activities can significantly impact the financial stability of the economy due to their large asset base. An NBFC is classified as systemically important if its asset size is ₹500 crore or above, based on the latest audited balance sheet. These NBFCs are subject to stricter regulatory oversight by the Reserve Bank of India to ensure their stability and prevent systemic risks.
Unlike banks, NBFCs have a different business and regulatory structure. Key differences include:
Deposits: Banks can accept demand deposits (savings/current accounts); NBFCs cannot. An NBFC may only accept term (time) deposits if it has RBI permission. For example, NBFCs are barred from taking deposits for less than 12 months or more than 60 months.
Payment System: Banks are integrated into India’s payment and settlement systems – issuing cheques, providing NEFT/RTGS, etc. NBFCs are not part of this system and cannot issue cheques.
Deposit Insurance: Deposits in banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). NBFC depositors do not have such insurance. If a bank fails, depositors up to ₹5 lakh are covered; NBFC depositors must rely on the company’s own safety.
Regulation & Prudential Norms: Banks face stringent norms (CRR/SLR requirements, Basel III capital ratios, periodic audits). NBFCs historically had lighter regulation. For instance, NBFCs were not required to maintain CRR/SLR or offer subsidized interest rates, and the RBI did not give them automatic RBI liquidity support.
Access to RBI Facilities: Banks have direct access to RBI’s Liquidity Adjustment Facility (repo/overnight rates), NBFCs generally do not get direct repo access (except some systemically important NBFCs under special arrangements).
Credit Services: Banks focus on broad public banking services (savings, credit, forex). NBFCs often specialize (e.g. vehicle finance, housing, gold loans, microfinance). This specialization allows NBFCs to lend to niche segments (e.g. rural borrowers, MSMEs) that banks may find hard to serve.
NBFCs engage in a diverse set of financial activities (many similar to banks). Key functions and services include:
Loans and Advances: Providing consumer loans (personal, education, gold loans, SME loans, etc.) and business loans (working capital, trade finance).
Asset/Vehicle Financing: Extending loans for physical assets like automobiles, trucks, tractors, machinery (often through hire-purchase or leasing).
Infrastructure and Housing Finance: Specialized NBFCs (e.g. Infrastructure Finance Cos, HFCs) finance large projects and affordable housing. For instance, an NBFC-Infrastructure Finance Company must invest ≥75% in infrastructure lending.
Investment in Securities: Buying/selling bonds, equities, mutual funds or offering brokerage/advisory services (some NBFCs function like investment companies).
Factoring and Commercial Finance: Providing invoice financing (factoring) or making wholesale advances to businesses.
Insurance and Pension Services: Some NBFC groups include insurance companies or pension funds (regulated by IRDA), expanding NBFC reach into risk-cover products.
Microfinance (NBFC-MFI): Collateral-free loans to low-income households. NBFC-MFIs deploy ≥75% of assets to such micro-loans.
Chit Funds and Other Niche Finance: Promoting chit schemes, supplying working capital in local markets, and even operating credit registries or fintech lending platforms.
NBFCs are categorized based on whether they can take public deposits:
Deposit-taking NBFCs (NBFC-D): With RBI permission, these NBFCs can accept fixed deposits from the public (subject to norms). They must follow prudential rules, such as maintaining 15% liquid assets of deposits, and can only take term deposits (12–60 months).
Non-Deposit NBFCs (NBFC-ND): These do not take public deposits; instead, they fund operations via equity, bonds, commercial paper, inter-corporate loans or bank lines. Most NBFCs fall in this category.
Systemic Importance: RBI designates NBFCs with large balance sheets as systemically important. Under current norms, an NBFC (deposit or non-deposit) with assets ≥₹500 crore (as per latest rules) is NBFC-ND-SI. Such NBFCs face stricter oversight (higher capital requirements, reporting frequency) due to their potential risk to financial stability.
Examples of Deposit NBFCs: Certain gold loan firms and housing finance companies (HFCs) hold RBI licenses to take deposits. Nidhi companies (collecting savings schemes) are also NBFCs by form but regulated by MCA rather than RBI.
The RBI is the principal regulator of NBFCs, empowered by the RBI Act (Sections 45-IA, 45-IC, etc.). Key regulatory points:
Registration (Sec 45-IA): No company can operate as an NBFC without RBI registration and maintaining a minimum Net Owned Fund (NOF).
Prudential Norms: RBI prescribes capital adequacy (CRAR), asset classification, provisioning norms, exposure limits, and audit requirements for NBFCs. These were enhanced post-IL&FS defaults. Systemically important NBFCs have higher CAR requirements (e.g., NBFC-IFCs need ≥15%).
