NBFC – Types, NBFC vs Bank, Non-Banking Financial Institution in India

By BYJU'S Exam Prep

Updated on: November 14th, 2023

NBFCs or Non-Banking Financial Institutions are the institutions that have been registered under the Companies Act, of 1956. NBFCs offer bank-related services without having banking licenses. Even though NBFCs provide financial services, they differ from banks in many ways. The Reserve Bank of India supervises Non-Banking Financial Institutions. The motive behind the emergence of NBFC was to meet the financial needs that weren’t met by the baking system of India.

In recent years, the role of NBFCs has gained even greater significance as they have emerged as a key source of credit for the rapidly growing digital economy. In this article, we will delve into the world of NBFCs, their importance, the types of NBFCs in India, and their impact on the financial landscape.

What is NBFC?

NBFC is known as a non-banking financial institution that offers financial services and products, but it is not officially recognized as a bank with a banking license. The activities of Non-Banking Financial Institutions(NBFI) include lending and other financial services like providing loans & advances, credit facilities, trading in the money market, savings, and investment products, managing stock portfolios, money transfers, etc.


Additionally, their activities also include leasing, hiring, venture capital finance, infrastructure finance, and so on. Before beginning the Non-Banking Financial Institutions activities, NBFC registration is required. Some of the popular examples of Non-Banking Financial Institutions include- ICICI Ventures, SBI Factors, Kotak Mahindra Finance, and Sundaram Finance.

Latest Updates on Non-Banking Financial Institutions(NBFC )

Recently, the Reserve Bank of India has proposed a strict regulatory framework for the NBFCs by creating a four-tier structure with a progressive increase in regulation intensity.

  • In 2020, RBI announced a host of measures to offer liquidity aid to NBFCs
  • RBI has also proposed the classification of non-performing assets of base layer Non-Banking Financial Institutions from 180 days to 90 days overdue.

Proposed Classification of Non-Banking Financial Companies (Four-Tier Structure)

The supervisory and regulatory framework of NGFCs must be based on a 4-layered structure.

Base layer

  • NBFCs in the lower layer would be known as the NBFC-Baselayer
  • Here least regulatory intervention is warranted

Middle Layer

  • The Non-Banking Financial Institutions in the middle layer would be known as NBFC-ML or NBFC- Middle Layer
  • Here, the regulatory regime is strict compared to the base layer

Upper Layer

  • Non-Banking Financial Institutions in the upper layer would be known as NBFC-UL or NBFC-Upper Layer
  • This layer would be crowed by the NBFCs that have great potential for systemic spill-over of risks, and the ability to influence the financial stability

Top Layer

  • This layer is supposed to be empty.
  • This top layer of the pyramid would be empty unless supervisors take a view of specific Non-Banking Financial Institutions.

License Criteria for NBFC in India

To get a license the Non-Banking Financial Institutions in India must meet the following criteria

  • The company should be registered as per the Companies Act.
  • The corporation must be either a Private Limited Company or a Limited Company.
  • The company must have at least Rs. 2 crores of Net Owned Funds.

Following Non-Banking Financial Institutions are spared from the requirement of registration with the Reserve Bank of India:

  • Merchant Banking Companies/ Venture Capital Fund/ Stockbroking companies registered with SEBI
  • Chit companies as defined in clause (b) of section 2 of the Chit Funds Act, 1982
  • Nidhi companies that are notified under section 620A of the Companies Act, 1956
  • Insurance companies holding a Registration certificate issued by IRDA
  • Stock exchange company
  • Housing finance companies that are regulated by NHB (National Housing Banks)

Types of Non-Banking Financial Institutions

There are three broad heads under which the NBFC in India can be categorized:

  • On the basis of deposits
  • On the Nature of their activity
  • On the basis of the size of their assets

On the Basis of Deposits

  • Deposit-taking non-banking finance companies
  • Non-Deposit taking Non-Banking Financial Institutions

