Non-Banking Financial Company (NBFC)

NBFC stands for Non-Banking Financial

Corporations. As per Section 451(c) of the RBI Act, a
Non-Banking Company that carries the business of
a financial institution is called a Non-Banking
Financial Corporation or NBFC.

A Non-Banking Financial Corporation (NBFC) is a

company that is registered under the Companies
Act, and is involved in the lending business, hire-
purchase, leasing, insurance business, receiving
deposits in some cases, chit funds, stocks, and
shares acquisition, etc.

As per law, 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 issued by Government or local
authority or other marketable securities of
a like nature, leasing, hire-purchase,
insurance business, chit business but does
not include any institution whose principal
business is that of agriculture activity,
industrial activity, purchase or sale of any
goods (other than securities) or providing
any services and
sale/purchase/construction of immovable
property.

In lay man language Non-Banking Financial

Companies (NBFCs) are the financial institutions
that offer the banking services but does not comply
with the legal definition of a bank, i.e. it does not
hold a bank license.

The functions of the NBFCs are managed by both

the Ministry of Corporate Affairs and the Reserve
Bank of India.
Examples of NBFC in India

Some of the examples of Non-Banking Financial

Company in India that offer investment options,
loans, fund transfer services, leasing, and hire-
purchase options are Bajaj Finserv, Power Finance
Corporation Limited, Mahindra & Mahindra
Financial Service, Shriram Transport Finance
Company, Muthoot Finance Ltd, etc.

NBFC vs Traditional Banks

The primary difference between NBFC and bank lies

in their functionalities and the regulations they fall
under. Unlike banks, NBFCs cannot accept demand
deposits or issue checks. The banking word
indicates their role in supplementing banking
services while operating under different rules.

Despite the difference between banking and non

banking financial institutions, both are pivotal for
financial stability and growth. The overlap of
banking and non banking financial institutions
ensures a more comprehensive reach of financial
services.

Different Types of NBFCs

The NBFCs can be categorised under two broad

heads:

 On the nature of their activity

 On the basis of deposits

The different types of Non-Banking Financial

Corporations or NBFCs are as follows:

On the nature of their activity:

1. Asset Finance Company

2. Loan Company
3. Mortgage Guarantee Company

4. Investment Company

5. Core Investment Company

6. Infrastructure Finance Company

7. Micro Finance Company

8. Housing Finance Company

On the basis of deposits:

1. Deposit accepting Non-Banking Financial

Corporations

2. Non-deposit accepting Non-Banking Financial

Corporations

Asset Finance Company (AFC): An AFC is an

NBFC whose principal business is to finance
physical assets that correlate to productive or
economic activity, such as automobiles, tractors,
generator sets, earth-moving and material handling
equipment, industrial machinery, etc.

Investment Company (IC): ICs are entities that

deal primarily with the acquisition of securities.
Their business activity mainly involves the holding
and managing of investment in other companies.
Loan Company (LC): LCs are NBFCs that provide
finance — whether by making loans or advances or
otherwise — for any activity other than its own
(excluding equipment leasing and hire-purchase
activities).
Infrastructure Finance Company (IFC): IFCs
are a category of NBFCs that provide infrastructure
loans, which are non-repayable over a period of
time. These companies play a crucial role in
developing the nation’s infrastructure.
Systemically Important Core Investment
Company : These are NBFCs involved in the
business of acquisition of shares and securities,
which satisfies a certain set of conditions put forth
by the RBI. They are called systemically important
as their failure or disruption can cause significant
disruption to the overall financial system.
Infrastructure Debt Fund Non-Banking
Financial Company (IDF-NBFC): IDF-NBFCs
are a category of NBFCs that are formed to facilitate
the flow of long term debt into infrastructure
projects. They raise resources through issue of
Rupee or Dollar denominated bonds of minimum
five-year maturity.
Micro Finance Institution (NBFC-MFI): These
are financial institutions that provide small-scale
financial services in the form of credit, savings, and
insurance to the low-income segments of the
society. They play a significant role in promoting
financial inclusion.
Non-Banking Financial Company – Factors
(NBFC-Factors): NBFC-Factors primarily engage
in the factoring business. Factoring is a financial
transaction where a company sells its receivables
(invoices) to a third party (called a factor) at a
discount. Factors help businesses by providing them
immediate liquidity based on their invoices or
receivables.

Requirements to be fulfilled in order to

obtain NBFC license:

The fundamental requirements which are to be

fulfilled in order to apply for NBFC license are as
follows:

 The company has to be registered under the

Companies Act. That is the company should
either be a Limited Company or a Private
Limited Company (PLC).
  The minimum Net Owned Fund of the company
must be Rs.2 crore.

Financial Organisations which do not need a

NBFC license

Certain entities are involved in the business of

financial activities but do not require obtaining a
registration with the Reserve Bank of India (RBI).
As these entities are regulated by other financial
sector regulators, they do not need either the NBFC
registration or the NBFC regulations of RBI. These
entities are as follows:

 Insurance Companies which are regulated by

Insurance Regulatory and Development
Authority of India (IRDA)
 Housing Finance Companies which are
regulated by the National Housing Bank
  Stock Broking Companies which are regulated
by Securities and Exchange Board of India
 Merchant Banking Companies which are
regulated by Securities and Exchange Board of
India
 Mutual Funds which are regulated by Securities
and Exchange Board of India
 Venture Capital Companies which are regulated
by Securities and Exchange Board of India
 Companies that run Collective Investment
Schemes which are regulated by Securities and
Exchange Board of India
 Chit Fund Companies which are regulated by the
respective State Governments
 Nidhi Companies which are regulated by the
Ministry of Corporate Affairs (MCA)