Supervision: RBI conducts off-site and on-site supervision of NBFCs. It can issue directions on lending practices, mergers, liquidations, etc.
Regulatory Framework (SBR): In Oct 2022 RBI implemented a Scale Based Regulation (SBR). Under SBR, NBFCs are classified into four layers:
Base Layer (NBFC-BL, smallest),
Middle Layer (ML),
Upper Layer (UL) and
Top Layer (TL – empty unless systemic risks rise).
Regulation intensity increases up the layers. For instance, NBFC-UL (very large NBFCs) will be subject to near-bank-like oversight.
Other Regulators: Some NBFC-like entities fall under other authorities to avoid dual oversight. For example, mutual fund companies, alternative investment funds (AIFs), stock brokers are under SEBI; insurance companies (even if NBFCs) are under IRDAI; chit funds are state-regulated, and Nidhi companies are overseen by the Ministry of Corporate Affairs. RBI explicitly exempts these from certain RBI norms to avoid overlapping regulation.
To understand RBI’s dual role in credit regulation. Check our blog: RBI’s Monetary Policy Committee (MPC), Composition & Objectives - PadhAI
Recent Reforms: RBI and the government have tightened rules post-crisis. Examples: merging the National Housing Bank (NHB) with RBI in 2019 to streamline housing finance regulation, bringing all HFCs under RBI. Budget 2021/22 increased oversight of corporate governance in NBFCs, and RBI has introduced prompt corrective action (PCA) for weak NBFCs. RBI also periodically adjusts risk weights and borrower exposure norms to curb aggressive lending.
Regulator | NBFC Roles | Key Rules/Acts |
RBI | Main regulator: registration, supervision. | RBI Act 1934 (Sec 45-IA/IC), Master Directions for NBFCs; SBR 2022; NBFC norms (CRR/ALM/PCA). |
SEBI | Oversees NBFCs offering securities/ funds. | SEBI (AIF) Regulations, Mutual Fund Regulations. |
IRDAI | Regulates NBFCs that are insurers/HFCs. | IRDAI Act (for insurance companies), with RBI-exempt HFCs. |
MCA/Govt | Regulates Nidhis, NBFC-NDC, companies law. | Companies Act 2013 (Section 620A for Nidhis), RBI exemptions. |
Others | (State Govts) chit funds, exchange boards. | Chit Fund Act 1982; Stock Exchange regulation (SEBI). |
NBFCs significantly bolster India’s credit system and economy:
Financial Inclusion: By focusing on niche segments (rural borrowers, low-income groups, small entrepreneurs), NBFCs extend financial services beyond what commercial banks cover. They have been crucial in last-mile lending – for example, financing rural micro-enterprises via NBFC-MFIs.
Complementing Banks: NBFCs ease the credit burden on banks. They offer loans to individuals or businesses who might not meet banks’ stringent collateral or credit score criteria. This “wholesale” of retail loans increases overall credit penetration.
Economic Growth: Sector-focused NBFCs (like housing finance companies) drive investment in priority areas. For instance, many HFCs and infrastructure NBFCs funded large housing and infrastructure projects. NBFCs have provided a large share of credit to housing and manufacturing in Tier-II/III cities.
Innovation and Competition: NBFCs often operate with lower costs and agile processes, thanks to simpler structures and tech adoption. This competition spurs banks to innovate and can lower borrowing costs (NBFCs often offer quicker loans with digital onboarding).
Credit to MSMEs: Several NBFCs specialize in MSME lending, a sector that is underserved by banks. By providing working capital and equipment loans, NBFCs support small businesses and entrepreneurship.
Size of Sector: NBFCs’ loan portfolio has grown rapidly. As of mid-2025, NBFCs’ outstanding loans were ~₹15.7 lakh crore, a testament to their scale. While still smaller than banking assets, they are a critical component of India’s financial sector.
Shadow banking refers to financial intermediation outside the traditional banking system. It includes institutions and activities that create bank-like credit but are not regulated as banks. Key points:
Definition: “Shadow banking” involves credit intermediation by non-bank entities – such as NBFCs, hedge funds, finance companies, etc. It’s also known as non-bank financial intermediation or market-based finance. For example, NBFCs acting as intermediaries between savers and borrowers are classic shadow banks.
Role of NBFCs: Many NBFCs fit the shadow banking profile because they borrow (from markets or deposits) and lend without the same oversight as banks. They channel funds from investors to borrowers in areas like real estate, infrastructure, and microfinance.
