📚 JAIIB 2025 • IE & IFS • Module C • Chapter 6 of 9

Non-Banking Financial Companies — NBFCs

What NBFCs are, how they differ from banks, classification by liability/activity/size, types (AFC, NBFC-MFI, HFC, P2P, CIC), Scale Based Regulation (4 layers), registration with RBI, and bank finance to NBFCs.

⏱ 17 min read🎯 High Exam Weightage🧠 8 Memory Tricks⚡ 12 Flash Cards

Banky Meets the ‘Almost-Banks’! 🏢

NBFCs are everywhere — Bajaj Finance, Muthoot, Shriram Transport, Manappuram. They look like banks, act like banks, but they’re NOT banks. This chapter explains what makes them different and how they’re regulated.

“Sir, my customer says Bajaj Finance gives faster loans than us. Aren’t they a bank? Why are they different?” 🤔

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Section 1 of 9

Why Read This Chapter?

NBFCs are your competition AND your partners — know them well

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Sir, if NBFCs do everything banks do, why study them separately?

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Banky, NBFCs do SIMILAR things but with KEY differences! NBFCs CANNOT accept demand deposits (no savings/current accounts). They CANNOT issue cheques drawn on themselves. They’re NOT part of the payment system. Deposit insurance (DICGC) does NOT cover NBFC deposits. But they’re VITAL — they reach areas banks can’t, serve customers banks won’t, and process loans FASTER. Your bank even co-lends with NBFCs! And with RBI’s new Scale Based Regulation (4 layers), NBFCs are now regulated almost like banks. Understanding NBFCs = understanding your competition AND your co-lending partners!

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Exam Marks

4-6 questions — NBFC definition, 3 classifications (liability/activity/size), NBFC-D vs NBFC-ND, Scale Based Regulation 4 layers, registration under Section 45-IA, NOF ≥ ₹2 crore. Very high weightage!

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Career Growth

Co-lending with NBFCs is a major growth area — understanding NBFC regulation = career in partnerships and co-lending

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Real Life

Next time you see a Bajaj Finance or Muthoot Gold Loan ad, you’ll understand exactly what they can and cannot do

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Section 2 of 9

How Will It Benefit You?

Real career advantages

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Give me a real scenario!

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🏢 Scenario: Your bank is exploring co-lending with an NBFC. The GM asks: ‘What regulatory layer is this NBFC in?’ You check: ‘Sir, this NBFC has assets over ₹1000 crore and accepts deposits — it falls in the Middle Layer under Scale Based Regulation. NBFC-D and HFC are always Middle or Upper Layer, never Base.’ GM: ‘You know NBFC regulation better than our compliance team!’ 🌟

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Section 3 of 9

What Is This Chapter About?

30-second summary

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Quick version, sir!

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This chapter covers: NBFC definition (Section 45-I(f) RBI Act — financial institution whose principal business is lending/investment). How NBFCs differ from banks: cannot accept demand deposits, no cheque facility, no DICGC coverage, not part of payment system. Registration: mandatory under Section 45-IA of RBI Act, minimum NOF ₹2 crore. 3 Classifications: By Liability (NBFC-D vs NBFC-ND), By Activity (AFC, LC, IC, IFC, CIC, NBFC-MFI, NBFC-P2P, NBFC-AA, HFC, etc.), By Size (systemically important ≥ ₹500 crore assets). Scale Based Regulation: 4 layers (Base, Middle, Upper, Top — Top ideally empty). Bank finance to NBFCs, Fair Practice Code, Ombudsman Scheme.

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Section 4 of 9

Key Definitions — Banky Asks, Mentor Explains

Every term explained like you’re 10

Critical Term

NBFC Definition

A company whose PRINCIPAL business is lending, investment, or accepting deposits

Section 45-I(f)

Banky’s Understanding: Defined in Section 45-I(f) of the RBI Act 1934. An NBFC is a company registered under the Companies Act that has its principal business as receiving deposits or lending in any manner. Key differences from banks: (1) Cannot accept DEMAND deposits (no savings/current accounts). (2) Cannot issue cheques drawn on itself. (3) Not part of payment and settlement system. (4) DICGC deposit insurance does NOT cover NBFC deposits.

