When you think about financial services, the first thing that comes to mind is probably banks. But in India, there’s another important group of financial institutions making a big difference, Non Banking Financial Companies (NBFCs).
NBFCs may not operate like banks or offer savings accounts, but they have become an essential part of the financial system, helping individuals and businesses get the money they need, especially for those who might not have easy access to traditional banking services. They offer loans to small businesses, help families buy homes, fund infrastructure projects, and even provide insurance and investment services. In short, they step in where banks often can’t, ensuring financial help reaches even the most remote corners of the country.
What makes NBFCs different is their ability to be flexible and innovative. They have to follow different guidelines than banks, which usually allows them to create solutions customized to the needs of their customers. Over the years, they have helped millions of people and played an important role in supporting India’s economic growth.
So, whether you are an individual or a business owner looking for financial services, read on to learn more about what NBFCs are and how they can help you.
What is NBFC?
An NBFC is a financial institution registered with the Reserve Bank of India (RBI), that offers a wide range of financial services similar to banks but without a banking license. These include loans, credit facilities, investment products, leasing, hire purchase, and insurance. However, NBFCs cannot accept demand deposits, such as savings or current accounts.
Regulated by the RBI, NBFCs follow a specific set of guidelines to ensure transparency and financial stability. They provide services to various sectors, including individuals and businesses traditional banks may not be able to reach. They also play an important role in providing loans to MSMEs (Micro, Small and Medium Enterprises) and have introduced new ways to distribute credit. This has significantly contributed to India’s economic growth and strengthened the financial sector.
Types of NBFCs
Now that we have an idea of what NBFCs are, let’s look at the various types of NBFCs to help you understand which would be the most suitable for your financial needs.
1. Asset Finance Company (AFC)
These NBFCs provide finances to businesses and individuals for purchasing physical assets such as machinery, equipment, and vehicles required for productive activities. For this, at least 60% of the company’s business must come from this type of financing.
2. Investment Company (IC)
Investment Companies manage investments in securities such as shares, bonds, and other instruments. They aim to optimize returns for their clients by strategically allocating funds into profitable ventures.
3. Loan Company (LC)
These NBFCs focus on providing various types of loans to individuals and businesses that require financial help for specific purposes.
4. Infrastructure Finance Company (IFC)
IFCs usually finance large-scale infrastructure projects like roads, telecom, power, and transportation. To qualify as an IFC, an NBFC must allocate at least 75% of its assets to infrastructure loans and maintain a minimum net owned fund of ₹300 crore.
5. Microfinance Institutions (MFIs)
Microfinance institutions provide financial solutions to underserved populations in rural and semi-urban areas. They provide small loans to individuals or groups, often without collateral, enabling economic growth starting from the grassroot level.
6. Systematically Important Core Investment Company (CIC-ND-SI)
CICs predominantly invest in their own group companies. They allocate at least 90% of their assets to group companies, with 60% in equity shares. Moreover, they do not actively trade their investments.
7. Infrastructure Debt Fund (IDF)
These NBFCs invest long-term funds into infrastructure projects through bonds with a minimum tenure of five years. IDFs are usually sponsored by infrastructure finance companies and focus on reducing the funding gap in infrastructure development.
8. NBFC-Factors
NBFC-Factors provide factoring services, helping businesses manage their accounts receivables efficiently. To qualify for this type of NBFC, the company must receive at least 50% of their income from the factoring business.
9. Mortgage Guarantee Companies (MGC)
MGCs specialize in providing mortgage guarantees. At least 90% of their income or turnover must come from this activity, with a minimum net owned fund requirement of ₹100 crore.
10. Non-Operative Financial Holding Company (NOFHC)
NOFHCs allow promoters or groups to establish new banks, acting as a financial holding entity. These entities are important for promoting financial inclusion through new banking operations.
