NBFC (Non-Banking Financial Company) - Meaning, types, and how it works

In India's rapidly expanding financial ecosystem, NBFCs have emerged as crucial enablers of financial inclusion. These are financial institutions that provide banking-like services without holding a banking licence. They cater to various sectors by offering credit, loans, leasing, hire purchase, and other financial products.

What is an NBFC? An NBFC (Non-Banking Financial Company) deals in financial services like loans and investments, fund transfers, insurance, and other services. Check how NBFCs work and how they differ from banks.

The role of an NBFC in India has grown remarkably over the years, especially in reaching underserved or niche markets. Unlike traditional banks, NBFCs often offer more flexible options, making them highly accessible for individuals and businesses alike.

Among the leading names in this space is Bajaj Finance Limited, a trusted NBFC in India, known for its wide range of offerings such as personal loans, fixed deposits, insurance, and other financial solutions that address the varied needs of Indian consumers.

✅ Check your pre-approved loan offer with phone number and OTP → Apply online in 5 minutes → Receive funds within a day*.

The NBFC full form is Non-Banking Financial Company. It refers to a financial institution that offers services similar to banks but does not hold a traditional banking licence. Despite this, NBFCs play a crucial role in bridging the credit gap and promoting financial inclusion, especially in developing economies like India.

To operate legally, an organisation must obtain an NBFC licence from the Reserve Bank of India (RBI), which regulates and supervises these entities under the RBI Act of 1934. This oversight ensures that NBFCs function within a structured framework, contributing significantly to the growth and accessibility of financial services across the country.

Non-Banking Financial Companies (NBFCs) provide a range of financial services, offering alternatives to traditional banking institutions:
 

• Loan services: NBFCs offer personal, business, and vehicle loans, catering to diverse financial needs. They often provide faster processing and flexible terms compared to banks, making credit accessible to underserved segments. Check your eligibility for personal loan from Bajaj Finance using just mobile number and OTP – 100% online process. 
• Investment solutions: They offer investment products such as mutual funds, bonds, and fixed deposits, enabling customers to grow their savings and build wealth over time.
• Asset financing: NBFCs provide financing for purchasing assets like machinery, equipment, and vehicles, supporting businesses in their growth and operational needs.
• Insurance services: Many NBFCs offer insurance products, including life, health, and general insurance, helping customers manage risks and protect assets.
• Wealth management: They offer financial planning, portfolio management, and advisory services for individuals and businesses seeking to manage and grow their wealth.
• Microfinance: NBFCs engage in providing small loans to underserved and low-income individuals, promoting financial inclusion and economic development.

Non-banking Financial Companies (NBFCs) serve vital functions in the financial sector.

• Credit provision: NBFCs extend credit facilities, providing loans and financial assistance to individuals and businesses. Read all about the features of our personal loan.
• Investment activities: They engage in various investment avenues, including securities, stocks, and bonds, contributing to market liquidity.
• Accepting deposits: Certain NBFCs accept deposits, offering an alternative to traditional banking institutions.
• Financial advisory: Many NBFCs offer financial advisory services, guiding clients on investments, financial planning, and risk management.
• Promoting financial inclusion: NBFCs play a pivotal role in bridging the credit gap, especially in underserved areas, promoting financial inclusion in diverse communities.

In India, various types of NBFCs contribute distinctively to the nation's financial landscape:

• Asset finance companies (AFCs): Specialising in financing tangible assets like machinery and vehicles, AFCs aid individuals and businesses in acquiring essential assets, and facilitating economic expansion.
• Loan companies: Prominent in consumer finance, they offer personal, home, and education loans, addressing specific financial needs and providing credit to those with limited access to formal banking channels.
• Infrastructure finance companies (IFCs): Focused on funding infrastructure projects in sectors like power and transportation, IFCs play a pivotal role in supporting national development and economic progress.
• Microfinance institutions (MFIs): Targeting economically disadvantaged segments, MFIs empower individuals and self-help groups with small loans, fostering entrepreneurship and sustainable livelihoods.
• Investment companies: Engaged in managing financial assets, investment companies cater to retail and institutional investors, contributing to capital formation and responsible investing practices.
• Systemically important core investment companies (CICs-SI): A subset of investment companies, CICs-SI, with their significant role, are closely regulated by RBI due to their potential impact on financial stability. They hold substantial assets in the equity shares, debt, or other financial assets of their group companies.
   

Additional read: Types of NBFCs in India

Incorporating a Non-Banking Financial Corporation (NBFC) involves several key steps. First, you must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN) for the proposed directors. Next, draft the Memorandum of Association (MoA) and Articles of Association (AoA), outlining the company’s objectives. Following this, file the incorporation application with the Registrar of Companies (RoC) along with the required documents. After approval, apply for an NBFC license from the Reserve Bank of India (RBI), meeting the necessary capital requirements. Once registered, the NBFC can offer various financial services, including nbfc personal loans, enhancing access to credit for individuals and businesses.

Here are the pros and cons of NBFCs:

In summary, while NBFCs offer unique advantages like accessibility and flexibility, they also come with certain drawbacks that potential borrowers should consider.

Net Owned Fund (NOF) refers to the capital that a Non-Banking Financial Corporation (NBFC) has after deducting its liabilities from its total assets. It is a crucial metric used to assess the financial health and stability of an NBFC. NOF includes equity capital, reserves, and surplus funds, providing insights into the company's ability to absorb losses and support its operations.
 

The net owned fund is particularly important in the context of regulatory compliance, as the Reserve Bank of India (RBI) mandates minimum NOF requirements for NBFCs to ensure they maintain sufficient capital to support their lending activities. The NBFC full form in banking is "Non-Banking Financial Company," and these institutions often engage in activities such as providing loans, asset management, and investment services.
 

A robust NOF signifies that an NBFC can effectively manage risk and continue to operate without relying excessively on borrowed funds. Consequently, a strong net owned fund is essential for sustaining growth, attracting investors, and maintaining confidence among stakeholders in the financial system.

Comparing NBFC and bank offers reveals a competitive landscape, with both entities presenting similar terms. However, banks adhere to stringent eligibility protocols, limiting accessibility for many. Higher credit score prerequisites, typically above 750, make bank loans challenging for individuals with weaker profiles. In contrast, NBFCs demonstrate flexibility. Approving loans for those with lower credit scores. To ensure a smooth application process, it is essential to check personal loan eligibility and understand the documents required for personal loan.
 

India's NBFC sector, with its diverse range, mirrors the richness and complexity of the nation's financial landscape. Each category of NBFC caters to distinct financial requirements, contributing uniquely to economic expansion. From facilitating asset financing and personal loans to driving infrastructure development and empowering marginalised communities, NBFCs have ingrained themselves deeply into India's financial fabric, offering more inclusive access to credit.