Indian Economy · Economy0029
Non-Banking Financial Companies (NBFCs) in India
A non-banking financial company (NBFC) is a company whose main business is finance, such as lending or investing.
It can serve borrowers that banks may not reach easily. It is regulated, but it is not a bank.
The main exam questions ask what NBFCs do, how RBI classifies them, and which risks require closer checks.
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What Is an NBFC?
1. What makes a company an NBFC?
RBI looks at the company’s main business. Its usual 50–50 test asks two questions.
Are financial assets over half its total assets? Does income from those assets exceed half its gross income?
If both answers are yes, finance is generally its principal business. A regular manufacturer does not become an NBFC merely by investing spare cash.
Most NBFCs need RBI registration under Section 45-IA of the RBI Act, 1934. Some types have legal exemptions or another regulator.
RBI’s July 2026 rules also allow a narrow exemption for eligible firms with no public funds and no customer contact.
That exemption has conditions and does not erase every RBI power. Check the current registration rules before saying “all NBFCs register.”
Timeline: Why the rules grew
1. IL&FS shows how a funding shock spreads
Infrastructure Leasing and Financial Services (IL&FS) missed debt payments in 2018. It had lent to long-term projects while relying on shorter-term funding.
The defaults shook lenders and investors connected to it. Other NBFCs faced harder or costlier borrowing.
The government changed IL&FS’s board in October 2018. This episode shows asset-liability mismatch: cash comes in later than debts fall due.
The DHFL failure also sharpened concern about governance and liquidity. These events inform the risk story; no one event alone explains every later rule.
2. RBI moves to scale-based oversight
The Reserve Bank of India (RBI) announced scale-based regulation in 2021. It began applying in October 2022.
RBI now groups NBFCs by size, activity and risk. Its 2025 directions bring registration and layer rules together.
RBI released an Upper Layer list for 2026–27 in August 2026. The list is dated and can change.
QUICK CHECK 1 OF 7 · TRUE OR FALSE
RBI’s scale-based framework groups NBFCs by size, activity and risk.
The four layers allow closer supervision where scale and risk are greater.
Show answer
True. The four layers allow closer supervision where scale and risk are greater.
Must Know: NBFC basics
1. NBFC versus bank
| Question | Bank | NBFC |
|---|---|---|
| Can it lend? | Yes | Yes, if its licence permits |
| Can it take demand deposits? | Yes | No |
| Can it issue its own cheques? | Yes | No |
| Are deposits insured by DICGC? | Eligible bank deposits are covered | NBFC public deposits are not covered |
Demand deposits can be withdrawn when asked, like money in a savings account. Some authorised NBFCs may take fixed-term public deposits.
NBFCs do not operate the payment and settlement system like banks. They can still use banks and payment services for their transactions.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) covers eligible bank deposits, subject to its rules. It does not insure NBFC deposits.
QUICK CHECK 2 OF 7 · TRUE OR FALSE
An NBFC is legally the same as a bank under another name.
NBFCs are separate financial companies. They cannot accept demand deposits or issue cheques on themselves.
Show answer
False. NBFCs are separate financial companies. They cannot accept demand deposits or issue cheques on themselves.
3. How NBFCs raise money and serve borrowers
Many NBFCs fund loans through bank borrowing, bonds or their own capital. Only permitted deposit-taking NBFCs may accept public term deposits.
A lender may finance a vehicle, home, small business or infrastructure project. An investment company may hold financial assets instead.
NBFC-D means deposit-taking NBFC. NBFC-ND means non-deposit-taking NBFC.
This deposit split differs from the scale-based layers. A deposit-taking firm starts no lower than the Middle Layer.
Useful reach can bring risk. The firm must collect repayments while paying its own lenders on time.
QUICK CHECK 3 OF 7 · TRUE OR FALSE
Every financial company in India must hold the same RBI registration, with no exemptions.
Most need registration, but RBI rules provide specific exemptions and conditions.
Show answer
False. Most need registration, but RBI rules provide specific exemptions and conditions.
Good to Know: Types and layers
1. Main activity types in one view
| Type | Main work |
|---|---|
| Investment and Credit Company (ICC) | Loans, asset finance or securities investment |
| Housing Finance Company (HFC) | Housing finance under its own rules |
| Microfinance Institution (MFI) | Qualifying small loans to lower-income households |
| Factor | Buys or finances trade receivables |
| Infrastructure Finance Company (IFC) | Primarily lends to infrastructure |
| Core Investment Company (CIC) | Holds group-company investments |
| Peer-to-Peer (P2P) platform | Connects lenders and borrowers under special rules |
| Account Aggregator (AA) | Shares financial data with consent under special rules |
A P2P platform and an Account Aggregator have narrow roles. Do not assume they can accept deposits or lend like an ICC.
