NBFC (Non-Banking Financial Company): How do they work?

A Non-Banking Financial Company (NBFC) is a firm registered under the Companies Act, 1956. It provides financial services similar to traditional banks but does not have a banking license. NBFCs are involved in businesses such as giving loans/advances and buying stocks, shares, debentures, bonds, and other securities issued by the government or local authorities. They are regulated by the RBI and drive economic growth by serving underserved segments of India, including micro, small, and medium enterprises (MSMEs). 

Additionally, any non-banking institution that has the principal business of receiving deposits under any scheme or arrangement in one lump sum or instalments is also a non-banking financial company. 

Read this blog to learn about India's different types of NBFCs, their functions, and the RBI-approved NBFC list.

Here are some of the major functions of a Non-Banking Financial Company:

• Retail Financing: Providing loans to individuals, households and businesses who might not qualify for loans from traditional banks.
• Infrastructure Financing: Funding essential projects, like roads, bridges, power plants and telecom networks, contributing to economic development.
• Hire Purchase Services: Helping people and businesses buy assets like vehicles, machinery and equipment without paying the full amount upfront.
• Trade Finance: Offering solutions for domestic and international trade, including letters of credit, factoring and bill discounting.
• Asset Management: Assisting individuals and institutions in investing in different asset classes such as stocks, bonds and real estate.
• Venture Capital Funding: Providing funds to early-stage businesses with high growth potential.
• Microfinance (NBFC-MFIs): Offering small loans and financial services to low-income individuals and small businesses in rural and underserved areas.
• Investment Banking Services: Helping businesses raise capital and manage strategic transactions.
• Facilitating Payments and Remittances: Enabling smooth funds transfer for individuals and businesses.
• Insurance Services: Providing financial protection and security against various risks for individuals and businesses.

NBFCs are classified based on their liabilities, size and activities. Here are the different types of NBFCs in India:

• Asset Finance Company (AFC)

This type of NBFC focuses on financing physical assets that support economic activities. These assets include machinery, vehicles, tractors and other industrial equipment. To qualify, at least 60% of the company's total assets and income must come from financing these physical assets.

• Investment Company (IC)

An IC primarily deals with acquiring securities. Its main business is investing in stocks, bonds and other financial instruments.

• Loan Company (LC)

A Loan Company's primary business is providing loans or advances for activities other than its own. It excludes companies classified as Asset Finance Companies.

• Infrastructure Finance Company (IFC)

This NBFC focuses on infrastructure loans, with at least 75% of its total assets in such loans. It must have a minimum net owned funds of ₹300 crore, a credit rating of ‘A’ or higher and a capital adequacy ratio (CRAR) of 15%.

• Systemically Important Core Investment Company (CIC-ND-SI)

These companies primarily invest in shares and securities of group companies. They must hold at least 90% of their total assets in investments, with at least 60% in equity shares of group companies. They should not engage in trading and must have assets of ₹100 crore or more, accepting public funds.

• Infrastructure Debt Fund (IDF-NBFC)

These companies facilitate long-term debt flow into infrastructure projects by issuing bonds with a minimum maturity of five years. Only Infrastructure Finance Companies can sponsor IDF-NBFCs.

• Micro Finance Institutions (MFIs)

These NBFCs provide microloans, with at least 85% of their assets in qualifying assets. Criteria include loan limits based on household income, total indebtedness and loan tenure, with a focus on income-generating activities.

• Non-Banking Financial Company - Factors (NBFC-Factors)

These companies engage in the factoring business, with at least 50% of their total assets and income derived from factoring.

• Mortgage Guarantee Companies (MGC)

These institutions focus on the mortgage guarantee business, with at least 90% of their turnover and gross income from this activity. They must have a net-owned fund of ₹100 crore.

• Non-Operative Financial Holding Company (NOFHC)

This is a financial institution through which promoter groups can set up new banks. It is a wholly-owned holding company that owns the bank and other financial services companies regulated by RBI or other financial sector regulators.

The following table shows the number of NBFC Companies registered with RBI, which are classified into different layers:

As mentioned in the table above, there are more than 9000 NBFCs that are approved under the Reserve Bank of India. You can visit the RBI website to download the RBI approved NBFC list or click on the link below to download the pdf.

The following are the different guidelines set by RBI for NBFCs:

• NBFCs are prohibited from accepting deposits payable on demand.
• The interest rates charged by NBFCs must not exceed the ceiling prescribed by the RBI.
• Deposits received from the public will be unsecured and must have a minimum term of 12 months and a maximum term of 60 months.
• NBFCs must maintain a minimum of 15% of public deposits in liquid assets.
• Any information about the company or changes in its composition must be reported to the RBI.
• NBFCs with public deposits of ₹20 crore or more or assets worth ₹100 crore or more must submit a half-yearly ALM return.
• RBI does not guarantee the repayment of any deposits accepted by the NBFC.
• NBFCs must submit their audited balance sheet annually.
• A statutory return on the public deposits must be submitted annually using the NBS–1 form.
• An auditor’s certificate must be obtained, verifying the company’s ability to repay public deposits.
• A quarterly return on the company’s liquid assets must be submitted.
• NBFCs must obtain and submit a credit rating every 6 months to the RBI.
• In case of default, consumers have the right to approach the National Company Law Tribunal or the Consumer Forum to file a suit against the NBFC.

NBFC plays a vital role in the financial system by offering a range of services like retail financing, infrastructure funding, microfinance and more, especially to underserved sections of society. While some NBFCs must register with the RBI and follow strict guidelines, others are regulated by different authorities. By meeting these regulatory requirements, NBFCs help maintain financial stability and foster economic development.