Definition
Non-Banking Financial Company (NBFC)
An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
NBFCs fill gaps banks leave, lending to segments such as vehicles, gold, consumer durables, MSMEs and infrastructure. They fund themselves through bank borrowings, NCDs, commercial paper and, for some, public deposits, rather than CASA, making their cost of funds dependent on capital markets.
The RBI regulates NBFCs under a layered framework (Base, Middle, Upper and Top layers) with tighter norms for larger ones. The 2018 IL&FS and DHFL crises exposed NBFC funding and asset-liability mismatch risks, prompting stricter liquidity and capital rules.
Related terms
- Housing Finance Company (HFC)A Housing Finance Company is an NBFC that primarily provides home loans and related housing finance, now regulated by the RBI.
- NBFC Scale-Based RegulationScale-Based Regulation is the RBI's framework that places NBFCs into Base, Middle, Upper and Top layers, with regulation tightening as size and systemic importance rise.
- Microfinance Institution (MFI)A Microfinance Institution provides small, collateral-free loans to low-income borrowers, typically women in groups, for income-generating activities.
- Asset-Liability MismatchAn asset-liability mismatch arises when the maturity or repricing profile of a lender's assets differs from that of its liabilities, creating liquidity or interest-rate risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.