Understanding NBFCs in India

Hiral Shah
May 18
2 min read

Introduction

Non-Banking Financial Companies (NBFCs) play a crucial role in India's financial ecosystem. They provide financial services similar to banks but do not hold a banking license. NBFCs are regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934. Their operations include lending, investment, asset financing, and microfinance, among others.

What Are NBFCs?

NBFCs are financial institutions that provide banking-like services such as loans, credit facilities, and investments but do not accept demand deposits. They are registered under the Companies Act, 1956/2013 and regulated primarily by the RBI

Key Features of NBFCs:

They do not form part of the payment and settlement system.
They cannot issue cheques drawn on themselves.
They do not have access to deposit insurance facilities like banks

Layers of NBFCs in India

With the implementation of the Scale-Based Regulation (SBR) framework in October 2022, NBFCs are categorized into four layers based on their size, activity, and risk perception:

Base Layer (NBFC-BL):
- Includes non-deposit-taking NBFCs with an asset size below ₹1,000 crore.
- Examples: Peer-to-Peer (P2P) lending platforms, Account Aggregators (AA), and NBFCs not availing public funds.
Middle Layer (NBFC-ML):
- Includes all deposit-taking NBFCs and non-deposit-taking NBFCs with an asset size of ₹1,000 crore and above.
- Examples: Housing Finance Companies (HFCs), Infrastructure Debt Fund NBFCs (IDF-NBFCs), Core Investment Companies (CICs).
Upper Layer (NBFC-UL):
- Consists of NBFCs identified by the RBI based on their systemic importance.
- These NBFCs are subject to stricter regulations.
Top Layer (NBFC-TL):
- Includes NBFCs that pose a potential systemic risk.
- The RBI may move NBFCs from the Upper Layer to the Top Layer if necessary

Classification of NBFCs

NBFCs are classified based on their nature of operations and acceptance of deposits

1. Deposit-Taking NBFCs (NBFC-D)

Accept public deposits.
Subject to strict RBI regulations to ensure financial stability.

2. Non-Deposit-Taking NBFCs (NBFC-ND)

Do not accept public deposits.
Further classified into:
- Systemically Important NBFCs (NBFC-ND-SI): Asset size ₹500 crore and above.
- Non-Systemically Important NBFCs (NBFC-ND-NSI): Asset size below ₹500 crore.

3. Housing Finance Companies (HFCs)

Specialize in housing loans.
Regulated by the National Housing Bank (NHB) and RBI.

4. Other Types of NBFCs

Loan Companies: Provide loans and advances.
Investment Companies: Manage securities for investment.
Asset Finance Companies: Finance physical assets like automobiles and machinery.
Infrastructure Finance Companies (NBFC-IFC): Provide infrastructure loans.
Microfinance Institutions (NBFC-MFI): Offer small loans to low-income individuals.
Core Investment Companies (NBFC-CIC): Invest in shares and securities

Ref RBI Master Circular No DOR.CRE.REC.No. 60/03.10.001/2021-22