Benefits vs. Risks: Shadow banking (via NBFCs) can boost liquidity and credit access. It “generates liquidity in the system” and deepens the financial market. However, the 2008 global crisis highlighted how shadow banking can transmit systemic risk.
Regulatory Gaps
Non bank financial institutions (NBFIs) have historically operated under lighter norms compared to banks.
For years, NBFCs did not maintain CRR/SLR and lacked access to a lender-of-last-resort facility from the Reserve Bank, exposing vulnerabilities in the financial system.
Such regulatory arbitrage allowed hidden risks to build up within the financial services industry.
Vulnerability to Economic Shocks
Heavy reliance on wholesale funding makes NBFCs highly sensitive to financial shocks and downturns.
The IL&FS crisis demonstrated how one large NBFC default created contagion across banks, mutual funds, and institutional investors, shaking financial stability.
Liquidity & Funding Risks
NBFCs often borrow short-term (via commercial papers, bank credit) but lend long-term (housing loans, personal loans).
This asset-liability mismatch means they may need to liquidate existing assets during crises.
In FY25, NBFCs accounted for 43% of India’s record $61B in external commercial borrowings, exposing them to foreign currencies risk, global interest rate shocks, and cross border investments volatility.
Asset Quality Risks
Many NBFCs serve higher-risk borrowers such as small businesses or rural households through micro finance institutions.
Rising loan defaults in sectors like real estate, gold loans, or agriculture can erode their net asset value and overall solvency.
Concentration in one targeted sector (e.g., housing finance) magnifies economic risks.
Complex Corporate Structures
NBFCs often operate via group companies with multiple subsidiaries and layered holdings.
Weak oversight makes it difficult for government regulators and auditors to track intra-group exposures or capital investment flows.
Problems in one arm (e.g., real estate subsidiary or overseas branch) can destabilize the entire NBFC conglomerate.
Shadow Banking Concerns
NBFCs, being nonbank financial institutions, do not accept demand deposits, unlike banks.
However, they increasingly provide various banking services such as personal loans, hire purchase, and housing finance.
This blurred line between banks and NBFCs makes them shadow players in the multi faceted financial system, sometimes fueling a credit bubble.
Governance & Operational Risks
Many NBFCs are family-owned, closely held financial entities, with weak checks on related-party lending.
Past frauds highlight risks of mismanagement, lack of focused NBFI supervision, and poor compliance with the Banking Regulation Act.
Absence of deposit insurance (unlike banks) means small investors and prospective homeowners face heightened risks.
Accountability & Public Interest
With growing exposure to retail investors, pension funds, and small depositors, NBFC failures put public money at stake.
Ensuring fair practices (e.g., preventing usurious interest on personal loans or unfair charges on transactions service) is a major challenge.
FAQ's
Q.What is the full form of NBFC?
A. NBFC stands for Non-Banking Financial Company.
Q.What is the meaning of non banking finance companies?
A. NBFCs are firms that offer banking-like financial services (loans, credit, investment) but do not have a bank license. They cannot accept demand deposits.
Q.Difference between NBFC and bank?
A. Banks can take demand deposits (current/savings) and issue cheques; NBFCs generally cannot. Banks have stricter regulation (CRR/SLR, deposit insurance) while NBFCs have lighter norms and no deposit insurance.
Q.Which body regulates NBFCs in India?
A. The Reserve Bank of India (RBI) is the primary regulator of NBFCs (under the RBI Act, 1934). (Other regulators like SEBI or IRDAI oversee specific activities, but RBI covers most NBFC supervision.)
Q.Is NBFC part of shadow banking?
A. Yes. NBFCs engage in bank-like lending outside formal banking, so they are a core part of India’s shadow banking sector. Their less-regulated nature means they exhibit typical shadow-bank risks.
Conclusion
Non-Banking Financial Companies (NBFCs) are a key pillar of India’s credit system. By definition they are “companies engaged in loans, advances and financial activities” but without a banking license. This gives them flexibility to innovate and reach segments that banks often miss, advancing inclusion and growth.
Regulators have responded by strengthening NBFC norms: RBI registration requirements, higher capital/NOF floors, and a new scale-based regulatory framework. These measures aim to curb risks that shadow banking poses to stability. Understanding NBFCs—how they operate, are regulated, and how they link to shadow banking—is essential. In sum, NBFCs play a vital credit intermediation role, but their growth must be balanced with robust oversight to safeguard India’s financial stability
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