One activity type does not reveal a firm’s risk layer. RBI applies both activity rules and scale-based rules.
2. Four layers: more risk, more oversight
| Layer | Who is usually there? | Regulatory idea |
|---|---|---|
| Base | Smaller non-deposit NBFCs below ₹1,000 crore; some special platforms | Basic safeguards |
| Middle | Deposit-taking NBFCs; larger non-deposit NBFCs; HFCs, CICs and IFCs | Stronger prudential rules |
| Upper | NBFCs specifically identified by RBI | Extra capital, governance and risk checks |
| Top | Reserved for exceptional risk if RBI assigns a firm | Further supervisory action |
From July 2026, RBI’s Upper Layer criterion uses audited assets of ₹1,00,000 crore or more.
An identified firm stays under enhanced rules for at least five years, even if it later falls below the line.
The Top Layer is designed to remain empty unless a risk becomes exceptional. Do not describe it as a normal size band.
QUICK CHECK 4 OF 7 · TRUE OR FALSE
RBI’s Top Layer is reserved for exceptional risk, rather than an automatic asset-size band.
RBI may move an Upper Layer firm there if its systemic risk rises sharply.
Show answer
True. RBI may move an Upper Layer firm there if its systemic risk rises sharply.
Great to Know: Risk and safeguards
1. What can go wrong, and what RBI checks
Asset-liability mismatch (ALM) happens when a firm must repay funding before its loans return cash.
For example, a finance company funds a five-year road loan with one-year borrowing. It must renew funding before the road loan repays.
If lenders refuse, the firm may sell assets quickly or miss payments. Banks and funds that lent to it may also suffer.
RBI uses capital, liquidity and governance rules to reduce these risks. It also sets loan classification and provisioning rules for overdue loans.
Capital absorbs some losses. Liquidity helps meet near-term cash needs. Provisioning records expected loan losses.
RBI supervision cannot remove all losses. Customers should check the firm’s RBI status, loan terms, charges and complaint route.
NBFC deposits lack DICGC insurance. Borrowers still have consumer-protection rights under the rules that apply to their lender.
Think it through. Why does a large NBFC need more than a rule to hold capital?
Show the explanation
It also needs cash when lenders demand repayment. Long loans cannot always be collected quickly.
Strong governance helps managers see and limit this mismatch before it spreads.
Previous Year Questions
1. CSP 2026: four statements about NBFCs
The paper tested demand deposits, RBI registration, own cheques and deposit insurance.
NBFCs cannot accept demand deposits or issue cheques on themselves. Their public deposits are not DICGC-insured.
The claim that every NBFC must register with RBI ignores exemptions. Read the exact question.
2. CAPF (ACs) 2022: what an NBFC cannot do
This question focused on demand deposits and own cheques. Lending, investing and borrowing can be NBFC activities.
Read the exact CAPF question. Do not confuse a term deposit with a demand deposit.
QUICK CHECK 5 OF 7 · TRUE OR FALSE
NBFCs can issue cheques drawn on themselves just like banks.
They are not part of the bank payment and settlement system in that way.
Show answer
False. They are not part of the bank payment and settlement system in that way.
Current Affairs
1. RBI’s dated 2026–27 Upper Layer list
RBI’s 6 August 2026 list named 17 NBFCs for 2026–27, based on accounts to 31 March 2026.
It includes REC, Power Finance Corporation, Indian Railway Finance Corporation and Housing and Urban Development Corporation.
Bajaj Finance, Shriram Finance and Tata Sons are also named. RBI says Tata Sons’ inclusion does not decide its pending de-registration request.
Two firms from earlier lists remain under enhanced rules even though they did not meet the current test.
Always date this list. It is a supervisory classification, not a ranking of which lender is safest for a customer.
An older Tata Sons report describes its past debt reduction. That report does not settle RBI’s current decision.
QUICK CHECK 6 OF 7 · TRUE OR FALSE
RBI named 17 NBFCs in its 2026–27 Upper Layer list.
The list was released on 6 August 2026 and is a dated supervisory classification.
Show answer
True. The list was released on 6 August 2026 and is a dated supervisory classification.
QUICK CHECK 7 OF 7 · TRUE OR FALSE
Tata Sons’ place on the 2026 RBI list settles its pending de-registration request.
RBI said the listing is without prejudice to its still-pending application.
Show answer
False. RBI said the listing is without prejudice to its still-pending application.
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