Other than banks, India’s financial system has an entire category of institutions that play a massive role in lending, investing, and wealth management: Non-Banking Financial Companies (NBFCs). They don’t have a banking license, which means they can’t accept demand deposits (like your savings account) or issue cheque books, but they still offer a wide range of financial services.
NBFCs assist people and businesses with loans, investment services, asset financing, and wealth management, bridging the gap between traditional banking and today’s evolving financial needs.
With their growing influence, understanding what an NBFC is and how they work is essential for investors, businesses, and everyday consumers. Let's explore what non-banking financial companies are, their functions, regulatory framework, and how they differ from banks.
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What Are Non-Banking Financial Companies (NBFCs)?
A non-banking financial company is a financial institution that offers many of the same services as traditional banks—but without holding a banking license. While NBFCs are not permitted to accept demand deposits, such as savings accounts, they play a crucial role by providing services such as asset management, leasing, lending, and insurance.
NBFCs play an important role in economic growth as they focus on segments that are overlooked by traditional banks, like startups, small businesses, and rural communities. Their capacity to provide personalized financial products, quicker loan approvals, and creative lending solutions makes them a vital component of India's financial system.
How NBFCs Differ from Banks
Many people ask, what is NBFC bank? While NBFCs function similarly to banks in providing credit and financial services, there are several differences:
Since NBFCs do not rely on deposits, they have more flexibility in designing financial products but also face higher risks.
Functions of an NBFC
NBFCs perform a range of essential financial activities that help individuals and businesses to manage, grow and optimize their finances effectively. Here’s a closer look at their key functions:
1. Lending & Credit Services
NBFCs provide instant personal loans, business loans, vehicle loans, and home financing options. Many fintech companies and microfinance institutions fall under this category, offering small-ticket loans that banks may not prioritize.
2. Investment & Wealth Management
Many NBFCs help individuals and businesses manage investments through mutual funds, stock market investments, and wealth advisory services.
3. Asset Financing
NBFCs specialize in leasing or financing large purchases like machinery, vehicles, or equipment. These asset finance companies (AFCs) help businesses acquire essential assets without large upfront payments.
4. Infrastructure & Housing Finance
Some NBFCs focus on real estate and infrastructure projects, offering loans for housing, commercial projects, and government-backed initiatives.
5. Microfinance Services
NBFCs play a significant role in providing credit to small businesses, self-employed individuals, and rural entrepreneurs who may not qualify for traditional bank loans.
NBFCs operate with greater flexibility than banks, making financial services more accessible, innovative, and efficient.
Types of NBFCs
There are different types of NBFCs based on their functions and the financial services they provide. Here’s a closer look at the different types of NBFCs in India:
1. Asset Finance Companies (AFCs) | Supporting Business Growth Through Asset Loans
Businesses often need vehicles, machinery, or specialized equipment to operate efficiently, but purchasing these assets outright can be costly. Asset Finance Companies (AFCs) step in by offering loans for acquiring such essential resources.
- Best suited for transport businesses, construction firms, and manufacturers.
- Helps companies maintain cash flow while upgrading their operations.
- Loan repayment is usually structured to match the revenue generation from the asset.
2. Investment and Credit Companies (NBFC-ICC) | A Versatile Source of Credit and Investment
These are multi-purpose financial service providers that offer:
- Loans to individuals and businesses.
- Investment options for those looking to grow their money.
- Asset financing solutions that help businesses acquire necessary assets without straining their working capital.
If you’re someone who needs a flexible lending partner that provides a mix of credit and investment solutions, these NBFCs might be the right fit for you.
3. Microfinance Institutions (MFIs) | Enabling Small Businesses and Entrepreneurs
In many parts of India, access to traditional banking remains limited. Microfinance Institutions (MFIs) bridge this gap by offering:
- Small-ticket loans to self-employed individuals and small businesses.
- Financial support to rural and semi-urban entrepreneurs.
- Loans for women entrepreneurs without the requirement of collateral, making it easier for first-time borrowers.
These NBFCs enable people to launch and expand their businesses, revolutionizing financial inclusion.
4. Housing Finance Companies (HFCs) | Making Homeownership a Reality
For many, buying a home is a lifelong dream. Housing Finance Companies (HFCs) specialize in offering home loans, ensuring that individuals can purchase or construct their own houses without financial stress.
- Offers loans for residential property purchases and construction.
- Provides real estate financing for developers.
- Comes with structured repayment plans to make homeownership more manageable.
If you’re looking to finance your dream home but don’t meet traditional banking criteria, an HFC might be the right alternative.
5. Infrastructure Finance Companies (IFCs) | Powering India’s Development
Large-scale projects such as highways, power plants, metro rail systems, and bridges require huge investments. Infrastructure Finance Companies (IFCs) provide long-term funding to both public and private infrastructure projects, ensuring steady economic growth.
- Focuses on financing critical infrastructure projects.
- Provides structured loan plans that align with the project's revenue cycle.
- Helps improve the country's overall economic framework by supporting essential developments.
6. Loan Companies | Personalized Lending for Every Need
Sometimes, life throws unexpected financial challenges your way, or perhaps you have a business opportunity that requires immediate funding. Loan companies serve segments like:
- Personal loans for emergencies, weddings, travel, or education.
- Business loans to help companies expand or manage cash flow.
- Working capital loans that ensure businesses have funds to run smoothly.
Understanding the different types of loans available in India through NBFCs helps individuals and businesses find suitable financing options.
What are the RBI Guidelines for NBFC?
Since NBFCs play a crucial role in India’s financial system, they are regulated by the Reserve Bank of India (RBI). Some important RBI guidelines for NBFCs include:
1. Registration Requirements
- Any company wishing to operate as an NBFC must register with the RBI.
- A minimum Net Owned Fund (NOF) of ₹2 crore is required for licensing.
2. Capital Adequacy and Risk Management
- NBFCs must maintain a Capital to Risk-Weighted Assets Ratio (CRAR) of at least 15%.
- They must follow strict risk management guidelines to ensure financial stability.
3. Lending and Borrowing Restrictions
- NBFCs cannot accept demand deposits like banks.
- They must follow fair lending practices and comply with RBI’s loan disbursement guidelines.
The RBI guarantees that NBFCs function openly and do not take advantage of borrowers by regulating them.
Process of Getting an NBFC License in India
There are several legal and regulatory procedures involved in the structured process of establishing a Non-Banking Financial Company (NBFC) in India. Since NBFCs are important to the financial system, the Reserve Bank of India (RBI) makes sure that only companies that are financially sound and well-prepared are given licenses. If you’re considering establishing an NBFC, here’s a detailed breakdown of the process:
- Register the Company under the Companies Act, 2013.
- Maintain a minimum Net Owned Fund (NOF) of ₹2 crore.
- Submit the NBFC license application to the RBI.
- Provide documents, including business plans, financial statements, and compliance records.
- Await RBI approval after due diligence.
Once licensed, NBFCs must comply with RBI regulations and periodic audits to maintain operational transparency.
Summary
Non-Banking Financial Companies (NBFCs) play a crucial role in in expanding access to credit beyond the reach of traditional banks. Whether it’s personal loans, business financing, or investment opportunities, NBFCs empower individuals and companies to meet their financial goals. While regulated by the RBI, their operational flexibility allows for faster processes and more customized financial solutions—making them a preferred choice for many borrowers and investors.
Knowing what an NBFC is and how it works gives you the clarity to make better financial choices, whether you're borrowing, investing, or managing your money.
Being one of the fast-growing NBFCs in India, Creditt+ offers fast approvals and customized loans for your needs! If you are looking for flexible financing options, contact us today!
