NBFCs in India: Features, Classification, and RBI Regulation

NBFCs in India are non-banking financial companies that provide a range of financial services similar to banks but operate under a distinct regulatory framework. NBFCs in India lend money, offer wealth management products, finance vehicle purchases, fund infrastructure projects, and provide gold-backed loans, among other activities. They have become a critical channel of credit, particularly to small businesses, vehicle buyers, and consumers in semi-urban and rural geographies that banks have historically underserved. The Reserve Bank of India regulates the NBFC sector through registration, prudential norms, and a layered supervisory approach that became more stringent after stress events in the late 2010s.

What an NBFC Is

An NBFC is a company registered under the Companies Act that carries on the business of lending, investing in financial securities, hire purchase, leasing, insurance, or chit fund activities. The principal business test, as defined by the RBI, requires that financial assets constitute more than fifty per cent of the total assets and that financial income constitute more than fifty per cent of the gross income.

NBFCs differ from banks in three critical ways. They cannot accept demand deposits, they cannot issue cheques drawn on themselves, and deposits placed with NBFCs are not covered under DICGC deposit insurance. These three distinctions define the regulatory boundary between banks and NBFCs.

Three Things NBFCs Cannot Do

The phrase “cannot do” matters because it draws the line that separates NBFCs from full-service banks.

NBFCs cannot accept demand deposits. A demand deposit, such as a current or savings account, is repayable on demand by the depositor. This is reserved for licensed banks. NBFCs that are permitted to accept deposits can take only term or fixed deposits subject to specific tenure and ceiling restrictions.

NBFCs cannot issue cheques drawn on themselves. Customers cannot write a cheque on their NBFC account because NBFCs are not part of the cheque clearing system. Payment instruments issued by NBFCs are not equivalent to bank cheques.

NBFC deposits are not covered by DICGC deposit insurance. Bank deposits up to five lakh rupees per depositor per bank are insured by the Deposit Insurance and Credit Guarantee Corporation. This protection does not extend to NBFC deposits. Depositors in NBFCs rely entirely on the financial strength of the NBFC itself.

RBI Registration Requirement

Every NBFC must register with the Reserve Bank of India before commencing operations. The registration process requires a minimum net owned fund of two crore rupees, with higher thresholds for specific NBFC categories. The application is examined for the fit and proper status of promoters, the source of capital, the business plan, and the operational systems.

Once registered, the NBFC receives a Certificate of Registration that specifies the categories of business it is authorised to undertake. The certificate can be cancelled if the NBFC fails to meet prudential norms or violates regulatory directions.

Classification of NBFCs

The RBI classifies NBFCs along two dimensions: the nature of activity and the size and systemic importance.

By Activity

Asset Finance Companies finance physical assets such as vehicles, machinery, and equipment.

Loan Companies provide unsecured and secured loans to individuals and businesses.

Investment Companies hold investments in securities as their primary business.

Infrastructure Finance Companies provide long-term funding to infrastructure projects, with specific tax and prudential benefits.

Infrastructure Debt Funds invest in completed infrastructure projects through bonds.

NBFC-MFIs serve the microfinance segment with small-ticket loans to low-income households.

NBFC-Factors purchase invoices and provide receivables financing.

NBFC-AAs are account aggregators that consent-based data sharing across financial institutions.

NBFC-P2P platforms intermediate peer-to-peer lending under the framework introduced in 2017.

Core Investment Companies hold investments in group companies and have a specific lighter regulatory framework when above-threshold.

By Layer

Since 2022, the RBI has applied a scale-based regulatory framework with four layers. The base layer covers non-deposit-taking NBFCs below a specified asset size with the lightest regulatory touch. The middle layer covers larger non-deposit-taking NBFCs and all deposit-taking NBFCs. The upper layer covers systemically important NBFCs identified by the RBI based on parameters including size, interconnectedness, and complexity. The top layer is currently empty but reserved for NBFCs that may require even tighter regulation in future.

Prudential Norms

NBFCs follow prudential norms similar in spirit to bank norms but calibrated to their layer. These include capital adequacy ratios, asset classification rules for non-performing assets, provisioning requirements, exposure limits to single and group borrowers, and corporate governance standards. Upper-layer NBFCs are subject to common equity tier one requirements, mandatory listing within three years, and stricter board independence norms.

The post-IL&FS reforms in 2018 and the post-DHFL reforms in 2019 tightened liquidity coverage and asset-liability management requirements. The RBI also imposed limits on bank lending to NBFCs and tightened exposure norms for housing finance companies, which became a separate but related category regulated by the National Housing Bank initially and then by the RBI directly.

Role in the Financial System

NBFCs complement banks rather than compete head-on. They specialise in segments where banks find it difficult to lend efficiently, including small-ticket vehicle finance, gold loans, microfinance, and equipment leasing. They also bring product innovation in areas such as supply chain finance, used vehicle finance, and digital consumer lending.

The integration of NBFCs with the broader financial ecosystem links to instruments like open market operations, the Cash Reserve Ratio management, and capital market intermediation regulated by SEBI. Refinance support from NABARD reaches the rural NBFC segment.

FAQs

What is an NBFC?

A non-banking financial company registered under the Companies Act that primarily lends, invests, leases, or provides similar financial services but does not have a banking licence.

What are the three things NBFCs cannot do?

NBFCs cannot accept demand deposits, cannot issue cheques drawn on themselves, and their deposits are not insured under DICGC.

Who regulates NBFCs in India?

The Reserve Bank of India regulates most NBFC categories. Housing finance companies were regulated by NHB earlier but now also fall under the RBI.

What is the minimum net owned fund for an NBFC?

Two crore rupees for most categories, with higher thresholds for specific types such as Infrastructure Finance Companies.

What are the layers under the RBI’s scale-based regulation?

Base, middle, upper, and top. The top layer is currently empty. The layers determine the depth of prudential requirements.

Are NBFC deposits safe?

NBFC deposits are not insured by DICGC. Safety depends on the financial strength of the individual NBFC and the regulatory protections in force.

What is an NBFC-MFI?

A microfinance institution registered as an NBFC that lends small-ticket loans, primarily to low-income borrowers, under a specific regulatory framework.

How do NBFCs raise funds?

Through bank borrowings, bond issuances, commercial paper, external commercial borrowings, retained earnings, and, for deposit-taking NBFCs, public deposits within prescribed limits.