NBFCs are further categorized based on their activity and whether they accept deposits. Their classifications are continually refined by the RBI to align with regulatory changes and market needs. This ensures NBFCs remain integral to the financial sector, addressing diverse demands across sectors.
Functions of an NBFC
NBFCs play an important role in the Indian financial system, complementing traditional banks by providing services to segments that are often overlooked. Their contributions extend beyond providing credit, such as enhancing economic growth and financial stability. Here are some of the primary functions of NBFCs.
1. Bridging the Credit Gap
NBFCs specialize in providing financial services to underserved segments, such as small businesses, low-income households, and rural areas. They offer customized financial solutions to ensure financial stability for individuals and businesses that lack access to traditional banking.
2. Promoting Financial Stability
As intermediaries in the financial market, NBFCs help maintain market stability by efficiently channeling resources. Their operations enhance liquidity and confidence, making them essential for a resilient financial system.
3. Mobilizing Resources
NBFCs help in transforming savings into investments. By channeling funds from savers to productive investments, they contribute significantly to the country’s economic development and infrastructure growth.
4. Fulfilling Investment and Infrastructure Needs
NBFCs are important for meeting the funding requirements of various industries and infrastructure projects. Their flexibility in financing options supports large-scale developments that fuel economic progress.
5. Offering Diverse Financial Products
NBFCs provide a wide range of financial services, including personal and business loans, insurance products, leasing, and asset management. This versatility is beneficial to the diverse financial needs of individuals and businesses.
6. Supporting Unorganized Sectors
Many unorganized and informal sectors rely on NBFCs for funding. These institutions bridge the financing gap, enabling such sectors to access credit and grow sustainably.
RBI Guidelines for NBFCs
The Reserve Bank of India (RBI) has established comprehensive guidelines for NBFCs to ensure their stability, protect customer interests, and promote financial discipline. Below provided is the breakdown of the important guidelines for non banking financial institutions:
1. Minimum Funds Requirement:
NBFCs need to have a certain minimum amount of money called Net Owned Funds (NOF), which varies as per the type of NBFC and its activities. This acts like a safety net to handle unexpected losses or financial problems.
2. Capital Adequacy Ratio (CAR):
NBFCs must have a minimum CAR, which is the ratio of their capital compared to their risk-weighted assets.. This ensures they’re prepared for sudden financial losses.
3. Liquidity Management:
NBFCs need to maintain a minimum level of cash or government securities. This helps them pay for their short-term liabilities and avoid running out of money during emergencies.
4. Recognition of Income and Classification of Assets:
The RBI has clear rules for how NBFCs should track and classify their loans. This helps in identifying loans that might not be repaid on time and taking action early.
5. Limit on Risky Loans:
NBFCs are not allowed to lend too much money to one person or a group. This prevents them from putting all their money in one place, reducing the risk of big losses.
6. Provision for Risky Loans:
NBFCs must set aside money for loans that might turn into bad debts. This ensures they’re prepared for possible losses.
7. Fair Practices Code (FPC):
NBFCs must follow a Fair Practices Code, ensuring transparency about loan terms, interest rates, and a proper system to handle customer complaints.
8. Regular Reports and Checks:
NBFCs must submit regular updates to the RBI and get their accounts audited to show they are following the rules.
How to Get an NBFC License in India?
Obtaining an NBFC license involves meeting specific criteria and adhering to regulations set by the RBI. But first, let’s understand the criteria for getting an NBFC license in India.
As per the RBI guidelines, a company qualifies as an NBFC in India if:
- Income from financial assets constitutes over 50% of its gross income.
- Financial assets make up more than 50% of its total assets.
Now, let’s look at the process to get an NBFC license in India:
1. Preliminary Compliance
- The company must first register as a private or public limited company under the Companies Act.
- A minimum Net Owned Fund (NOF) of ₹10 crore is mandatory.
- At least one-third of the board of directors must have experience in financial services or related sectors.
