what is an NBFC: In India’s complex financial environment, non-banking financial companies (NBFCs) have emerged as a very important column of alternative borrowings. While banks still rule the highest rule in the formal credit process, NBFCs are covering a huge difference that still remains in places where traditional banks are not willing to run. Whether giving loans to small and medium enterprises, funding rural consumers, or providing microlone to the city residents, NBFC has received the commanding lead. But what are NBFCs and why are they so important for India’s economic power plant?
Table of Contents
Let us go in-depth into everything that there is to learn about NBFCs — from definition and classification to economic contribution and employment generation.
Learning the Definition and Legal Structure of NBFCs in India
Non-banking financial companies, or NBFCs, are banking companies that offer banking products without bank licenses. Most of the Indian Reserve Banks of India (RBI) regulated through the Reserve Bank of India Act, 1934, such companies are barred from accepting demand deposits, which provide them separate from traditional banks. Despite this, they deal with all types of financial products such as personal loans, asset financing, lease and investment products.
RBI classifies non-banking financial companies into various groups based on its work, for example, debt companies, investment companies, assets finance companies, infrastructure finance companies and microfinance institutions. NBFCs have to be registered with RBI and also maintain the requirement of a minimum net owned fund (NOF) – a statutory obligation that ensures financial stability.
Most Important Differences Between NBFCs and Conventional Banking Institutions
One of the most common questions asked is what marks the difference of NBFCs from banks. Though they might appear similar to the naked eye, there are a number of points of difference which distinguish them:
Deposit-taking: non-banking financial companies (NBFCs) are prohibited from taking demand deposits such as current accounts or savings. Certain NBFCs are permitted to take term deposits, but only under strict regulatory terms.
Payment and Settlement System: NBFCs are not covered under the payment and settlement system and cannot issue cheques drawn on themselves.
Regulatory Oversight: Whereas banks are subject to tight regulatory oversight of the RBI and are Basel norm compliant, NBFCs are in a less intensive regulatory environment but with increased compliance after reforms.
Nature of Loan Giving: NBFCs lend to risky segments such as startups, small and medium enterprises, and do not do individuals without credit history – which traditional banks usually shy away.
This enables more flexibility to provide non-banking financial companies (NBFCs) to provide niche requirements and serve the underbank segment especially in rural and semi-urban areas.
Understanding different types of non-banking financial companies
NBFCs come in all sizes and sizes, and each category conforms to a specific requirement of finance or customer type. RBI classifies the following comprehensive type of NBFCs:
Asset Finance Companies (AFCs): These non-banking financial companies (NBFCs) provide loans to buy tangible property like vehicle, equipment or machinery.
Investment companies (ICS): They mostly include themselves in securities and other financial products that allow investments in shares, debentures and bonds.
Debt Companies (LCS): Multi -purpose non-banking financial companies (NBFCs) provide loans and advances to support different types of activities.
Infrastructure Finance Company (IFCs): Lend yourself to raising mass money to support mega infrastructure projects such as roads, ports and power projects.
Microfinance Institutions (NBFC-MFIS): Extend small-ticket credits for poor homes or self-help groups without collateral
Housing Finance Companies (HFCs): Although regulated by the National Housing Bank (NHB), these come under the definition of NBFC for practical discussion purposes.
Companies, it is important to remember these classifications for candidates applying for jobs, and investors want to trade with or with the financial services industry.
Role of NBFCs in Promoting Financial Inclusion Across India
One of the most appreciative roles played by non-banking financial companies (NBFCs) is financial inclusion. In India, most people—particularly rural and underserved segments—haven’t had any exposure to formal banking avenues. NBFCs fill this gap by applying new credit models, alternative credit scoring systems, and mobile-based distribution channels to offer credit where it’s most needed.
They’ve become especially critical in facilitating access to credit for:
- First-time borrowers without a credit history
- Small and medium-sized enterprises (SMEs)
- Women entrepreneurs
- Farmers and farm workers
- Urban migrant workers
The success of microfinance non-banking financial companies (NBFCs) in empowering rural women and small business is a testament to the revolutionary power of such institutions in transforming society.