🧒 Analogy: Like a restaurant that serves food (lending) but can’t also run a grocery store (demand deposits). NBFCs do the ‘lending restaurant’ part without the ‘deposit supermarket’ of banks!

Critical Term

Registration — Section 45-IA

All NBFCs MUST register with RBI — minimum NOF ₹2 crore

Mandatory

Banky’s Understanding: Section 45-IA of RBI Act 1934: mandatory Certificate of Registration (CoR) from RBI for NBFCs. Minimum Net Owned Funds (NOF) = ₹2 crore. NBFCs not registered but conducting financial business → RBI can impose penalty/fine or prosecute. 1997 amendment to Chapter IIIB of RBI Act gave comprehensive powers to regulate NBFCs. NBFCs must also create a reserve fund and transfer ≥ 20% of profits every year.

🧒 Analogy: Like a driving license — you MUST get registered (CoR) before you can drive (operate as NBFC). No registration = illegal driving = penalty!

Critical Term

3 Classifications of NBFCs

By Liability (deposits), By Activity (what they do), By Size (how big)

3 ways

Banky’s Understanding: (1) Liability-based: NBFC-D (accept public deposits) vs NBFC-ND (don’t accept deposits). (2) Activity-based: AFC (Asset Finance), LC (Loan Companies), IC (Investment), IFC (Infrastructure Finance), CIC (Core Investment), NBFC-MFI (Microfinance), IDF-NBFC (Infra Debt Fund), NBFC-P2P (Peer to Peer), NBFC-AA (Account Aggregator), NOFHC (Non-Operative Financial Holding Co), MGC (Mortgage Guarantee), NBFC-Factors. (3) Size-based: Assets ≥ ₹500 crore = Systemically Important (NBFC-ND-SI).

🧒 Analogy: Like classifying cars: by fuel (petrol/diesel = liability), by type (sedan/SUV/truck = activity), by engine size (small/large = size). Same NBFC, 3 different lenses!

Critical Term

Scale Based Regulation (SBR)

4 layers of regulation — Base, Middle, Upper, Top (Top ideally empty)

4 layers

Banky’s Understanding: RBI’s revised framework effective October 1, 2022. 4 layers based on size, activity, and riskiness: Base Layer (BL): NBFC-P2P, NBFC-AA, NOFHC, NBFCs without public funds. Middle Layer (ML): NBFC-D, CIC, IFC, HFC, SPD, IDF-NBFC (always middle or upper, never base). Upper Layer (UL): Top 10 NBFCs by asset size + others based on risk. Top Layer (TL): Ideally EMPTY — only for NBFCs posing extreme systemic risk. Govt-owned NBFCs: Base or Middle only (not Upper).

🧒 Analogy: Like a building with 4 floors — Base (ground floor, light regulation), Middle (first floor), Upper (penthouse, heavy regulation), Top (rooftop — ideally nobody there, it’s for extreme cases only!)

Critical Term

NBFC-D vs NBFC-ND

D = accepts public deposits (more regulated). ND = no deposits (less regulated).

Deposit distinction

Banky’s Understanding: NBFC-D (Category A): Accepts public deposits. Subject to: capital adequacy, liquid asset maintenance, exposure norms, ALM discipline, reporting. More heavily regulated because public money is at stake. NBFC-ND (Category B): Does NOT accept public deposits. Less regulated but if assets ≥ ₹500 crore → classified as Systemically Important (NBFC-ND-SI) → subject to capital adequacy, exposure norms, reporting.

🧒 Analogy: NBFC-D = a restaurant that also stores customer food (deposits) — needs more safety rules. NBFC-ND = takeaway only (no storage) — fewer rules but still regulated if big enough!