- The company should adhere to Capital Compliance norms and regulations under FEMA (Foreign Exchange Management Act).
2. Online Application Submission
- Eligible companies can submit their application online through the RBI’s official portal.
- The application includes completing prescribed forms and uploading necessary documents, such as financial records, director details, and proof of compliance with NOF requirements.
3. Assessment by the RBI
- The RBI reviews the integrity and eligibility of the company’s promoters and senior management to ensure they meet the required standards.
- The creditworthiness of the company and its directors is assessed through their CIBIL records.
4. Issuance of Application Reference Number (ARN)
Once the initial checks are complete, the RBI issues an Application Reference Number (ARN). This number allows the applicant to track the status of their application.
5. Final Approval and Licensing
If the RBI approves all the submitted documents and assessments, you will be granted an NBFC license.
6. Post-Licensing Obligations
After obtaining the license, the NBFC must:
- Regularly submit financial and prudential reports to the RBI.
- Comply with ongoing regulations for effective monitoring and supervision.
How Do NBFCs Differ from Banks?
NBFCs and banks both are important to India’s financial system, providing credit, investment, and other financial services. However, they operate under different regulatory frameworks and offer different features and services. Understanding the differences can help individuals and businesses make informed financial decisions.
| Parameter | Banks | NBFCs |
| License | Banking license from RBI is mandatory | Banking license is not mandatory but should be registered with theRBI |
| Regulatory Framework | Governed by the Banking Regulation Act, 1949 | Governed by the RBI Act, 1934 and Companies Act |
| Deposit Acceptance | Accepts demand deposits (savings, current) | Cannot accept demand deposits; limited to fixed deposits, bonds, and debentures |
| Deposit Insurance | Deposits insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) | No deposit insurance available for depositors |
| Payment and Settlement | Part of the payment and settlement system, can issue cheques | Not part of the payment and settlement system, cannot issue cheques |
| Risk Assessment | Conducts stricter risk assessments, including detailed evaluations of a borrower’s creditworthiness and mandatory capital adequacy ratios to ensure the ability to absorb potential losses | More flexible risk assessment procedures, with fewer regulatory constraints on evaluating a borrower’s credit risk, allowing for quicker loan approvals |
| Strengths | One-stop shop for diverse financial needs, secure deposits | Specialized expertise, faster approvals, competitive rates in specific sectors |
| Weaknesses | Less flexibility, may not focus on specialized services | Limited deposit options, higher risk profile in certain areas |
| Suitable For | Individuals and businesses with varied financial needs | Individuals and businesses seeking specialized financial solutions |
Conclusion
Non banking financial institutions are an important part of the Indian financial system. They provide services like loans, credit lines, and other financial solutions that help individuals and businesses meet their needs. NBFCs have a big role in supporting small businesses, promoting financial inclusion, and driving economic growth. Their flexibility and customer-focused approach make them a valuable alternative to traditional banks.
If you’re looking for financial support, LoanTap is the best partner for your financial requirements. As an RBI-registered NBFC in India, LoanTap offers quick and easy personal loans and business loans up to ₹10 lakh with minimal documentation, flexible repayment options and transparent application process. Whether you need funds for a big expense, a home renovation, or a dream vacation, LoanTap makes borrowing simple and stress-free.
Frequently Asked Questions
How do NBFCs support financial inclusion?
NBFCs provide credit and other financial services to underserved populations, including small businesses, rural communities, and low-income individuals.
What is the role of NBFCs in economic development?
BFCs drive economic growth by funding small businesses, creating jobs, and providing infrastructure and housing finance.
Who is eligible for NBFC?
Any company registered under the Companies Act of India and meeting the criteria set by the RBI can apply for an NBFC license. The company must have:
- A minimum net owned fund (NOF) of ₹10 crore (₹5 crores for microfinance NBFCs in some cases).
- A detailed business plan for providing financial services.
- Compliance with RBI’s guidelines and regulations.
