Non-Banking Financial Companies

Non-Banking Financial Companies (NBFCs) are financial institutions that provide banking and financial services without meeting the legal definition of a bank. In India, an NBFC is incorporated under the Companies Act, 2013 and engaged in the business of a non-banking financial institution as defined under Section 45-I(a) of the Reserve Bank of India Act, 1934. NBFCs form a critical part of the Indian financial system by extending credit, supporting financial inclusion, and catering to segments that are often underserved by traditional banks.
NBFCs undertake activities such as loans and advances, acquisition of shares, stocks, bonds, debentures and other marketable securities issued by the Government or local authorities. They may also engage in leasing, hire-purchase, insurance distribution, factoring, microfinance, and infrastructure financing, subject to regulatory permissions.
However, companies whose principal business relates to agriculture, industrial activity, trading of goods, or the sale, purchase, or construction of immovable property are not treated as NBFCs, except where such activity is undertaken for financing purposes.

Registration and the 50–50 Test

A commonly applied benchmark for determining NBFC eligibility is the 50–50 test. Under this test, a company qualifies as an NBFC if:

• At least 50 per cent of its total assets are financial assets, and
• At least 50 per cent of its gross income is derived from financial assets.

Companies meeting both criteria are required to register with the Reserve Bank of India before commencing or carrying on NBFC activities, unless specifically exempted.

Regulatory Framework for NBFCs

NBFCs in India are regulated by multiple authorities depending on the nature of their activities. The primary regulator for most NBFCs is the Reserve Bank of India, which supervises entities engaged in lending, deposit-taking, leasing, hire purchase, and investment activities.
Other regulators include:

• Securities and Exchange Board of India, which regulates stock broking, merchant banking, venture capital funds, and investment advisers
• Insurance Regulatory and Development Authority of India, which regulates insurance companies and insurance intermediaries
• The Ministry of Corporate Affairs, which oversees Nidhi companies and Chit Fund companies

Housing Finance Companies, earlier regulated by the National Housing Bank, are now regulated directly by the Reserve Bank of India following regulatory changes introduced in 2019.
NBFCs that are regulated by sector-specific regulators are generally exempt from separate RBI registration but must comply with the regulatory framework of their respective authorities.

Differences Between NBFCs and Banks

NBFCs differ from banks in several fundamental ways:

• NBFCs cannot accept demand deposits; they may accept only term deposits where permitted
• NBFCs do not form part of the payment and settlement system
• They cannot issue cheques drawn on themselves
• Deposits with NBFCs are not covered under the Deposit Insurance and Credit Guarantee scheme
• NBFCs typically face fewer restrictions than banks but also do not enjoy access to low-cost public deposits

Despite these differences, NBFCs play a complementary role to banks by improving credit penetration and innovation.

Classification of NBFCs

NBFCs are broadly classified into deposit-taking (NBFC-D) and non-deposit-taking (NBFC-ND) entities. Non-deposit-taking NBFCs with asset size of ₹500 crore or more are categorised as Systemically Important NBFCs (NBFC-ND-SI), owing to their potential impact on financial stability.
Within these broad groups, NBFCs are further classified based on their principal business.

Asset Finance Company (AFC)

An Asset Finance Company is primarily engaged in financing physical assets such as automobiles, tractors, construction equipment, industrial machinery, and generators. These assets typically support income-generating activities.

Investment Company (IC)

Investment Companies primarily deal in the acquisition of securities, including shares, bonds, and debentures, as their main business activity.

Loan Company (LC)

Loan Companies focus on providing loans and advances for purposes other than asset financing, such as working capital finance, personal loans, or business loans.

Infrastructure Finance Company (IFC)

An Infrastructure Finance Company is an NBFC with:

• Net Owned Funds of at least ₹300 crore,
• At least 75 per cent of total assets deployed in infrastructure loans,
• A minimum credit rating of ‘A’ or equivalent, and
• A Capital to Risk-Weighted Assets Ratio (CRAR) of at least 15 per cent.

IFCs play a significant role in financing long-gestation infrastructure projects.

Core Investment Company (CIC-ND-SI)

A Systemically Important Core Investment Company is a non-deposit-taking NBFC with asset size of ₹100 crore or more that:

• Invests at least 90 per cent of its assets in shares, debt instruments, or loans to group companies
• Has at least 60 per cent of such investments in equity shares or compulsorily convertible instruments
• Does not trade in its investments except for block sales or dilution

CICs are subject to a separate regulatory framework under the RBI.

Infrastructure Debt Fund – NBFC (IDF-NBFC)

An Infrastructure Debt Fund–NBFC is a specialised non-deposit-taking NBFC with a minimum Net Owned Fund of ₹300 crore, established to channel long-term debt into infrastructure projects. IDF-NBFCs invest in Public–Private Partnership projects and post-commercial operation infrastructure assets with stable cash flows, thereby freeing up bank resources for new projects.

NBFC – Microfinance Institution (NBFC-MFI)

An NBFC-MFI is a non-deposit-taking NBFC that has at least 85 per cent of its net assets as qualifying microfinance loans. Updated regulatory norms provide that:

• Loans are extended to households with annual income up to prescribed regulatory limits
• Loans are collateral-free
• Repayment is structured through flexible instalments chosen by the borrower

NBFC-MFIs play a vital role in promoting financial inclusion and rural credit access.

NBFC – Factors

NBFC-Factors are engaged in the factoring business, which involves the acquisition of receivables through assignment or financing. Such entities must maintain:

• Minimum Net Owned Funds of ₹5 crore, and
• At least 75 per cent of assets and income from factoring activities

Factoring improves liquidity for micro, small, and medium enterprises.

Deposit-Taking by NBFCs

Only NBFCs specifically authorised by the Reserve Bank of India are permitted to accept public deposits. Key provisions include:

• Acceptance of term deposits only, with a minimum tenure of 12 months
• Interest rates subject to RBI-prescribed ceilings
• Prohibition on offering gifts or incentives to depositors
• Requirement of minimum investment-grade credit rating, subject to exceptions
• Prohibition on accepting deposits from Non-Resident Indians, except in limited cases

Deposits with NBFCs remain uninsured, unlike bank deposits.

Consumer Protection and Ombudsman Framework

NBFCs are required to appoint a Grievance Redressal Officer and display contact details prominently. Under recent reforms, eligible NBFCs now fall under the Integrated Ombudsman Scheme of the Reserve Bank of India, providing customers with a formal dispute resolution mechanism.

Residuary Non-Banking Companies

Residuary Non-Banking Companies constitute a specific class of NBFCs whose principal business is receiving deposits. Due to concerns over investor protection, no new RNBCs are being registered, and existing entities are subject to strict regulatory oversight.

Unincorporated Bodies and Illegal Deposit Schemes

Unincorporated Bodies, including individuals, firms, or unregistered associations that accept deposits, are prohibited under Section 45S of the RBI Act. Regulation and enforcement against such entities primarily fall within the domain of state governments to safeguard depositor interests.