Critical Term

Key NBFC Types

AFC, NBFC-MFI, HFC, CIC, NBFC-P2P, NBFC-AA — each serves a different purpose

12+ types

Banky’s Understanding: AFC: Asset Finance Company — finances physical assets (vehicles, equipment). NBFC-MFI: Microfinance — small loans to poor. HFC: Housing Finance Company — home loans (now regulated by RBI, supervised by NHB). CIC: Core Investment Company — holds investments in group companies (≥90% assets in investments). NBFC-P2P: Peer-to-Peer Lending Platform — connects borrowers with individual lenders online. NBFC-AA: Account Aggregator — consolidates financial data from multiple sources. NOFHC: Non-Operative Financial Holding Company — holds group financial entities.

🧒 Analogy: Like different specialist doctors — AFC treats vehicle loans, HFC treats home loans, NBFC-MFI treats poor patients, P2P connects patients directly with pharmacies!

Critical Term

Bank Finance to NBFCs

Banks CAN lend to NBFCs for their lending activities

WC + Term loans

Banky’s Understanding: Banks may extend working capital facilities + term loans to all RBI-registered NBFCs engaged in infrastructure financing, equipment leasing, hire-purchase, loan, factoring, and investment activities. Banks can also finance NBFC-MFIs for micro-lending. However, banks CANNOT provide guarantees for NBFC deposits. Banks cannot finance NBFCs for: IPO subscriptions, unsecured corporate loans, investing in shares. Co-lending (CLM) scheme replaces co-origination scheme.

🧒 Analogy: Like a wholesale supplier (bank) selling to a retailer (NBFC) — the bank provides funds, the NBFC distributes to end customers!

Critical Term

Fair Practice Code & Ombudsman

Rules for how NBFCs must treat customers — grievance redressal

Customer protection

Banky’s Understanding: RBI mandates a Fair Practice Code for all NBFCs: board-approved loan application forms, transparent interest rates (annualised), published on website, no coercive recovery. Integrated Ombudsman Scheme 2021 covers NBFCs. Appellate authority: Executive Director of RBI (changed from Deputy Governor). NBFCs excluded from Ombudsman: CIC, IDF-NBFC, NBFC-IFC, companies in resolution/winding up.

🧒 Analogy: Like consumer protection laws for restaurants — the Fair Practice Code ensures NBFCs serve customers fairly and the Ombudsman is the complaint hotline!

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Section 5 of 9

Chapter Explained in Simple Stories

So easy even Banky’s nephew understands

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Sir, explain this like a story!

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Three bite-sized stories coming up — impossible to forget! 🚀

🏢 Block 1: NBFCs — Banks Without the Full License

NBFCs are like banks that are missing 4 key powers:

❌ Cannot accept DEMAND deposits — no savings accounts, no current accounts. Can only accept TERM deposits (like FDs).

❌ Cannot issue CHEQUES drawn on themselves — no chequebook from NBFCs.

❌ Not part of PAYMENT system — no NEFT/RTGS/UPI from NBFC accounts.

❌ No DICGC coverage — NBFC deposits are NOT insured like bank deposits.

But NBFCs have competitive advantages: faster loan processing, lower transaction costs, superior understanding of local/regional dynamics, personalized service, reach in remote areas. That’s why Bajaj Finance, Muthoot, Shriram Transport are so successful — they serve customers banks miss!

Registration: mandatory under Section 45-IA of RBI Act. Minimum NOF = ₹2 crore. Must transfer ≥20% of profits to reserve fund every year.

Key Term

Principal Business

NBFC’s PRINCIPAL business must be financial (lending/investment/deposits). If a company does manufacturing as primary and lending as secondary, it’s NOT an NBFC. The ‘principal business’ test matters!

🧑‍💼 Banky: “So NBFCs can lend like banks but can’t take savings deposits, issue cheques, or join UPI? They’re banks minus the deposit franchise! 🏢”

📊 Block 2: 3 Ways to Classify NBFCs

NBFCs are classified through 3 different lenses:

🔍 Lens 1 — By Liability (deposits): NBFC-D (accepts public deposits = Category A, more regulated) vs NBFC-ND (no deposits = Category B, less regulated). NBFC-ND with assets ≥₹500 crore = Systemically Important (SI).

