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Decoded: What are Non-Banking Financial Companies (NBFCs)?

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Decoded: What are Non-Banking Financial Companies (NBFCs)?


Non-Banking Financial Companies (NBFCs) play a crucial role in India’s financial ecosystem, offering various financial services similar to traditional banks but with certain limitations. In 2024, NBFCs continue to thrive, attracting investors seeking diverse investment avenues. Before diving into this lucrative sector, it’s imperative to understand the intricacies, types, pros, cons, and key players dominating the market.

What are NBFCs?

An NBFC (Non-Banking Financial Company) is a type of financial institution that offers services similar to banks but without being officially recognized as a bank. These companies provide various financial services such as loans, insurance, and investment management.

NBFCs are regulated by the Reserve Bank of India (RBI) and are registered under the Companies Act, 2013 or 1956. Unlike banks, NBFCs cannot accept deposits that customers can withdraw on demand, and they are not part of the country’s payment and settlement system.

Although they provide essential services, NBFCs operate with less strict regulations compared to banks. This means they can sometimes be more flexible in lending money to individuals and small businesses. However, it also means they may pose a higher risk of fraud or financial problems, which could affect the overall banking system of the country.

What is RBI’s Definition of NBFCs?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 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. Still, it does not include any institution whose principal business is agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construction of immovable property.

What are the Types of NBFCs?

The classification of NBFCs undergoes continual adjustments in accordance with RBI directives. NBFCs are categorized by the RBI based on their deposit-taking status, operational activities, and systemic significance.

Asset Finance Company (AFC)

An AFC facilitates financing for individuals and enterprises to acquire tangible assets such as vehicles, agricultural machinery, or other equipment contributing to economic or productive endeavors. To qualify as an AFC, at least 60% of the NBFC’s business must be derived from such lending activities.

Investment Company (IC)

An IC is an NBFC that generates revenue by acquiring securities, including equity shares, debt instruments, or government securities. NBFC ICs assist both corporate entities and individual investors optimize their investment portfolios effectively. Any NBFC involved in lending activities but not meeting the criteria for classification as an AFC falls under the category of a Loan Company.

Infrastructure Finance Company (IFC)

An NBFC-IFC specializes in financing infrastructural projects crucial for national development, such as power, transportation, telecommunications, and roads. The eligibility criteria for classification as an NBFC-IFC include:

  • Investment of at least 75% of total assets in infrastructure loans
  • Minimum net owned funds of Rs 300 crore
  • Minimum credit rating of ‘A’ or equivalent
  • Credit risk adequacy ratio (CRAR) of 15%

Systemically Important Core Investment Company (CIC-ND-SI)

CIC-ND-SI engages in acquiring shares and securities within its group. Distinguished from NBFC-IC, CIC-ND-SI invests a minimum of 90% of its total assets in its group companies’ shares, with 60% allocated to equity shares of its group entities.

Additional conditions for NBFC classification as CIC-ND-SI include:

  • No active trading of investments in shares, debt, or loans in group companies, except for block sales for dilution or disinvestment purposes.
  • Avoidance of financial activities specified in Section 45I(c) and 45I(f) of the RBI Act, 1934, apart from specific permitted activities like investing in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies, or guarantees issued on behalf of group entities.
  • An asset size of ₹100 crores or more
  • Acceptance of public fund

What are the Pros of Investing in NBFCs?

  • Diversification: NBFCs offer a diversified investment portfolio beyond traditional banking.
  • Higher Returns: NBFCs often provide higher returns than banks due to their focused operations and risk appetite.
  • Flexibility: NBFCs can be more flexible than banks regarding lending criteria and customer service.
  • Sector-specific Expertise: Certain NBFCs specialize in specific sectors, allowing investors to capitalize on niche markets.
  • Growth Potential: With India’s expanding economy, NBFCs have significant growth potential, attracting investors seeking high-growth opportunities.

What are the Cons of Investing in NBFCs?

  • Regulatory Risks: NBFCs are subject to stringent regulatory oversight, which can impact their operations and profitability.
  • Asset Quality Risks: NBFCs are susceptible to asset quality deterioration, especially during economic downturns.
  • Liquidity Concerns: NBFCs rely on borrowing to fund their operations, making them vulnerable to liquidity crunches.
  • Market Volatility: NBFC stocks can be volatile, influenced by macroeconomic factors and market sentiment.
  • Competition: NBFCs face intense competition from banks, fintech startups, and other financial institutions, impacting their market share and profitability.