Role of NBFCs in Financial System

Nonbank financial companies (NBFCs) in India play
a crucial role in the financial sector. They provide a
wide range of financial services and contribute to
the overall economy in the following ways:

 Financial Inclusion: NBFCs help promote

financial inclusion by extending credit and
financial services to underserved population
segments.
 Credit Access: NBFCs complement the banking
sector by providing access to credit for
individuals and businesses who may not meet
the stringent requirements of traditional banks.
 Sector-Specific Financing: It is specialize in
catering to specific sectors such as vehicle
financing and housing finance.
 Rural and Agriculture Development: NBFCs play
a significant role in supporting rural and
agricultural development.
 Employment Generation: NBFCs contribute to
job creation by facilitating financing for small
and medium enterprises (SMEs) and supporting
entrepreneurship.
 Innovation and Flexibility: NBFCs often
demonstrate greater flexibility and innovation in
their products and services, adapting to evolving
market demands and customer needs.
 Financial Stability: It contributes to the
country's overall financial stability by providing
an alternative source of credit.
 Market Development: NBFCs enhance the
overall depth and breadth of the financial
market by offering a diverse range of financial
products, promoting competition, and
encouraging innovation in the financial sector.
Functions of NBFCs

NBFCs play a significant role in diversifying the

financial landscape by offering a wide range of
services that complement traditional banking
services. Here are the functions of Non-Banking
Financial Companies (NBFCs):

Financial Intermediation: NBFCs act as

intermediaries between borrowers and lenders,
providing various financial services without being
full-fledged banks.

Credit Provision: They offer loans and credit

facilities to individuals, businesses, and sectors that
might have limited access to traditional banking
services.
Investment Activities: NBFCs invest in various
financial assets such as stocks, bonds, mutual funds,
and other securities.

Leasing and Hire-Purchase: They offer services

like leasing and hire-purchase, allowing individuals
and businesses to acquire assets without the
immediate need for large upfront payments.

Factoring and Bill Discounting: NBFCs provide

factoring services where they purchase accounts
receivable from businesses and provide immediate
funds, helping with cash flow management.

Insurance Services: Some NBFCs offer

insurance-related services, especially in rural areas,
to provide coverage to those who are underserved by
traditional insurance companies.
Foreign Exchange Services: Certain NBFCs
offer forex services for individuals and businesses
needing currency exchange and remittance facilities.

Microfinance: NBFCs provide microfinance

services to financially underserved sections of
society, particularly in rural areas, by offering small
loans and financial products.

Advisory Services: Some NBFCs offer financial

advisory services, helping clients with investment
decisions, financial planning, and portfolio
management.

Mortgage Services: They provide mortgage loans,

allowing individuals to buy or improve real estate
properties.

Vehicle Finance: NBFCs offer loans for

purchasing vehicles, both for personal use and
commercial purposes.
Retail Financing: They provide financing for
consumer goods, electronics, and other retail
products through partnerships.

Advantages of NBFC:

 Can provide loans and credit facilities

 Can trade in money market instruments
 Can do wealth management such as managing
portfolios of stocks and shares
 Can underwrite stock and shares and other
obligations
 NBFCs are the last resorts of borrowing; NBFCs
are there where banks are not there
 NBFCs are the largest propellants of ushering
finance into the country
 Agility is very important for NBFCs as it sets the
banks apart. Banks function slower as compared
to the NBFCs
 The use of modern methods by NBFCs has
overcome key challenges that had overwhelmed
conventional lending. NBFCS have made great
use of technological advancements like the use
of mobile phones and the internet which has
helped in making information easily accessible
anytime anywhere. It has reduced the demand
and reliance on bank branches
 Technology is not only at the head of banking
and financial services, but also an increasingly
digitized India has underpinned the rise of
NBFCs. Digitalization has given NBFCs the
ability to present multiple choices and reach the
larger audience at quicker pace. This indirectly
gives rise to larger NBFCs
 Combination of partnership and database helps
in increasing penetration of financial inclusion.
To reach large numbers of customers
 successfully, and minimize risks, NBFCs have
forged partnerships including the government to
use their database and identify customer
worthiness. Thus lending has been productive

Another major advantage of NBFCs is the ground

level understanding of their customers profile and
the need for their credit, which gives them an edge,
as their ability to customize their products according
to client needs

Disadvantages of NBFC:

 NBFCs cannot accept demand deposits as it falls

within the realm of activity of commercial banks
 An NBFC is not a part of the payment and
settlement system and as such an NBFC cannot
issue cheques drawn on itself
  Deposit insurance facility is not available for
NBFC depositors unlike in case of banks
 All NBFCs cannot accept deposits; only some
can. Only those NBFCs holding a valid
Certificate of Registration with authorisation to
accept Public Deposits can accept/hold public
deposits
 The regulatory mechanism for NBFCs is
stringent

Disadvantages of NBFC:

 NBFCs cannot accept demand deposits as it falls

within the realm of activity of commercial banks
 An NBFC is not a part of the payment and
settlement system and as such an NBFC cannot
issue cheques drawn on itself
 Deposit insurance facility is not available for
NBFC depositors unlike in case of banks
 All NBFCs cannot accept deposits; only some
can. Only those NBFCs holding a valid
Certificate of Registration with authorisation to
accept Public Deposits can accept/hold public
deposits
 The regulatory mechanism for NBFCs is
stringent