Types of Non-Banking Financial Companies (NFBC)

The NBFC sector in India is diverse, comprising various categories of institutions tailored to different functions. The RBI classifies NBFCs on three broad bases: by the nature of liabilities they hold, by the activities they conduct, and by their size (systemic importance). Below is an overview of NBFC classifications and the different types of NBFCs in India:

Classification by Liabilities:

Deposit-taking NBFCs (NBFC-D)

These are NBFCs authorized to accept public deposits. They typically offer fixed deposits with specified maturity and interest (somewhat similar to bank FDs, but without deposit insurance).

• NBFC-Ds are subject to additional regulations to protect depositors – for example, maintaining a 15% liquid assets reserve, ceiling on interest rates payable, compulsory credit rating, etc.
• Only a limited number of NBFCs (generally well-capitalized and well-governed ones) have this status.

Examples of Deposit Taking NBFCs include Bajaj Finance Ltd., Kerala  State Power and Infrastructure Finance Corporation  Ltd., Berar Finance Ltd, Muthoot Capital Services etc.

Non-Deposit-taking NBFCs (NBFC-ND)

The majority of NBFCs do not accept public deposits. They raise funds through other sources like bank loans, bonds/debentures, commercial paper, or equity. NBFC-NDs are further segmented by size:

• Non-Systemically Important NBFCs (NBFC-ND) – those with smaller asset size (historically < ₹500 crore). These had lighter regulatory oversight (some prudential norms like capital adequacy were not compulsory for the smallest ones earlier).
• Systemically Important NBFCs (NBFC-ND-SI) – larger non-deposit NBFCs that could impact the financial system. Traditionally, RBI classified any NBFC-ND with asset size ≥ ₹500 crore as systemically important, meaning it must follow stricter norms (15% capital adequacy ratio, exposure limits, periodic reporting, etc.).

Under the new Scale-Based Framework (2022 onward), this threshold has effectively been raised to ₹1,000 crore for many regulatory purposes. Systemically important NBFCs are significant players often competing with banks in certain lending segments.

Classification by Activity (Functional Types of NBFCs):

NBFCs are categorized into various functional types based on the predominant business activity they undertake. As of current RBI definitions, important categories of NBFCs in India include:

Investment and Credit Company (NBFC-ICC)

An NBFC-ICC is a broad category that encompasses companies carrying out the business of lending and investing. This includes what were earlier classified separately as Loan Companies and Investment Companies, now combined.

• Essentially, NBFC-ICCs provide loans and advances for any purpose other than their own (commercial or personal loans, asset finance, etc.) and/or deal in securities investments.
• Most finance companies that do not fall into a specialized category (like infrastructure, microfinance, etc.) will be classified as NBFC-ICC. (For example, a company financing consumer durables or offering personal loans would be an ICC).

Asset Finance Companies (AFCs) – which focus on financing physical assets like vehicles or equipment – are also subsumed under ICC if they meet the broad criteria (though sometimes the term AFC is still used for those with >60% asset finance business). NBFC-ICCs must maintain at least ₹10 crore NOF and adhere to prudential norms set by RBI.

Infrastructure Finance Company (NBFC-IFC)

These NBFCs specialize in infrastructure project lending. An NBFC-IFC is required to deploy at least 75% of its total assets in infrastructure loans (such as funding for roads, bridges, power plants, telecom, etc.), have a minimum NOF of ₹300 crore, and maintain a high credit rating and capital adequacy (CRAR of 15% or above).

They provide the long-term finance needed for infrastructure development which banks alone may not be able to fulfill. IFCs often raise funds via bonds and can also receive certain regulatory benefits (like eligibility for refinancing schemes).

Infrastructure Debt Fund – NBFC (IDF-NBFC)

An IDF is a specialized NBFC that facilitates refinancing of existing infrastructure projects. IDFs raise resources through issue of bonds (usually with minimum 5-year maturity) from domestic or foreign investors and invest these in the debt of infrastructure projects (often public-private partnership projects that have completed at least one year of operation). Only an existing IFC or bank can sponsor an IDF. IDF-NBFCs help channel long-term pension and insurance money into infrastructure by providing a vehicle with credit enhancement (since they often offer bond investors guarantees). They require ₹300 crore NOF and other conditions (e.g. low NPAs, stable track record) to register.

Housing Finance Company (HFC)

HFCs are NBFCs primarily engaged in housing finance – i.e. providing home loans to individuals and financing residential housing projects.

• To be classified as an HFC, an NBFC must have at least 60% of its net assets as housing finance assets. (Additionally, as per updated RBI norms, 75% of those housing finance assets should be individual home loans by a specified timeline – ensuring HFCs mainly serve retail housing).
• HFCs can also provide loans for residential property development, but they cannot be purely builder-financiers without the majority retail portfolio.

HFCs were earlier regulated by the National Housing Bank but since 2019 are regulated by RBI. They have a separate chapter (Chapter 38) in this unit due to their importance.

Microfinance Institution (NBFC-MFI)

These are NBFCs focused on micro-credit – providing small, collateral-free loans to economically vulnerable groups. An NBFC is classified as NBFC-MFI if it dedicates a large portion of its portfolio to micro-loans.

• Earlier, the norm was 85% of assets as qualifying microfinance loans; RBI has since relaxed this to 75%, and in 2023 to 60%, to allow some diversification. Still, the majority of loans must be micro-loans.
• Traditionally, qualifying micro-loans meant loans to households with annual income below a certain limit (e.g. ₹1.25 lakh), with caps on loan size and tenure, no collateral, and end-use often for income-generating activities.
• In March 2022, RBI revised the definition: now a microfinance loan is defined broadly as a collateral-free loan given to a household with annual income up to ₹3,00,000.
• NBFC-MFIs must ensure at least 60% of their assets are such loans on an ongoing basis.

