NON-BANKING FINANCIAL COMPANIES (NBFCS)

• Non-Banking Financial Companies (NBFCs) are financial institutions that perform many banking-like functions, but they are not banks. 
• They are registered under the Companies Act, 1956 or 2013, and regulated mainly by the Reserve Bank of India (RBI).
• While banks are central to India’s formal financial system, NBFCs have emerged as key players in extending credit to underserved sectors, offering niche financial products, and promoting financial inclusion especially in areas and to populations that are typically beyond the reach of traditional banks.

Key Functions of NBFCs:

• Providing loans and advances
• Engaging in asset financing
• Offering microfinance services
• Dealing in securities, leasing, and hire purchase
• Investing in stocks and bonds
• Factoring and infrastructure finance

Key Regulatory Criteria:

• According to RBI, a company is classified as an NBFC if:
• It is a company under the Companies Act.
• It has financial assets comprising more than 50% of its total assets.
• Income from financial assets is more than 50% of its total income.
• This test is commonly known as the “50-50 test” for classification as an NBFC.

Difference between Banks and NBFCs 

Regulatory Framework:

• Banks are governed by the Banking Regulation Act, 1949 and regulated by the Reserve Bank of India (RBI).
• NBFCs are registered under the Companies Act, 1956/2013 and regulated by the RBI or other regulators depending on their nature (e.g., SEBI, IRDAI, NHB).

Acceptance of Demand Deposits:

• Banks can accept demand deposits (savings and current accounts).
• NBFCs cannot accept demand deposits.

Participation in Payment and Settlement System:

• Banks are part of the payment system and can issue cheques.
• NBFCs are not part of the payment system and cannot issue cheques drawn on themselves.

Deposit Insurance (DICGC):

• Bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh per depositor.
• NBFC deposits are not covered under DICGC.

Issuance of Cheques:

• Banks can issue cheques and are directly integrated into the clearing system.
• NBFCs cannot issue cheques on themselves.

Statutory Requirements:

• Banks must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
• NBFCs are exempt from CRR and SLR but must follow liquidity norms as per RBI’s SBR framework.

Foreign Investment (FDI):

• FDI in banks is allowed up to 74% (automatic + government route).
• FDI in NBFCs is allowed up to 100% under the automatic route (for specified activities).

Priority Sector Lending (PSL):

• Banks are required to meet PSL targets (40% of Adjusted Net Bank Credit).
• NBFCs are not generally mandated to follow PSL norms (some exceptions like NBFC-MFIs).

Range of Services:

• Banks offer comprehensive services including deposits, loans, credit cards, foreign exchange, remittances, etc.
• NBFCs mainly provide loans, advances, leasing, hire purchase, microfinance, and investment services.

Role in the Economy:

• Banks are central to formal finance and large-scale credit distribution.
• NBFCs complement banks by serving niche, informal, and underserved segments like MSMEs, rural borrowers, and self-employed individuals.

Why NBFCs Matter to India

• In a country as diverse and financially uneven as India, Non-Banking Financial Companies (NBFCs) have become a vital pillar of the financial system. 
• While commercial banks cater to the formal, urban economy, NBFCs serve the vast informal and rural sectors plugging gaps, fuelling entrepreneurship, and accelerating financial inclusion.

Credit to the Unbanked and Underbanked

• NBFCs play a major role in offering credit to:
• Micro, Small, and Medium Enterprises (MSMEs)
• Self-employed individuals
• Farmers and rural households
• First-time borrowers with thin or no credit history

Specialized Sectoral Focus

• NBFCs are agile and tailored to specific needs. They specialize in:
• Housing finance (especially affordable housing)
• Education loans for vocational and higher studies
• Vehicle finance (especially two-wheelers and commercial vehicles)
• Consumer durable loans (phones, appliances, and electronics)

Catalysts of Financial Inclusion

• NBFCs, especially Microfinance Institutions (MFIs), bring financial services to the remotest parts of India:
• Empowering women entrepreneurs
• Supporting SHGs (Self-Help Groups)
• Financing rural businesses and cottage industries

Driving Digital Innovation

• Many NBFCs have partnered with fintech companies to revolutionize credit delivery:
• Instant digital loans via mobile apps
• AI-based credit scoring for new-to-credit customers
• Paperless onboarding using eKYC and UPI
• Lending-as-a-Service (LaaS) models

Last-Mile Financial Access

• Perhaps the most important contribution: NBFCs reach the last-mile borrower who remains invisible to banks due to geography, lack of formal employment, or absence of documents.
• NBFCs fill this void with:
• Customized products
• Flexible repayment options
• Quick disbursals
• Localised presence and operations