On the Nature of their Activity

  • Asset Finance Company (AFC)
  • Non-Banking Financial Company-Factors (NBFC-Factors)
  • Investment Company (IC)
  • Systematically Important Core Investment Company (CIC-ND-SI)
  • Non-Banking Financial Company: Micro Finance Institutions (NBFC-MFI)(IDF-NBFC)
  • NBFC-Non-Operative Financial Holding Company (NOFHC)
  • Loan Company (LC)
  • Infrastructure Debt Fund: Non-Banking Financial Institutions
  • Infrastructure Finance Company (IFC)
  • Mortgage Guarantee Company (MGC)

On the Basis of the Size of Their Assets

  • Non-systematically Important NBFCs
  • Systematically Important Non-Banking Financial Institutions

NBFC vs Bank

A few activities of NBFC are akin to that of banks; for example, Non-Banking Financial Institutions lend and make investments. However, there are a few differences between banks and NBFCs.

  • Non-Banking Financial Institutions are types of financial institutions in India that offer banking services without a banking license but on the other hand, Bank is a government-authorized financial intermediary which aims to provide banking services.
  • NBFC can’t accept demand deposits
  • They don’t form part of the payment and settlement system. Also, they can’t issue cheques drawn on themselves.
  • Credit Guarantee Corporation and the deposit insurance facility of Deposit Insurance are not available to the depositors of Non-Banking Financial Institutions.

Significance of NBFC

The NBFC sector in India has undergone significant growth in recent years. Below, we have pointed out the importance of non-banking financial companies in India.

  • In a country like India, where access to bank finance remains a challenge for a large population, NBFC plays a crucial role.
  • Non-Banking Financial Institutions are the types of financial institutions that offer services to the market segments that the commercial banks don’t due to high risk and low returns
  • NBFCs are an essential part of the economy’s financial sector because of their inherent characteristics.
  • NBFCs have played a critical role in promoting financial inclusion, especially in rural areas, by providing credit to those who may not have access to formal credit channels.
  • Moreover, NBFCs also contribute significantly to economic growth by creating employment opportunities and supporting the growth of various sectors of the Indian economy.

Challenges with NBFC

NBFCs are not heavily regulated, just like banks. Due to this, a huge risk was highlighted during the 2008 Global Financial Crisis, where the lending practices of the companies were unchecked. In the end, it resulted in a disastrous outcome. The IL&FS default and turbulence in the Indian Credit Market in 2018 pointed out some fundamental and critical questions about the role of NBFCs and their business model. To address these challenges, NBFCs need to adopt best practices in risk management, governance, and compliance, and work closely with regulators and stakeholders.


An understanding of NBFCs is important for aspirants preparing for the UPSC exam, as questions related to financial inclusion, economic development, and financial sector reforms often feature in the exam. Moreover, given the importance of NBFCs in the UPSC Economics Syllabus, a thorough understanding of their operations, regulations, and challenges can help aspirants develop a nuanced perspective on issues related to financial stability, risk management, and regulatory reforms. It is highly recommended to go through the best books, and economics notes for UPSC to prepare for this topic comprehensively.

NBFC UPSC Questions

Question: Which of the following is an example of a Non-Banking Financial Institution (NBFI)? a) State Bank of India b) ICICI Bank c) Housing Development Finance Corporation (HDFC) d) Indian Overseas Bank

Answer: c) Housing Development Finance Corporation (HDFC)

Question: Which of the following is not a type of Non-Banking Financial Institution (NBFI)? a) Insurance companies b) Mutual funds c) Money market funds d) Commercial banks

Answer: d) Commercial banks

Question: Which of the following is not a function of Non-Banking Financial Institutions (NBFI)? a) Providing credit facilities b) Mobilizing savings c) Providing deposit facilities d) Providing investment advice

Answer: c) Providing deposit facilities

Question: Which of the following is not a type of Non-Banking Financial Institution (NBFI)? A) Mutual Funds B) Insurance Companies C) Investment Banks D) Public Sector Banks

Answer: D) Public Sector Banks

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