Introduction

Non-Banking Financial Companies (NBFCs) are financial institutions that offer various banking services but do not hold a banking license. They are regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934. NBFCs play a critical role in India's financial ecosystem by providing credit to underserved and unbanked sectors.

Key Features of NBFCs

• Do not accept demand deposits like banks
• Cannot issue cheques drawn on themselves
• Regulated primarily by the Reserve Bank of India (RBI)
• Provide loans, asset financing, leasing, and investment services
• Offer services such as hire purchase, microfinance, and infrastructure finance

Types of NBFCs

• Asset Finance Company (AFC)
• Investment Company (IC)
• Loan Company (LC)
• Infrastructure Finance Company (IFC)
• Systemically Important Core Investment Company (CIC-ND-SI)
• NBFC-Micro Finance Institution (NBFC-MFI)
• NBFC-Factors
• Mortgage Guarantee Companies
• NBFC-Account Aggregators

Registration & Licensing Requirements

• Must be registered under the Companies Act, 2013
• Minimum Net Owned Fund (NOF) of ₹2 crore (₹10 crore for NBFC-MFI/Factor)
• Certificate of Registration (CoR) issued by RBI is mandatory
• Ongoing compliance with RBI guidelines on lending, investments, and governance

RBI’s Scale-Based Regulation Framework

Introduced in 2022, this framework classifies NBFCs into the following layers:

• Base Layer: Small non-deposit taking NBFCs
• Middle Layer: Larger NBFCs and all deposit-taking NBFCs
• Upper Layer: Systemically important NBFCs identified by RBI
• Top Layer: Reserved for high-risk NBFCs under stricter supervision (currently unoccupied)

Functions of NBFCs

• Providing credit and loans
• Leasing and hire purchase services
• Micro-finance and financial inclusion
• Investment in securities and capital markets
• Funding infrastructure and SMEs

Risks Faced by NBFCs

• Credit Risk: Borrowers defaulting on repayments
• Liquidity Risk: Inability to raise short-term funds
• Interest Rate Risk: Due to mismatch in borrowing and lending tenures
• Operational Risk: Fraud, cyber risk, or process failure
• Regulatory Risk: Penalties for non-compliance with norms

Challenges Faced by NBFCs

• Limited access to low-cost deposits
• Heavy dependence on bank borrowings and capital markets
• Asset-Liability mismatches
• Concentration of exposure to real estate and retail lending

Way Forward

• Adoption of digital technologies for onboarding and credit scoring
• Better risk management and capital adequacy standards
• Partnerships and co-lending with commercial banks
• Enhancing governance and internal audit systems

Frequently Asked Questions (FAQs)

Q. Can NBFCs accept deposits?

Only deposit-taking NBFCs (NBFC-D) can accept public deposits under RBI guidelines.

Q. Do NBFCs need to maintain CRR or SLR like banks?

No, CRR and SLR requirements do not apply to NBFCs.

Q. How are NBFCs different from banks?

NBFCs cannot issue cheques, do not maintain demand deposits, and operate under different regulatory norms compared to banks.

Q. How do NBFCs raise funds?

NBFCs raise funds via debentures, commercial papers, loans from banks, equity capital, and securitization.