How NBFCs Support Economic Development and GDP Growth
NBFCs are not just alternate financiers—They are trendsetters in India’s growth saga. By lending to industries that are not in the traditional reckoning of banks, NBFCs drive entrepreneurship, generate jobs, and spur consumption-led economic growth.
Their contribution is greatest in the following sectors:
Real Estate and Infrastructure: NBFCs are at the core of financing real estate construction and building infrastructure.
Agriculture: Crop loans, equipment finance, and warehouse finance are extended to farmers by most NBFCs.
Retail: NBFCs’ financing has enabled millions to own appliances, automobiles, and electronics.
Education: Many a student goes for higher studies because of education loans offered by NBFCs.
By investing funds in growing industries, NBFCs are also growth promoters, facilitating larger macroeconomic objectives of poverty reduction and employment generation.
Knowledge of the Risks and Regulatory Issues Confronting NBFCs
While NBFCs are key players, they are far from risk-free. The sector of NBFCs has witnessed some serious crises in the past, but the most noted among them has been the fall of IL&FS in 2018, which led to a surprise liquidity crisis. This uncovered the sector to being over-leveraged, with asset-liability mismatches, and weak governance.
To counterbalance these risks, the RBI has launched a new Scale-Based Regulatory Framework (SBR), where NBFCs are divided into layers (Base, Middle, Upper, and Top) and allocate stricter regulation to larger and systemically more significant players.
The most important regulatory reforms are:
- Tighter capital adequacy requirements
- Strengthened corporate governance requirements
- Forced internal audit and risk management practices
- Disclosure of related-party transactions
These reforms are aimed at enabling NBFCs to further grow without posing risks to systemic stability to the economy.
Career Prospects in the NBFC Industry and Recruitment Agencies’ Role
With portfolios and customers expanding, needs for professionals are increasing in finance, risk, operations, compliance, technology, and marketing functions. From credit analysts to digital lending specialists, the industry is recruiting in a large scale.
PACE Recruit, being a top recruitment partner to India’s BFSI industry, assists NBFCs in acquiring specialized talent suited to changing business requirements. Recruitment for fintech-enabled NBFCs or traditional institutions venturing into new vistas, our solutions provide timely and quality hiring.
Our recruitment solutions are:
- BFSI Executive Search
- Bulk Hiring for NBFC Field Sales Teams
- Risk & Compliance Talent Mapping
- Digital Transformation Staffing for NBFC FinTechs
Partner With PACE Recruit for Specialized NBFC Recruitment Solutions
The NBFC industry is at a juncture. With rising regulation, technology transformation, and growing markets, never has the need for trained manpower been so acute. That is where PACE Recruit comes in.
We offer rich domain experience, vast candidate repositories, and a tried-and-tested recruitment process optimized for the NBFC ecosystem. If your NBFC must hire faster and better, join forces with us for full-cycle recruitment services for growth.
Shape India’s future financial landscape with us — together.
Get in touch: https://www.pacerecruit.com/contact-us/
Most Asked Questions on what is an NBFC
1. What is the key activity of an NBFC in India?
The credit facility, investment, and loans are facilitated by the NBFCs in under-served segments, not properly covered by the banks.
2. In India, is an NBFC regulated?
In India, an NBFC is regulated by monitoring their registration, capital, management, risk exposure as well.
3. Are NBFCs permitted to take deposits like banks?
No, NBFCs cannot take demand deposits. A few NBFCs can accept term deposits but strictly under RBI directions.
4. Are NBFCs safe investments?
NBFCs are safe enough if registered with the RBI and regulated. But the investors must ensure checking credit ratings and balance sheets first before investment.
5. What is the contribution of NBFCs towards employment in India?
NBFCs create direct employment via employment generation and indirect employment by supporting SMEs, entrepreneurs, and infrastructure development.