What is NBFC - Meaning, Benefits and Importance
Over the past two decades, Non-Banking Financial Companies (NBFCs) have grown significantly, from being small lending institutions to key players driving credit access across India.
As per the latest report, NBFC credit to GDP has increased to 26% in FY 2025, up from 16% in FY 2019.
Many people are still unaware of what an NBFC is and how it differs from a typical financial institution, despite the term being commonly used in conversations about loans and financial products. Read on as we address this query and go into greater detail about how they have incorporated themselves into India's borrowing, saving, and construction in this blog.
What Is NBFC? Understanding the Meaning of NBFC
The full form of NBFC stands for Non-Banking Financial Company. The Reserve Bank of India (RBI) is responsible for regulating NBFCs, which are also incorporated under the Companies Act 2013 as registered entities.
The activities of NBFCs involve making loans and advances, investing in securities, and providing leasing and hire-purchase facilities. The key difference between an NBFC and a bank is that an NBFC cannot accept demand deposits from savings or current accounts, nor can it issue cheques against its own accounts.
NBFCs can meet the specific needs of the various groups that make up India's population, particularly in underdeveloped areas of the country where the formal credit system is not well established. Supporting the small business owners, freelancers, gig workers, and others, NBFCs have played a significant role in the expansion of India's financial inclusion circle.
What is an NBFC Company? Key Characteristics
Understanding the term NBFC requires looking into its special features. Namely, non-banking financial companies, or NBFCs, even though they do not belong to the traditional banking sector, are very reliable and convenient at the same time for customers because of the following reasons:
- Legal Status: NBFC's become legal when they are incorporated as companies under the Companies Act of 2013 and are registered with the RBI. This gives NBFCs the status of corporate entities; the banks, contrary to this, are controlled through banking acts.
- Core Services: The main business of NBFCs includes granting loans, managing investments, financing, and marketing financial products such as personal loans.
- Customer Orientation: NBFCs are usually customer-centric institutions that tend to serve niche markets and customer segments, primarily first-time borrowers, small-scale enterprises, and customers in semi-urban areas.
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Types of NBFCs in India
Indian NBFCs are categorised by business nature and the types of financial services offered. Let us discuss the primary forms in detail:
1. Asset Finance Company (AFC)
These NBFCs specialise in lending for tangible assets such as commercial vehicles, machinery, or heavy machinery. They finance companies that need capital for fixed assets but may not have ready access to conventional bank financing.
2. Loan Company (LC)
A Loan Company mainly offers personal and business loans that are not tied to any particular asset. Their versatility makes them the first choice for salaried as well as self-employed borrowers.
3. Infrastructure Finance Company (IFC)
The role of these non-banking financial companies in national development is considerable, as they provide funds for large infrastructure projects such as roads, power plants, and telecommunications systems. They help in bridging the investment gap of the country in these critical areas.
4. Investment Company (IC)
Investment companies buy securities such as shares, bonds, or debentures with the aim of generating returns. Their activities help circulate funds in financial markets.
5. NBFC-Micro Finance Institution (NBFC-MFI)
An NBFC-MFI offers small microloans and other financial products to low-income persons, who generally lack access to formal credit.
6. Factors or Factoring Company
Factoring NBFCs offer working capital financing by buying accounts receivable from firms. In simple terms, they improve cash flow by turning outstanding invoices into cash on the spot.
7. Core Investment Company (CIC)
An NBFC is considered a CIC if it invests at least 90% of its total assets in debt, loans, preference shares, or equity shares in group companies. They don't lend to the general public or deal in securities. Rather, they serve as holding companies for major conglomerates.
8. NBFC-D vs NBFC-ND (Deposit-taking vs Non-Deposit-taking)
NBFCs that take deposits (NBFC-D) under RBI regulations can accept time deposits, while NBFCs that do not take deposits (NBFC-ND) depend entirely on borrowing or the capital markets for their funds. The vast majority of today's NBFCs, including Hero FinCorp, function primarily as NBFC-ND.
9. Residuary Non-Banking Company (RNBC)
These are specialised NBFCs that receive deposits under special schemes and invest them in permissioned securities. Their activities are stringently regulated because of the nature of the public deposits they receive.
NBFC vs Bank: What's the Difference?
While both NBFCs and banks lend money, there's a fine line between them, mainly to do with their functions and objectives.
| Feature | NBFC (Non-Banking Financial Company) | Bank (Commercial Bank) |
|---|---|---|
| Core Functions | Cannot accept savings or current account deposits. Can provide only credit. | Can accept all forms of deposits and provide credit. |
| Cheque Issuance | Cannot issue cheques drawn on itself. | Can issue cheques and is part of the payment system. |
| Deposit Insurance | Not covered by DICGC (Deposit Insurance). | Covered by DICGC up to ₹5 Lakh per depositor. |
| Regulation | Regulated by the RBI, primarily under the Companies Act. | Heavily regulated by the RBI under the Banking Regulation Act. |
| Loan Approval Speed | Generally faster and more flexible documentation due to new-age tech. | Typically slower due to traditional financial processes. |
| Credit Score Requirement | Often more flexible, catering to those with medium scores. | Usually requires a higher, more established credit score. |
| Service Range | More specialised (e.g., consumer loans, microfinance). | Wider range (accounts, cards, treasury, trade finance). |
Importance and Role of NBFCs in India Economy
NBFCs are the bridge between the old finance and the millions of Indians who have been out of the formal financial system for a long time. They are in India to bring transparency and equity to this unbanked community.
They are transforming the new Indian economy by:
- Advancing Financial Inclusion: NBFCs have deeply infiltrated rural and semi-urban areas, where traditional banks have almost no presence. They granted the least documentation and followed a digital-first approach to give credit to individuals and small businesses in the most remote areas.
- Sector Financing: Micro, Small, and Medium Enterprises (MSMEs) are major contributors to the Indian economy, but most of them do not have the required collateral or formal papers that banks ask for. NBFCs are lenders of last resort for these borrowers, extending working capital and equipment loans so they can grow and hire new workers.
- Collaborative Banking Services: NBFCs are a reliable alternative that complements banks' services, such as personal loans, which are quick and flexible credit products.
- Stabilising the Economy During Hard Times: NBFCs are a major source of credit support during the economic crisis that accompanies the COVID-19 pandemic or other emergencies. Constant credit support not only helps consumer spending and business operations continue but also makes the economy the ultimate beneficiary in a crisis.
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Wrapping Up
In short, NBFCs are the unsung backbone of India's lending system, especially for those who fall outside the parameters of the traditional banking system. They provide financial access to these individuals and small businesses, bridging the lending gap with flexibility, innovation, and accessibility.
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Frequently Asked Questions
1. What are the main differences between banks and NBFCs?
NBFCs are financial institutions that focus on providing credit to the customers who need it the most, in areas where banks usually do not lend at all. Besides, they offer considerable flexibility in making loans, financing, or investing; however, they do not offer services similar to banks, such as accepting demand deposits or issuing cheques.
2. Is the Reserve Bank of India the regulator for NBFCs?
Definitely, all registered NBFCs are under the surveillance of the Reserve Bank of India (RBI). The companies must adhere to certain norms regarding minimum capital requirements, lending, and good conduct, thereby safeguarding borrowers and ensuring transparency throughout the process.
3. Can NBFCs accept deposits?
Yes. A very small category (NBFC-D) can take deposits, but even they are under strict RBI guidelines.
4. How to apply for a loan from an NBFC?
It is very easy to get a loan from an NBFC on its official website or via a dedicated digital lending app. The process typically consists of an online application form, an instant eligibility check, and a digital document upload.