They also follow certain customer protection rules (like limits on borrower indebtedness, fair practices). NBFC-MFIs are a key vehicle for financial inclusion, lending to self-help groups, joint-liability groups, women entrepreneurs, etc.

Core Investment Company (CIC)

A CIC is an NBFC which primarily holds investments in shares and securities of its group/holdings and does not do regular lending to the public. Specifically, a CIC (of systemically important category, CIC-ND-SI) invests predominantly (at least 90% of its assets) in equity or debt of its group companies, with at least 60% of its assets as equity investments in group entities.

• CICs are basically holding companies for corporate groups, managing group capital and investments.
• They do not trade these investments except for restructuring. If above ₹100 crore asset size and accessing public funds, they are regulated by RBI with special guidelines (including capital adequacy of 30% as Adjusted Net Worth, leverage limits etc.).

CICs help in separating the financial holdings of conglomerates from the operational companies. (Example: Tata Sons, or Bajaj Holdings could be considered similar to CICs for their respective groups).

NBFC-Factor

These NBFCs are engaged mainly in the factoring business, which means acquiring receivables (invoices/bills) of other companies at a discount and then collecting them from the debtor.

• A Factor provides working capital to businesses by financing their accounts receivable.
• An NBFC-Factor must ensure at least 50% of its assets are in the factoring business and 50% of its income from factoring.

They help especially MSMEs by quickly converting their sales invoices into immediate cash. NBFC-Factors are regulated by RBI under the Factoring Regulation Act as well, and require registration. (Banks can also do factoring, but NBFC-Factors specialize in it).

Mortgage Guarantee Company (MGC)

An MGC is a specialized NBFC that guarantees housing loans against default, thereby enhancing creditworthiness of mortgage loans.

• At least 90% of its business turnover must be mortgage guarantee business and it must have strong capital (minimum ₹100 crore NOF to start, possibly more as stipulated).
• By offering a guarantee on home loan portfolios (to banks and HFCs), MGCs help expand housing credit to riskier segments (because the lender is partly protected if the borrower defaults).

In India, there are few such companies (e.g. India Mortgage Guarantee Corporation).

Non-Operative Financial Holding Company (NOFHC)

This is an NBFC which holds the banking and financial subsidiaries of a corporate group. RBI introduced NOFHC as a structure for new bank licenses (2013 guidelines) where the promoters set up a holding NBFC (NOFHC) to hold the newly created bank and other financial services firms.

The NOFHC itself doesn’t do lending; it’s a ring-fencing vehicle to keep the bank insulated from other businesses of the group. It’s categorized as an NBFC in the Base Layer of regulation.

Account Aggregator (NBFC-AA)

Account Aggregators are NBFCs that provide a data aggregation service – they are licensed to retrieve and consolidate financial information of individuals from various financial institutions, under user consent, and share it with the user or other authorized financial entities.

Essentially, NBFC-AAs act as data intermediaries, part of the RBI’s initiative to enable customers to securely share their financial data (bank accounts, investments, insurance, etc.) for better financial services.

They do not lend or take deposits; their role is purely to aggregate and provide information in a standardized format. AAs are important in the emerging open banking ecosystem.

Peer-to-Peer Lending Platform (NBFC-P2P)

This is a type of NBFC which operates an online platform to connect individual borrowers and lenders. NBFC-P2Ps do not lend from their own balance sheet; instead, they enable crowd-lending – multiple lenders can lend small amounts to individual borrowers, with the platform facilitating loan matching, documentation, and repayments. RBI regulates these platforms as NBFC-P2P with various safeguards (cap on maximum exposure per lender and per borrower on the platform, escrow mechanisms, etc.). P2P platforms expand credit access, often for personal loans, outside traditional banks.

Residuary Non-Banking Company (RNBC)

RNBCs are a virtually extinct category now. Historically, these were NBFCs that accept deposits under schemes (like recurring contributions) not quite in the form of fixed or savings deposits, and invest in approved securities. They were required to maintain very high liquid reserves (e.g. 100% of liabilities in specified assets). Example: Peerless General Finance was an RNBC. RBI has since disallowed new RNBCs and phased out this model due to regulatory concerns.

(Aside from the above, there are specialized institutions like Standalone Primary Dealers (SPD) – primary dealers in government securities – which are technically NBFCs but they deal exclusively in G-Sec trading and are categorized in the middle layer of SBR. Also, Government-owned NBFCs (like public financial institutions) exist, which currently enjoy certain regulatory forbearance and are placed at most in the middle layer, not upper.)

Classification by Size (Systemic Importance)

As mentioned earlier, size matters for NBFC regulation:

Traditionally, NBFC-ND-SI was defined as any NBFC-ND with assets ₹500 crore or more. These NBFCs had to comply with almost all regulations applicable to deposit-taking NBFCs (except deposit-specific rules).

Under the Scale-Based Regulation (SBR) introduced in October 2022, NBFCs are now slotted into layers.

• The size threshold for stricter norms has effectively moved to ₹1000 crore: all NBFCs with assets ₹1000 cr+ (and all deposit-takers, regardless of size) are at least in the Middle Layer (akin to systemically important category).

Those among the very largest NBFCs are then identified for the Upper Layer with bank-like regulation.