What is the Difference Between Banks and NBFCs?

RegulationsBanks are regulated per the RBI and the Banking Regulation Act 1949 provisions.Banks are charged with accepting payments, being part of the settlement process, and other services like issuing cheques, demand drafts, etc.
DepositsBanks are permitted to accept deposits from account holders.NBFCs are not permitted to accept deposits from the public or businesses.
Payments and settlement systemBanks have to maintain the mandatory CRR ratios and other similar ratios as per the guidelines of the RBI.NBFCs are not allowed to accept payments or be part of the settlement process in the form of issues of cheques, demand drafts, etc.
Maintenance of mandatory ratiosBanks have to maintain the mandatory CRR ratios and other similar ratios per the RBI guidelines.NBFCs are not required to maintain any similar ratios as in the case of traditional banks as there are limited regulations of RBI guidelines.
Insurance facilityThe deposits in Banks are secured up to Rs. 5,00,000 under DICGC.No such facility is available for NBFCs.

What are the Factors for Setting up an NBFC?

Setting up an NBFC requires careful consideration of various factors:

  • Capital Requirement: The minimum capital requirement the RBI sets must be met to obtain the NBFC license.
  • Regulatory Compliance: Strict adherence to RBI regulations and guidelines is necessary throughout the establishment and operation of an NBFC.
  • Business Plan: A comprehensive business plan outlining the proposed activities, target market, and growth strategy is essential for obtaining regulatory approval.
  • Infrastructure: Adequate infrastructure, including skilled manpower and technological capabilities, is crucial for the smooth functioning of an NBFC.
  • Risk Management Framework: Implementing robust risk management policies and procedures is vital to mitigate potential risks and ensure financial stability.

What are the Top NBFCs in 2024?

The Reserve Bank of India recently released a list of fifteen NBFCs figuring in the ‘upper layer’ under the scale-based regulation for these lenders for 2024.

Name of the NBFCCategory of the NBFC
LIC Housing Finance LtdDeposit-taking NBFC-ICC
Bajaj Finance LimitedDeposit-taking NBFC-ICC
Shriram Finance Limited (formerly Shriram Transport Company Limited)Deposit-taking NBFC-ICC
Tata Sons Private LimitedCore Investment Company (CIC)
L&T Finance LimitedNon-deposit taking NBFC-ICC
Piramal Capital & Housing Finance LimitedNon-deposit taking HFC
Cholamandalam Investment and Finance Company LimitedNon-deposit taking NBFC-ICC
Indiabulls Housing Finance LimitedNon-deposit taking HFC
Mahindra & Mahindra Financial Services LimitedDeposit-taking HFC
Tata Capital Financial Services LimitedNon-deposit taking NBFC-ICC
PNB Housing Finance LimitedDeposit taking HFC
HDB Financial Services LimitedNon-deposit taking NBFC-ICC
Aditya Birla Finance LimitedNon-deposit taking NBFC-ICC
Muthoot Finance LimitedNon-deposit taking NBFC-ICC
Bajaj Housing Finance LimitedNon-deposit taking NBFC-ICC


Investing in NBFCs can offer attractive opportunities for diversification and potentially higher returns. Still, it’s essential for investors to thoroughly understand the types of NBFCs, weigh the pros and cons, and consider the factors involved in setting up an NBFC. By staying informed and making well-informed investment decisions, investors can effectively navigate the dynamic landscape of NBFCs.

  1. What distinguishes NBFCs from traditional banks?

    NBFCs operate similarly to banks but without a banking license. They cannot accept demand deposits but offer various financial services such as loans, investments, and asset management.

  2. What are the key risks associated with investing in NBFCs?

    Some key risks include regulatory constraints, liquidity risks, higher interest rates, and vulnerability to market fluctuations. Investors should carefully assess these risks before investing in NBFCs.

  3. How can one set up an NBFC in India?

    Setting up an NBFC requires meeting the minimum capital requirement, complying with regulatory guidelines, developing a comprehensive business plan, establishing adequate infrastructure, and implementing robust risk management practices.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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