🔍 Lens 2 — By Activity (what they do): AFC (vehicles/equipment), LC (loans), IC (investments), IFC (infrastructure), CIC (group holdings), NBFC-MFI (microfinance), HFC (housing), NBFC-P2P (peer-to-peer), NBFC-AA (account aggregator), NOFHC, MGC, NBFC-Factors. ~12 types!

🔍 Lens 3 — By Size: Non-deposit NBFCs with assets ≥ ₹500 crore = Systemically Important (NBFC-ND-SI). Subject to capital adequacy, exposure norms, reporting.

Key Term

₹500 Crore Threshold

Non-deposit NBFCs with assets ≥ ₹500 crore = Systemically Important (NBFC-ND-SI). More regulated because their failure could impact the financial system.

🧑‍💼 Banky: “3 lenses: deposits (D vs ND), activity (AFC/MFI/HFC…), size (≥₹500Cr = systemically important). Three ways to look at the same NBFC! 🔍”

🏗️ Block 3: Scale Based Regulation — The 4-Layer Pyramid

RBI’s 2022 framework organizes ALL NBFCs into a 4-layer pyramid:

🟢 BASE LAYER (lightest regulation): NBFC-P2P, NBFC-AA, NOFHC, NBFCs without public funds/customer interface. Also: govt-owned NBFCs (base or middle only).

🟡 MIDDLE LAYER: NBFC-D, CIC, IFC, HFC (always middle or upper, NEVER base). SPD and IDF-NBFC always stay middle. More regulation than base.

🟠 UPPER LAYER: Top 10 NBFCs by asset size + others identified by RBI based on risk parameters. Near-bank regulation. Govt NBFCs: NOT placed in upper layer (till further notice).

🔴 TOP LAYER (ideally EMPTY): Only for NBFCs posing extreme systemic risk. This layer should have NOBODY — it’s the emergency zone!

NBFC-ICC, NBFC-MFI, NBFC-MGC can be in ANY layer depending on size/risk parameters.

Key Term

Top Layer = Empty

The Top Layer of SBR is ideally expected to be EMPTY. It exists only as a warning zone for NBFCs posing extreme systemic risk. If an NBFC reaches here, it needs the most intense supervision.

🧑‍💼 Banky: “Base=light, Middle=moderate, Upper=heavy, Top=ideally nobody there? It’s like a risk pyramid — the higher you go, the more RBI watches you! 👀”

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Section 6 of 9

Exam Angle — Every Testable Point

All facts, numbers, definitions JAIIB tests

✅ Must-Know Facts — Highest Probability

NBFC defined in Section 45-I(f) of RBI Act 1934 — principal business: lending/investment/deposits
NBFCs CANNOT: accept demand deposits, issue cheques, join payment system, get DICGC coverage
Registration: Section 45-IA RBI Act — mandatory CoR + minimum NOF ₹2 crore
NBFCs must transfer ≥ 20% of profits to reserve fund every year
1997 amendment to Chapter IIIB RBI Act: comprehensive NBFC regulation powers to RBI
3 classifications: Liability (D vs ND), Activity (AFC/LC/IC/IFC/CIC/MFI/P2P/AA/HFC…), Size (SI ≥ ₹500Cr)
NBFC-D (Category A) = accepts deposits, more regulated | NBFC-ND (Category B) = no deposits
NBFC-ND-SI: non-deposit NBFC with assets ≥ ₹500 crore = Systemically Important
Scale Based Regulation: 4 layers — Base, Middle, Upper, Top (Top ideally EMPTY)
Base Layer: NBFC-P2P, NBFC-AA, NOFHC, no public funds/customer interface
Middle Layer: NBFC-D, CIC, IFC, HFC (always middle/upper, NEVER base) | SPD, IDF always middle
Upper Layer: Top 10 by assets + RBI risk assessment | Govt NBFCs NOT in upper layer
NBFC-ICC, NBFC-MFI, NBFC-MGC: can be in ANY layer (depends on size/risk)
Bank finance to NBFCs: working capital + term loans — BUT not for IPO/unsecured loans/shares
Banks CANNOT guarantee NBFC deposits
Co-Lending Model (CLM) replaced co-origination scheme — bank + NBFC joint lending
Fair Practice Code: transparent rates (annualised), board-approved forms, no coercive recovery
Ombudsman: Integrated Scheme 2021 covers NBFCs — appellate authority: ED of RBI (not DG)
HFCs: regulated by RBI (regulator), supervised by NHB (supervisor) — recent change
Exempted from RBI registration: Mutual Benefit Cos, Chit Cos, Nidhi Cos — NOT HFCs!
HFCs are NOT exempted from registering with RBI (exam trap!)

