Meaning and Types of NBFCs

Non-Banking Financial Company (NBFCs) may be stated as a company registered under the Companies Act, 1956 and under the provisions of section 45-IA of the Reserve Bank of India Act, 1934. NBFCs offers banking services without actually being a legal bank as they do not hold a banking license.

 Section 45-I of the Reserve Bank of India Act, 1934 has clearly defined ‘‘non-banking financial company’’ as–
(i) a financial foundation that is a company;
(ii) a non-banking foundation established as a company and has as its main business in taking deposits, through any scheme or 
(iii) such other non-banking establishment or class of such foundations, like the Bank with the aforementioned approval of the Central Government and through notification by the Official Gazette, specify.arrangement or any other similar manner, or lending in any way;

NBFCs are engaged in the following business:

  • Offering Loans and advances
  • Procurement of shares/stocks/bonds/debentures/securities issued by the government or local authority or other securities of like marketable nature,
  • Leasing
  • Hire-purchase
  • Insurance business,
  • Chit-fund business

NBFC does not include any institution whose primary business includes an agricultural activity or any industrial activity or sale, purchase, or construction of the immovable property.

Classification of NBFCs based on the nature of its business

NBFCs are registered under RBI based upon the nature of the business and categorized into five segments:

• hire-purchase company;
• equipment leasing company;
• loan company;
• investment company;
• infrastructure finance company

Reclassification of NBFCs w.e.f.  6th December 2006

The aforementioned NBFCs registered with RBI are re-categorized in terms of the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1988 with effect from 6th December 2006 as follows:

Loan Company (LC)

A financial company whose primary business includes providing finance by making loans or advances or otherwise, for any activity other than its own is called a Loan Company. It needs to be noted that such companies does not include Asset Finance Company.

Investment Company (IC) 

A financial institution whose primary business includes the acquisition of securities is known as an Investment company. Investment companies are further classified into the following sub-categories:

Core Investment Companies:

These are NBFCs whose fundamental business includes acquisition of shares and securities, satisfying the following conditions on the date of the last audited balance sheet: –

  1. It should not hold less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;
  2. Equity share investments (including instruments mandatory to be convertible into equity shares within a period not being more than 10 years from the date of issue) in group companies establishes not less than 60% of its net assets Net assets, for the purpose, would mean total assets excluding –
    • cash and bank balances;
    • investment in stock market mediums and mutual funds
    • advance payments of taxes; and
    • deferred tax payment
  3. No trading done in shares, bonds, debentures, debt or loans in group companies except through block sale for the resolution of dilution or disinvestment;
  4. No other financial activities are carried out as referred to in section 45-I(c) and 45-I(f) of the Reserve Bank of India Act, 1934 except:
  1. a) Investment in
  • bank deposits
  • instruments pertaining to money market, including mutual funds,
  • government securities, and
  • bonds or debentures issued by group companies;
  1. b) Granting of loans to group companies;
  2. c) issuing guarantees on behalf of group companies.

Asset Finance Company (AFC)

These are financial establishments whose principal business includes funding of physical assets, financing productive/economic activity, such as automobiles, tractors, generators, ground moving and material handling equipment, having motion on their own power and all-purpose industrial machines as their principal business. Financing of physical assets can be done through the following ways:

  • loans,
  • lease or
  • hire purchase transaction

Primary business can be stated as an aggregate of financing real/physical assets supporting economic activity and revenue generated though the business is not less than 60% of its total assets and total income respectively.

Mutual Benefit Financial Company (MBFC)

Mutual Benefit Financial Company are financial institutions reported by the Central Government under section 620A of the Companies Act, 1956.

MBFCs can be further classified into:

  • NBFCs accepting public deposit (NBFCs-D) and
  • NBFCs not accepting/holding public deposit (NBFCs-ND)

Classification based on Size of Assets

NBFCs-ND may also be categorized into :

  • Systematic Investment NBFCs whose assets size is greater than 500 Crores 
  • Non-Systematic Investment NBFCs whose assets size is greater than 500 Crores.

Returns to be submitted by deposit-taking NBFCs:

  1. NBS-1 Returns received on deposits on a quarterly basis in First Schedule.
  2. NBS-2 Quarterly return on Prudential Norms needed to be submitted by NBFC accepting public deposits.
  3. NBS-3 Return received on Liquid Assets on a quarterly basis by deposit-taking NBFC.
  4. NBS-4 Annual return of critical parameters by a rejected company having public deposits. (NBS-5 was withdrawn since submission of NBS 1 is made quarterly.)
  5. NBS-6 Exposure to the capital market is subjected to monthly return by deposit-taking NBFC with total assets of ₹ 100 crores and greater.
  6. ALM return by NBFC possessing public deposits on a half-yearly basis. The public deposit amount is greater than ₹ 20 crores or asset size amounting greater than ₹ 100 crore
  7. Balance sheet which is audited and Auditor’s Report by the Auditor of NBFC accepting public deposits.
  8. Information Return of the branch.

Returns to be submitted by NBFCs-ND-SI:

  • NBS-7 A Quarterly statement of capital funds, risk-weighted assets, risk asset ratio, etc., for NBFC-ND-SI.
  • Return on Monthly basis- Significant Financial Parameters of NBFCs-ND-SI.
  • ALM returns:
    (i) On a monthly basis- short-term dynamic liquidity statement in format ALM [NBS-ALM1] –
    (ii) On half yearly basis- structural liquidity statement in format ALM [NBS-ALM2] Half-yearly,
    (iii) On half yearly basis- Rate of interest Sensitivity statement in format ALM -[NBS-ALM3], Half Yearly
  • Information Return of the branch

NBFCs vs. Conventional Banks

  • It does not form a part of the payment and settlement system which is the primary reason why it cannot issue cheques to its customers.
  • Deposit insurance facility of DICGC is unavailable for NBFC depositors unlike in the case of banks.
  • SARFAESI Act provisions have not currently been offered to NBFCs. Except the above-mentioned differences, NBFCs are involved in providing the services that banks do.


NBFCs are now considered as important financial intermediaries particularly for the small-scale and retail sectors with the rising importance assigned to financial inclusion. In the multi-layered financial system of India, the significance of NBFCs in the Indian financial system is much conversed by various committees appointed by RBI in the past and RBI has been adapting its regulatory and supervising policies from time to time to keep updated with the changes in the system. NBFCs form a significant aspect of the Indian financial system, encouraging healthy competition and variation in the financial sector, distributing risks specifically during the times a financial struggle, and is now being considered as complementary of the banking system at competitive rates. 

The Banking sector always has been given high preference, however, easier sanction process, flexibility, and timeliness in catering to the credit demands and low-cost operations have now resulted in the NBFCs having a competitive advantage over banks in providing funding. NBFCs have been revolutionary at retail asset-backed lending, lending against securities, microfinance, etc.

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