Financial Management and Business Data Analytics · Financial Institutions

Non-Banking Financial Companies (NBFCs): Meaning, Types and Regulation

Updated 10 October 2026

A Non-Banking Financial Company (NBFC) is generally a company registered under the Companies Act that lends, invests in securities, leases or hire-purchases, or runs similar financial business, but is not a bank. It cannot accept demand deposits or issue cheques drawn on itself. In India, the RBI registers and regulates NBFCs.

Understand Non-Banking Financial Companies (NBFCs)

Banks are not the only source of credit. Many borrowers, such as small traders, truck owners, first-time buyers of vehicles and small businesses, find it hard to get a bank loan. NBFCs fill this gap. They lend, invest, lease and finance assets, often faster and with more flexible terms than banks.

An NBFC is generally a company incorporated under the Companies Act, 2013 (or an earlier Companies Act). Its principal business is financial: giving loans and advances, acquiring shares, stocks, bonds or other marketable securities, leasing or hire-purchase. Companies whose main business is agriculture, industry, trading in goods, providing services, or buying and selling immovable property are not treated as NBFCs. The RBI Act also lets the RBI specify other non-banking institutions or classes as NBFCs, so the statutory definition is not limited to companies in every case. For exam answers, treat an NBFC as generally a company.

The RBI Act defines a residuary non-banking company (RNBC) separately, in section 45-I(g). This is a company whose principal business is receiving deposits under schemes or arrangements, and which does not fall in the other categories. RNBCs are treated as a category of NBFC.

Section 45-I(c) of the RBI Act lists insurance business and chit business within the meaning of 'financial institution'. Even so, insurance business (regulated by IRDAI) and chit funds (governed by the Chit Funds Act, 1982) are outside the RBI's NBFC regulatory framework. So do not list them as NBFC activities in your answer.

The key difference from a bank is what an NBFC cannot do. It cannot accept demand deposits (like savings or current accounts), it is not part of the payment and settlement system and cannot issue cheques drawn on itself, and its depositors do not get deposit insurance from DICGC. A bank can do all three.

NBFCs can be classified in more than one way. By liabilities, they are deposit-taking (NBFC-D) or non-deposit-taking (NBFC-ND). By activity, examples are asset finance companies, loan companies, investment companies, infrastructure finance companies (IFC), microfinance institutions (MFI), factors, infrastructure debt fund NBFCs (NBFC-IDF), and residuary non-banking companies (RNBC). By size, the RBI uses a scale-based approach with layers: Base, Middle, Upper and Top. Check the latest RBI framework in your study material for the exact layers and thresholds, since these are revised from time to time.

Regulation: NBFCs need a Certificate of Registration from the RBI and must meet a minimum net owned fund (NOF) requirement. The RBI issues directions on capital adequacy, asset classification and provisioning, fair practices and liquidity. Larger NBFCs face tighter rules, close to those for banks. Through the 2019 amendments (effective August 2019), the RBI was given regulatory powers over housing finance companies (HFCs). HFCs are treated as a category of NBFC for most regulatory purposes and are covered by RBI directions. Foreign investment, deposit acceptance and credit rating are also subject to conditions.

In financing, NBFCs matter for credit to the unbanked, vehicle and equipment finance, infrastructure funding, microfinance and gold loans. Their risk is that they depend on borrowings from banks and markets, so a funding squeeze can hurt them quickly.

Key rules to remember

Definition test for an NBFC: NBFC = generally a company under the Companies Act, 2013 (or an earlier Act) + financial activity as principal business + not a bank; Principal business means financial assets and income from financial activity are the larger part of the company's assets and income. Check the RBI's latest criteria for the exact thresholds.
What an NBFC cannot do: No demand deposits + no cheques drawn on itself + no DICGC deposit insurance; These three points are the standard answer for the difference from a bank.
Classification by liabilities: NBFC-D (accepts public deposits) | NBFC-ND (does not accept public deposits); Deposit-taking NBFCs face stricter norms.
Classification by activity: Asset Finance | Loan | Investment | Infrastructure Finance | Microfinance | Factor | NBFC-IDF (Infrastructure Debt Fund) | RNBC (Residuary Non-Banking Company); Learn the names and one line of what each does. An RNBC mainly receives deposits under schemes. Insurance (IRDAI-regulated) and chit fund business are outside the RBI's NBFC regulatory framework.
Scale-based regulation layers: Base → Middle → Upper → Top; Higher layers face stricter rules. Do not quote thresholds unless your study material gives them.
Regulator: RBI registers, regulates and supervises NBFCs; Registration is through a Certificate of Registration.

How to solve Non-Banking Financial Companies (NBFCs) questions

Use this method for any theory or short-note question on NBFCs.

1Read the verb. 'Define' needs meaning and what is excluded; 'distinguish' needs a point-wise comparison; 'discuss' needs categories and regulation.
2Start with a one-line definition: generally a company registered under the Companies Act, engaged mainly in financial business, not a bank.
3State the three things an NBFC cannot do: demand deposits, cheques drawn on itself, deposit insurance.
4Give the classification asked for: by liabilities, by activity, or by size. Name each category with one line.
5Add the regulatory point: Certificate of Registration, minimum NOF, RBI directions on capital, provisioning and liquidity.
6Link to financing: who they serve and why they matter.
7For a comparison, write 5 to 6 points, one line per point, in the form 'Bank: ... NBFC: ...'.
8Close with a one-line conclusion on the complementary role of NBFCs and banks.

