If you have ever applied for a personal loan, vehicle loan or other financial product, you may have come across the term NBFC. But what is an NBFC?

What are NBFCs?

NBFC stands for Non-Banking Financial Company. An NBFC is a financial company that provides services such as loans, financing and investments, but does not operate as a bank or hold a banking licence. In India, NBFCs are regulated by the Reserve Bank of India (RBI) under the applicable regulatory framework.

NBFCs can offer many services that people commonly associate with banks, including personal loans, vehicle finance, business finance and other forms of credit. However, an NBFC and a bank are not the same. For example, NBFCs cannot accept demand deposits and cannot issue cheques drawn on themselves.

In this guide, we explain the NBFC meaning, how NBFCs work in India, the different types of NBFCs, their services, how they differ from banks and what borrowers should know before dealing with one.

Types of NBFCs in India

NBFCs in India are not all the same. They differ in terms of the services they provide, their size, the risks associated with their activities and the level of regulatory oversight they require.

The Reserve Bank of India (RBI) uses a Scale Based Regulation (SBR) framework to classify NBFCs into four regulatory layers: Base Layer, Middle Layer, Upper Layer and Top Layer. The layer an NBFC falls into depends on factors such as its size, activities and perceived risk. The framework is designed so that larger or more systemically important NBFCs are subject to greater regulatory requirements.

1. NBFC Base Layer

The Base Layer generally includes smaller non-deposit-taking NBFCs with assets below ₹1,000 crore. It also includes certain specialised entities such as NBFC-P2P (Peer-to-Peer Lending Platforms) and NBFC-AA (Account Aggregators). NBFCs that do not use public funds and do not have customer interfaces can also fall within this layer.

2. NBFC Middle Layer

The Middle Layer includes all deposit-taking NBFCs, as well as non-deposit-taking NBFCs with assets of ₹1,000 crore or more. Certain specialised entities, including Housing Finance Companies (HFCs), Infrastructure Finance Companies (NBFC-IFCs), Core Investment Companies (CICs) and Infrastructure Debt Fund-NBFCs, are also placed in this layer or, where applicable, the Upper Layer.

3. NBFC Upper Layer

The Upper Layer consists of NBFCs identified by the RBI as requiring enhanced regulatory oversight based on their size, risk profile and other prescribed parameters. The RBI also states that the top ten eligible NBFCs by asset size are placed in the Upper Layer, irrespective of other factors.

4. NBFC Top Layer

The Top Layer is intended to remain empty under normal circumstances. It can be used if the RBI determines that a particular NBFC in the Upper Layer poses a substantial increase in potential systemic risk. Such an NBFC can then be moved into the Top Layer and subjected to additional regulatory requirements.

Activity-Based Types of NBFCs

Apart from the four regulatory layers, the RBI also recognises NBFCs based on the nature of their activities. Some examples include:

• NBFC-ICC (Investment and Credit Company): Companies primarily engaged in investment and credit activities.

• NBFC-MFI (Micro Finance Institution): NBFCs focused on providing microfinance loans to eligible borrowers.

• NBFC-Factor: NBFCs engaged in factoring activities.

• NBFC-P2P: Platforms that facilitate peer-to-peer lending.

• NBFC-AA (Account Aggregator): Entities that facilitate the secure sharing of financial information between financial institutions and customers with consent.

• Infrastructure Finance Company (NBFC-IFC): NBFCs that primarily finance infrastructure projects.

• Core Investment Company (CIC): Companies whose principal activity involves holding investments in group companies, subject to the applicable RBI framework.

• Housing Finance Company (HFC): Companies primarily engaged in housing finance and subject to the regulatory framework applicable to HFCs.

Importantly, these activity-based categories do not replace the four-layer SBR structure. Depending on the category and applicable criteria, an NBFC can fall within different regulatory layers.

What Services Do NBFCs Provide?

NBFCs offer a wide range of financial services, including:

• Personal loans

• Home loans

• Vehicle loans

• Gold loans

• Microfinance

• Leasing and hire-purchase services

• Credit card services

• Insurance services

• Investment and asset management services

Regulation of NBFCs

NBFCs are regulated by the Reserve Bank of India (RBI), the central bank of India. The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure that they adhere to the established norms and regulations.

Role of NBFCs in the Financial Market

NBFCs play a crucial role in the financial market by providing credit and other financial services to people who are unable to access traditional banking services. They also provide alternative investment opportunities to investors, particularly in rural and semi-urban areas where banks may not have a strong presence.

Benefits of NBFCs

• Offer a range of financial services to people who are unable to access traditional banking services

• Provide alternative investment opportunities to investors

• Offer quick and easy loan disbursal

• Offer flexible repayment options

• Provide insurance services to individuals and businesses

What are the differences between NBFCs and banks?

While NBFCs and banks offer several similar financial services, they operate under different regulatory frameworks and have some important differences.

The table below highlights the key differences between an NBFC and a bank, including their licences, deposits, lending activities and payment services.