What is an NBFC? Meaning, Functions, Types & Importance

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Now let's understand its types. NBFCs are mainly divided into Deposit-Taking (NBFC-D) and Non-Deposit-Taking (NBFC-ND) companies. Only authorised NBFC-Ds can accept term deposits. Also NBFCs cannot accept demand deposits. 

What are the core functions of NBFCs?

NBFCs perform different key functions in the economy depending on their licence:

• Retail and Consumer Credit: you can get a loan from NBFCs for two-wheelers, cars, consumer durables, and personal credit needs.
• MSME and Business Financing: NBFCs do not only give loans to individuals. They also provide capital and machinery loans to small and medium enterprises.
• Housing Finance: There are specific NBFCs which offer you a housing loan. 
• Microfinance: NBFCs provide collateral-free micro-loans for those who have less income. 
• Infrastructure Funding: NBFCs also provide loans for roads, renewable energy, and ports.

What are the different types of NBFCs? 

Normally, one NBFC offers a specific type of service. It depends on their area of focus. There are some NBFCs that offer only personal loans. Similarly, some NBFCs offer only business loans. Many NBFCs focus on housing finance, microfinance, or investments. Here are some types of NBFCs.

• Investment and Credit Company (ICC): These types of  NBFCs give asset finance, personal loans, business advances, and investment services.
• ​Housing Finance Company (HFC): If you want housing loans for home purchase, construction, and renovation you can get it through these NBFCs. 
• ​Infrastructure Finance Company (IFC): Long-term debt funding for large-scale infrastructure projects like power, highways, and logistics gets funds from these NBFCs. 
• ​Infrastructure Debt Fund (IDF-NBFC): These NBFCs provide long-term loans for infrastructure projects. Mainly by investing in or refinancing loans. These are related to completed infrastructure projects.
• ​Micro Finance Institution (NBFC-MFI): These institutions provide small, collateral-free credit to low-income individuals.
• Peer-to-Peer Lending Platform (NBFC-P2P): These are intermediaries which operate an online platform. Actually this matches individual borrowers with lenders.
• Non-Operative Financial Holding Company (NOFHC): A specialised holding structure is a company or entity through which a promoter group holds shares in a bank and other regulated financial businesses.

Different types of NBFCs have different functions. Some NBFCs give loans and invest. Some NBFCs specialise in home finance, microfinance, infrastructure funding, or digital financial services.

What is the difference between banks and NBFCs?

The primary difference between bank and NBFCs is about the function. Banks can do almost all the financial services, while NBFCs are limited to some. 

Cheque is the part of the payment and settlement system; can issue cheques drawn on themselves.

NBFCs cannot issue cheques drawn on themselves; rely on standard banking channels..

Eligible bank deposits are insured up to ₹5,00,000 per depositor per bank (principal + interest).

No DICGC insurance cover is available for NBFC deposits.

These are the core differences between banks and NBFCs. 

What is the importance of NBFCs? 

Whenever a person or business needs funding, they often look for credit options that suit their profile. Traditional banks have fixed underwriting rules, and applicants who lack conventional income documentation or standard profiles may face difficulties. In this scenario, Non-Banking Financial Companies (NBFCs) fill the credit gap.

​NBFCs help people, self-employed professionals, and small businesses by providing accessible credit. They operate actively in semi-urban and rural areas, catering to small borrowers, startups, and MSMEs. With tailored evaluation methods and faster processing, NBFCs provide credit for housing, vehicles, working capital, and consumer purchases.

Things to check before borrowing from an NBFC

You should always compare the following factors before applying for the loan. 

• Interest Rate & APR: You should check the annual percentage rate (APR). which includes the base interest rate and other mandatory fees.
• Processing Fees: You should also check upfront processing and administrative charges.
• Foreclosure & Prepayment Charges: You need to verify prepayment rules, especially regarding floating-rate personal/business loans.
• Penal Charges: You should check default and late-payment fee terms.
• Regulatory Status: You should know about NBFCs credibility. So that you can  check theNBFC is registered on the RBI's official list of registered financial companies.

Conclusion

Non-banking financial companies (NBFCs) are very important for India's financial system. Banks can not provide loans to every borrower, and they have high eligibility criteria for loan approval. 

There are different types of NBFCs. The type depends on the function of the NBFCs, like housing finance, microfinance, infrastructure funding, and business loans.  That's why NBFCs are an important part of the financial system in India. 

Frequently asked questions

What is the basic function of NBFC?

NBFCs provide structured credit and financial intermediation. It is on their specific RBI registration. Their functions are retail lending, MSME and corporate advances, infrastructure financing, and investments.

Which are some famous NBFCs in India?

Shriram Finance limited, bajaj finance limited are famous NBFCs in India. You can get a loan from these NBFCs. 

Is NBFC good or bad?

Neither is always better. Banks can offer lower interest rates to borrowers with a good income and credit history. NBFCs can offer more flexible loan options, but their interest rates and fees can vary. It is best to compare the total cost of the loan before choosing.

Can I get a personal loan if my credit score isn't good?

Yes, but not guaranteed. Low credit does not guarantee approval but it can lead to rejection, higher rates, or stricter terms. 

Can I get a loan online from NBFCs?

Yes, NBFCs services are available online and offline mode. You can prefer any. Applying for a loan online is a simple process. Documentation and digital KYC requirements vary widely by lender and product.

Is NBFC safe for FDs?

The biggest difference between NBFC FD and bank FD is about safety. Bank FDs are insured up to ₹5,00,000 under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. But there is no such scheme for NBFCs. 

What can NBFC not accept?

NBFCs usually do not accept demand deposits. Also they can not issue cheques.

 Can an NBFC issue credit cards?

NBFCs cannot issue credit cards without permission of the RBI. Normally NBFCs do partnership with commercial banks as co-branded card arrangements. 

What happens if a borrower defaults on an NBFC loan?

If any borrower defaults in NBFCs, that NBFCs reports delinquency to credit information bureaus. These CICs add this information in the credit report and it negatively affects credit score.

 Is SBI a bank or an NBFC?

No, SBI is not an NBFC. It is an Indian Multinational, Public Sector Banking and Financial services statutory body. Who has headquarters in Mumbai.