📝 Previous Year Questions

Q: Banks can extend to NBFCs:

A: (d) Both working capital and term loans ✅

Q: Which NBFC is NOT exempted from RBI registration?

A: (b) Housing Finance Companies ✅ (must register!)

Q: Banks can finance NBFCs for:

A: (c) Financing second-hand assets ✅ (not IPO/unsecured/shares)

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Section 7 of 9

Memory Tricks That STICK

Lock every fact permanently

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Too many facts! Help! 🤯

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These tricks will lock everything in forever! 🧲

🧠 Trick 1 — NBFC ≠ Bank

4 things NBFCs CAN’T do

NBFCs CAN’T: DCPD Demand deposits ❌ Cheques ❌ Payment system ❌ DICGC coverage ❌

DCPD = 4 things NBFCs lack. Demand deposits, Cheques, Payment system, DICGC. This is what separates NBFCs from banks. Remember DCPD!

🧠 Trick 2 — Section 45

45-I(f) definition, 45-IA registration

45-I(f) = what is NBFC (definition) 45-IA = how to REGISTER Both in RBI Act 1934, Chapter IIIB

Section 45-I(f) defines NBFC. Section 45-IA mandates registration. Both in RBI Act. NOF minimum = ₹2 crore. 20% profits to reserve fund.

🧠 Trick 3 — 4 SBR Layers

Base, Middle, Upper, Top

B-M-U-T = Base, Middle, Upper, Top Bottom = lightest regulation Top = ideally EMPTY! (BMUT = Big Money Under Tension!)

4 layers from least to most regulated. Top is ideally empty (nobody should be THAT risky). P2P/AA always Base. NBFC-D/HFC always Middle+. Govt NBFCs: not upper.

🧠 Trick 4 — ₹500 Crore = SI

Systemically Important threshold

₹500 Crore = Systemically Important ND + ₹500Cr = NBFC-ND-SI (FIVE hundred = System risk!)

Non-deposit NBFCs with assets ≥ ₹500 crore = Systemically Important. Subject to enhanced regulation (capital adequacy, exposure, reporting). Below ₹500Cr = less regulated.

🧠 Trick 5 — NOF ₹2 Crore

Minimum Net Owned Funds for registration

NOF = Net Owned Funds Minimum = ₹2 CRORE (TWO crore to start an NBFC!)

To register as NBFC: minimum NOF of ₹2 crore + CoR from RBI. Without this = illegal = penalty/prosecution. NOF = owned funds minus investments in subsidiaries.

🧠 Trick 6 — HFC Regulation

RBI regulates, NHB supervises

HFC = RBI is REGULATOR NHB is SUPERVISOR (Boss=RBI, Manager=NHB!)

Recent change: HFCs are now regulated by RBI (not NHB). NHB continues as supervisor. HFCs must register with RBI (not exempted!). HFC is always in Middle or Upper layer.

🧠 Trick 7 — CLM Replaced Co-Origination

Co-Lending Model = new scheme

OLD = Co-Origination NEW = Co-Lending Model (CLM) Bank + NBFC = joint lending!

