Non-Banking Financial Companies (NBFCs) are a vital part of India's financial ecosystem and play an important role in providing various banking services without holding a banking licence. NBFCs also provide other financial services and are registered under the Companies Act of 1956.
The NBFC sector’s total assets have been estimated at ₹61.09 Lakh Crore based on the Reserve Bank of India (RBI) data for the financial year 2025. This indicates the importance of understanding the functioning and role of NBFCs in India. Read this blog to know more.
What are the Functions of an NBFC?
The various NBFC functions that serve to enhance the overall bank functions and the financial inclusion objectives of India are as follows:
Meeting Credit Needs
NBFCs meet credit needs in various forms, such as personal loans, business loans and vehicle loans to individuals and businesses.
Addressing the Needs of Underserved Sectors
NBFCs address the needs of low-income individuals and provide access to formal financial services to the large segment of underserved markets.
Fulfilling Funding Requirements
They play an important role in the economic growth of the country by meeting funding requirements necessary for various investment and infrastructure projects.
Offering Diverse Financial Products and Other Financial Services
NBFCs in India have a broad and rapidly expanding role, catering to the increasing demand for credit and financial services. They provide a range of financial products and services, including loans and other credit facilities, benefiting the general public.
What are the Different Types of NBFCs?
The different types of NBFCs in India are classified based on their activity and the sectors they serve:
Asset Finance Company
An asset finance company provides funds for procuring assets such as tractors, industrial machines, and automobiles to companies involved in manufacturing or other economic activities.
Investment Company
These companies solely deal in investments by investing funds on behalf of their clients. The clients are expected to share the total profit or loss with the investment company.
Infrastructure Finance Company (IFC)
An infrastructure financing company provides the necessary funding for the infrastructure required to develop products and services of energy, transportation, or communication.
Loan Company
A loan company provides customers access to loans in the form of various financial products, such as personal loans, business loans and working capital loans.
Housing Finance Company
A housing finance company is a type of NBFC whose primary business is providing housing finance to individuals as well as to corporations. HFCs are regulated by the Reserve Bank of India (RBI).
Core Investment Company (CIC)
A Core Investment Company (CIC) is a form of NBFC that basically invests in equity securities, preference shares, debt, loans or group businesses. Its income often comes from interest, dividends, and gains on those investments.
A Systemically Important Core Investment Company (CIC-ND-SI) means a CIC with an asset size of ₹100 Crore or more, either alone or together with other CICs in the group. Such enterprises are required to comply with more regulatory standards as defined by the Reserve Bank of India (RBI).
Micro-Finance Company
Micro-finance companies typically provide small amounts of financial services, in the form of credit, to individuals and families who have no access to traditional banking services.
Each of the different types of NBFCs serves a distinct segment of the economy, ensuring a wide range of financial services reach individuals and businesses across India.
What is the Difference Between NBFCs and Banks?
The table below covers what is the difference between an NBFC and a bank.
|
Parameters |
NBFCs |
Banks |
|
Definition |
It is a company that provides financial services to the public and does not have a banking licence. |
It is a government-authorised company that provides banking services to the public. |
|
Regulatory Act |
Incorporated under the Companies Act of 1956. |
Incorporated under the Banking Regulations Act of 1949. |
|
Functions |
Provides lending and investment activities. |
Provides a wide range of banking services. |
|
Deposit Acceptance |
Most NBFCs do not accept public deposits; only deposit-taking NBFCs (NBFC-D) can, subject to RBI approval |
Accepts deposits from the general public. |
|
Risk Assessment |
Relatively more flexible underwriting. |
Strict risk assessment. |
What is the Role and Scope of Non-Banking Financial Companies?
Digital lending has become one of the fastest-developing financial services across India. Individuals and small-to-medium enterprises are looking for quick loans via easy, distinctively digital loan application processes, which has led to greater opportunities for NBFCs.
Compared to banks, NBFCs have the ability to provide better and quicker service to small and medium-sized enterprises. New-age NBFCs offer more flexible loan product features such as flexible payment structures, competitive interest rates, and affordable financing solutions. By utilising digital channels, NBFCs can expand access to formal credit for individuals and businesses that may have limited access to traditional banking services.
What are the RBI Guidelines for NBFC Functioning?
NBFCs must abide by the rules and regulations established by the Reserve Bank of India:
- Net Owned Fund: NBFCs must maintain a minimum net owned fund to be able to absorb financial shocks.
- Capital Adequacy Ratio: NBFCs must maintain a capital adequacy ratio to ensure that they have sufficient funds to cover unexpected losses.
- Liquidity Requirements: NBFCs must hold sufficient government securities and cash in order to meet their short-term obligations.
- Concentration Risk: NBFCs cannot be exposed to a significant group of borrowers, as their exposure to risk can affect overall stability.
Read Also: Why Choose NBFCs Over Banks for Business Loans in India?
To Conclude
NBFCs are an integral part of the financial ecosystem in India. This is because it provides loans and financial services to both individuals and businesses that may have limited access to traditional banking services. As digital lending increases, more individuals gain access to financial services through financial inclusion.
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FAQs
What is the meaning of an NBFC, and how does it work?
NBFCs are non-banking financial institutions that provide loans, advances, and other financial services to individuals and businesses under the supervision of the RBI.
Are NBFCs safe to borrow from?
Yes, it is safe to borrow from an NBFC. This is because it is regulated by the Reserve Bank of India, and therefore, it must comply with the RBI regulations regarding capital adequacy, liquidity, and risk management.
Can an NBFC offer fully digital loan application and approval processes?
Yes, many NBFCs utilise digital platforms to facilitate online applications, verification and loan disbursals.
What types of collateral are commonly accepted by NBFCs?
Depending on the loan type, NBFCs may accept property, vehicles, gold, equipment or other eligible assets as collateral.
What factors should borrowers consider before choosing an NBFC?
Borrowers should compare eligibility criteria, interest rates, repayment terms, fees, and customer service standards.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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