Quickest way: The three-cannots and RBI-registration shortcut

When to use it: Use this for MCQs and for 4 to 6 mark theory answers when time is short.

For any 'is it an NBFC or a bank' question, apply the three-cannots test: demand deposits, own cheques, DICGC insurance.
Only a bank can accept demand deposits and issue cheques drawn on itself. An entity that does so must be a licensed bank. DICGC insurance covers bank deposits, not NBFC deposits.
If the entity does none of these and its principal business is financial, it is an NBFC.
For classification, recall the two axes: deposits (D or ND) and activity.
For regulation, recall: RBI registers, sets NOF, issues directions, supervises.
For role, recall: credit to unbanked, asset finance, infrastructure, microfinance.

Common mistakes in Non-Banking Financial Companies (NBFCs)

Saying NBFCs cannot accept any deposits at all.
Students mix up 'demand deposits' with all deposits.
Fix: Deposit-taking NBFCs can accept term public deposits within RBI limits. What no NBFC can accept is demand deposits.
Writing that SEBI is the main regulator of NBFCs.
NBFCs deal with securities and the market, so students link them to SEBI.
Fix: The RBI registers and regulates NBFCs. SEBI regulates certain activities such as mutual funds or market intermediaries, but it is not the NBFC regulator.
Treating any company that lends as an NBFC.
Students ignore the 'principal business' test.
Fix: Financial activity must be the principal business. Companies mainly in agriculture, industry, trading or services are excluded.
Claiming NBFC deposits are insured like bank deposits.
Students assume all deposits are protected.
Fix: DICGC insurance covers banks, not NBFCs. Say so in comparison answers.
Quoting exact thresholds or layer limits from memory.
Students memorise numbers from different years.
Fix: These thresholds are revised by the RBI. Write the layers by name and the principle that higher layers face stricter rules, unless your latest material gives figures.
Writing a comparison as a paragraph without clear points.
Students run out of time and write loosely.
Fix: Use one line per point: deposits, cheques, insurance, regulator, regulatory framework, role. Each point earns marks.

Worked examples

Example 1

Distinguish between a bank and an NBFC. (Short answer, 5 marks)

Show the solution

Define both: a bank accepts deposits repayable on demand and is licensed under banking law; an NBFC is generally a company under the Companies Act doing financial business without a banking licence.
Demand deposits: a bank can accept savings and current deposits; an NBFC cannot.
Payment system: a bank issues cheques drawn on itself and takes part in clearing and settlement; an NBFC does not.
Deposit insurance: bank deposits are covered by DICGC up to the prescribed limit; NBFC deposits are not.
Regulation: a bank is regulated by the RBI under banking law and maintains CRR and SLR; an NBFC is registered with the RBI and follows RBI directions. NBFCs do not maintain CRR and SLR as banks do; deposit-taking NBFCs hold prescribed liquid assets against public deposits.
Role: banks mobilise savings and create deposit money; NBFCs mainly lend and invest funds raised through borrowings, debentures and permitted deposits.

Answer: A bank can accept demand deposits, issue cheques drawn on itself and has DICGC-insured deposits; an NBFC can do none of these three things. Both are regulated by the RBI, but under different frameworks, and both finance the economy in complementary ways.

Example 2

Classify the following as NBFC or bank, with a reason: (a) a company that finances tractors and vehicles and takes no savings deposits; (b) an entity offering savings accounts with cheque books and ATM cards.

Show the solution

Apply the three-cannots test to each entity.
(a) It lends for assets, accepts no demand deposits and issues no cheques of its own. It is a company in financial business, so it is an NBFC, specifically an asset finance type.
(b) Savings accounts are demand deposits, and cheque books mean it is part of the payment system. Only a bank can do this, so it must be a licensed bank.
Note that (a) is regulated by the RBI through registration and directions, and (b) through a banking licence.

Answer: (a) NBFC (asset finance), because it lends without taking demand deposits or issuing its own cheques. (b) Bank, because savings accounts and cheque facilities are permitted only to banks.

Exam tips

For a 'distinguish' question, give at least five labelled points. Deposits, cheques, insurance, regulator and regulatory framework are the safest.
In MCQs, look for the words 'demand deposits' and 'cheques drawn on itself'. They usually decide the answer.
Do not quote thresholds or layer limits unless the question gives them; name the layers and the principle of stricter rules at higher layers.
Name examples of categories (asset finance, microfinance, infrastructure finance) to show understanding.
Link NBFCs to the financial system chapter: mention RBI as regulator and the complementary role with banks.

Practice questions from Financial Institutions

Non-Banking Financial Companies (NBFCs): frequently asked questions

What is the difference between a bank and an NBFC?

A bank accepts demand deposits, issues cheques drawn on itself and its deposits are insured by DICGC. An NBFC can do none of these three things. Both are regulated by the RBI, though under different frameworks, and both lend and invest funds.

Who regulates NBFCs in India?

The RBI registers NBFCs, prescribes minimum net owned fund and issues directions on capital, asset classification, provisioning and liquidity. Some of their activities may also fall under other regulators such as SEBI.

What are the main types of NBFCs?

By liabilities they are deposit-taking and non-deposit-taking. By activity they include asset finance, loan, investment, infrastructure finance, microfinance, factoring and infrastructure debt fund companies. By size, the RBI uses layers from Base to Top.

Can an NBFC accept deposits?

Only a deposit-taking NBFC registered for it can accept term public deposits, within RBI limits. No NBFC can accept demand deposits.