RBI replaced co-origination with Co-Lending Model (CLM). Bank and NBFC sign Master Agreement. NBFC is single interface for customer. Escrow account routes all transactions.

🧠 Trick 8 — Ombudsman ED

Appellate authority changed

Ombudsman appellate authority: OLD = Deputy Governor NEW = Executive Director of RBI (ED, not DG!)

Under Integrated Ombudsman Scheme 2021: Executive Director of RBI is the appellate authority (changed from Deputy Governor). Covers NBFCs except CIC, IDF, NBFC-IFC, and those in resolution.

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Section 8 of 9

Visual Summary — Chapter Map

Entire chapter in one diagram

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Section 9 of 9

Flash Revision — Last-Minute Cards

Read these 10 minutes before exam

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EXAM IN 15 MINUTES! 😰

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12 cards — read twice, you’ll get every question right! 💪

NBFC Definition

Section 45-I(f) RBI Act — principal biz: lending/investment

Cannot: demand deposits, cheques, payment system, DICGC

Registration

Section 45-IA — mandatory CoR + NOF ≥ ₹2 crore

Reserve fund: ≥20% of profits yearly | 1997 amendment gave RBI power

NBFC-D vs NBFC-ND

D = accepts deposits (Cat A) | ND = no deposits (Cat B)

NBFC-ND-SI: assets ≥ ₹500 Cr = Systemically Important

3 Classifications

Liability (D/ND) + Activity (12+ types) + Size (SI)

Activity: AFC, LC, IC, IFC, CIC, MFI, P2P, AA, HFC, NOFHC…

SBR 4 Layers

Base → Middle → Upper → Top (empty!)

NBFC-D/HFC: always Middle+ | P2P/AA: always Base

Base Layer

P2P, AA, NOFHC, no public funds

Lightest regulation | Govt NBFCs: Base or Middle only

Top Layer

Ideally EMPTY — extreme risk zone

Heaviest regulation | Emergency zone for systemic risk

HFC Regulation

RBI = Regulator, NHB = Supervisor

HFCs NOT exempted from registration — must register!

Bank Finance to NBFCs

WC + Term loans — NOT for IPO/shares/unsecured

Banks CANNOT guarantee NBFC deposits

Co-Lending Model

Replaced co-origination — Bank+NBFC joint lending

NBFC = customer interface | Escrow account mandatory

Ombudsman

Integrated Scheme 2021 — covers NBFCs

Appellate: ED of RBI (changed from DG) | Excludes CIC/IDF

Exempted from Registration

Mutual Benefit, Chit, Nidhi companies

HFCs are NOT exempted — exam trap!

⚡ Chapter 25 Complete — Non-Banking Financial Companies (NBFCs)

NBFC: Section 45-I(f) RBI Act — principal biz lending/investment — CANNOT: demand deposits, cheques, payment system, DICGC
Registration: Section 45-IA mandatory — NOF ≥ ₹2 crore — reserve fund ≥ 20% profits
3 classifications: Liability (D vs ND), Activity (AFC/MFI/HFC/P2P/AA/CIC…), Size (SI ≥ ₹500Cr)
Scale Based Regulation (Oct 2022): 4 layers — Base (P2P/AA) → Middle (NBFC-D/HFC/CIC) → Upper (top 10) → Top (ideally EMPTY)
HFCs: RBI = regulator, NHB = supervisor — NOT exempted from registration
Bank finance: WC + term loans — NOT for IPO/shares — CANNOT guarantee NBFC deposits
Co-Lending Model replaced co-origination — NBFC = single customer interface
Ombudsman 2021: covers NBFCs — appellate authority = ED of RBI (not DG)

Banky says: “NBFCs can’t do DCPD (deposits/cheques/payments/DICGC), SBR has 4 layers, and Top layer is ideally empty!” 🎉🏢

You now understand NBFCs inside out — what they can and can’t do, how they’re classified, and the new 4-layer regulation pyramid. When your bank considers co-lending with an NBFC, you’ll know exactly what questions to ask! 💪

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