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Decoding NBFCs: Catalysts for financial inclusion and economic growth

There are 4 layers of NBFC regulations as set by the Reserve Bank of India. Learn what they are and how they differentiate from each other.


Embark on an intriguing journey through the financial universe! Today, we’re navigating the intriguing waters of NBFCs. You might be wondering, What’s an NBFC? Well, let’s unravel this mystery together.

Non-Banking Financial Company, or NBFC, is a term that carries a great deal of relevance in our financial industry. Together with banks, these organisations help ensure that people in all parts of the nation have access to the financial services they need.

By meeting the varied financial requirements of consumers and companies, NBFCs play a key role in fostering inclusive growth in the nation. Their services range from loans and advances to trading money market instruments.

So, why should you care about NBFCs? Simply put, understanding NBFCs can help you navigate the financial landscape more effectively, whether you’re an investor, a business owner, or an individual interested in finance.

Stay with us as we delve deeper into the world of NBFCs, their types, their role in our economy, and much more. 

What is NBFC?

Financial institutions that do not hold a banking licence are known as NBFCs, the full form of which is Non-Banking Financial Company. Their registration is in accordance with the Companies Act, 1956. 

In contrast to banks, NBFCs cannot take demand deposits or write checks drawn on themselves because they are not involved in the payment and settlement system. However, they play an essential role in the economy by providing banking services to those who would not be able to afford them otherwise from banking institutions. This category includes people in rural areas and small and medium-sized businesses.

In the realm of finance, NBFCs offer a wide variety of services. These encompass various services, such as loans for individuals, houses, cars, gold, microfinance, leasing, hire-purchase, credit, insurance, investments, and asset management. 

Because of their sector-specific focus, NBFCs can better meet the financial needs of certain communities, particularly those disproportionately impacted by larger banks.

NBFCs play an important role in today’s financial environment. The Indian economy and financial system have greatly benefited from their innovative approaches to lending to micro, small, and medium-sized enterprises (MSMEs).

Also read: Unlocking prosperity: The transformative power of financial literacy/ 

History of NBFCs

The term “Non-Banking Financial Companies” (NBFC) first appeared in India in the ’60s. They sprang up to fill a need in the banking system that was never satisfied by traditional banks, both for individuals and companies.

In their early days, NBFCs were relatively minor players in the financial sector. However, the Reserve Bank of India (RBI) added a new section addressing NBFCs to the RBI Act 1934 in December 1964. This change allowed NBFCs to start up and expand in India.

The Indian government formed the James S. Raj Committee in the 1970s to investigate NBFC structures. All across the country, the committee pushed for a unified chit-fund law. After this, in 1982, the Indian government formed the Chakravarty Committee to examine the country’s currency. The committee’s recommendation was to conduct a thorough investigation into the connections between NBFCs and the banking industry.

In terms of business scope, product offerings, and technical sophistication, NBFCs have expanded greatly throughout the years. As a result of their substantial contributions to economic growth, they now hold a pivotal position in India’s financial landscape.

Types of NBFCs

Let’s delve deeper into the topic and explore different types of NBFCs:

Asset finance companies (AFCs)

Companies in this sector often provide funding for tangible assets such as cars, tractors, lathe machines, generator sets, earth moving equipment, and material handling machinery. They are indispensable in meeting the capital needs of various industries and businesses.

Loan companies (LCs)

In addition to offering the services offered by AFCs, LCs also lend money through advances and loans. From one-person operations to multinational conglomerates, they serve a wide range of clients. Their services are vital to providing credit to different parts of the economy.

Investment companies (ICs)

ICs deal in various types of securities. They connect people and businesses to the securities market and help them invest. They are crucial for pooling resources and channelling them into worthwhile investments.

Infrastructure finance companies (IFCs)

This NBFC does not accept deposits and allocates at least 75% of its assets to infrastructure loans. Their work is essential to improving the country’s infrastructure, and financing massive infrastructure projects relies heavily on their services.

Microfinance companies

Low-income people and organisations can get small loans from these businesses. In the fight for financial inclusion, they are crucial. When it pertains to extending credit to individuals experiencing poverty, their services are vital.

There are many different kinds of non-bank financial companies (NBFCs), and they all serve different purposes in the financial system. The Reserve Bank of India and the Ministry of Corporate Affairs monitor them to ensure that they follow all the rules regarding money.

Regulatory structure of NBFCs in India

The NBFC sector is structured into four distinct layers, each with its unique characteristics and regulatory requirements:

Base layer: Financial companies that do not accept deposits and have assets less than ₹1000 crore are included in this layer. Furthermore, it encompasses NBFCs involved in specific operations, such as peer-to-peer lending (termed as NBFC-P2P), account aggregation (known as NBFC-AA), non-operational financial holding companies (abbreviated as NOFHC), and those NBFCs that refrain from utilising public funds and lack a customer interface.

Middle layer: This layer includes non-bank financial companies (NBFCs) that accept deposits (NBFC-Ds), irrespective of the size of their assets, as well as non-bank financial companies (NBFCs) with assets of ₹1000 crore or more. 

Upper layer: This layer is reserved for non-bank financial companies (NBFCs) that the Reserve Bank determines, using a scoring system and a set of criteria, require stricter regulatory oversight. No matter what else is considered, the top ten eligible NBFCs by asset size will always be in the top layer.

Top layer: This layer should ideally be empty. Nevertheless, the Reserve Bank can include certain NBFCs from the upper layer if it assesses a substantial rise in their systemic risk.

Here’s a list of NBFCs in India:

Also read: The best banks in India: Leading the way in finance

Role of NBFCs in the Indian economy

The Indian economy relies heavily on NBFCs or non-banking financial companies. These companies work in tandem with banks to provide credit to people and companies that conventional banks don’t normally target, such as low-income families and small businesses. It has resulted in economic growth and financial inclusion.

One of the advantages of NBFCs is flexibility in loan and credit facilities. They also oversee stock and share portfolios and trade money market instruments. Many prefer them because they can provide loans quickly and with little paperwork.

An NBFC loan can range from personal loans to loans for small and medium corporations. In particular, an NBFC personal loan for a low CIBIL score is a unique offering that caters to individuals who might not qualify for loans from traditional banks due to their low credit scores. 

These loans may come with more stringent conditions, such as a lesser loan amount or a higher interest rate. Nonetheless, they open the door to credit for people with poor scores, which is a lifesaver when money is tight. This offering highlights how important non-bank financial companies are for expanding access to credit and fueling economic expansion.

Also read: Explore the complex world of investment banks, one function at a time


In the dynamic world of finance, NBFCs are the unsung heroes, bridging gaps, and fostering economic growth. They are the financial lifelines for many, especially those underserved by traditional banks. From providing NBFC personal loans for low CIBIL score individuals to financing small businesses, NBFCs are making finance accessible for all. 

Thus, when you come across the term NBFC, bear in mind that it’s more than just an abbreviation; it’s a driving force for fostering financial inclusivity and propelling economic advancement. Enjoy your journey through finance!

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StockGro Team

StockGro is India’s first and largest ‘Social Investment’ platform aimed at helping you master the art of “Trading & Investment”. Trade, Invest and get rewarded to Learn everything about ‘Investments’ the fun-filled way.

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