💼 JAIIB · Module C · Chapter 25
Non-Banking Financial Companies (NBFCs)
Registration, types, classification, Net Owned Funds, bank finance to NBFCs, Fair Practice Code, Ombudsman, Scale Based Regulation — the complete picture of India’s shadow banking sector.
⏱ 18 min🎯 Very High WeightageNBFC Types + NOF⚡ 5 PYQs
What is an NBFC and How are They Classified?
Definition
NBFC
“Company registered under Companies Act | Loans, investments, leasing, hire-purchase, chit”
Registered under Companies Act
An NBFC is a company registered under the Companies Act, engaged in: loans and advances, acquisition of shares/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit business. Does NOT include entities whose principal business is: agricultural activity, industrial activity, purchase/sale of goods (other than securities), providing services, sale/purchase/construction of immovable property. NBFCs are NOT part of the payment and settlement system — they cannot issue cheques drawn on itself and cannot borrow from RBI. Defined under Section 45-I(b) and Chapter IIIB of RBI Act. Must obtain Certificate of Registration (CoR) from RBI (Section 45-IA) and have minimum Net Owned Funds of Rs 2 crores to commence business.
Evolution: Chapter IIIB added to RBI Act in 1997 (Q1 PYQ)
NBFCs started in the 1960s. Chapter IIIB first added to RBI Act giving RBI limited regulatory authority. James S. Raj Study Group (1975) recommended hire purchase/leasing companies accept deposits only up to Net Owned Funds. Shah Committee (1992) — recommended compulsory registration and prudential norms. Major amendments January 1997 to Chapters IIIB, IIIC and V of RBI Act — establishing complete regulatory and supervisory structure. 2016: FDI under Automatic Route permitted for regulated NBFCs.
Regulators of NBFCs (Not all regulated by RBI)
| NBFC Type | Regulator |
|---|---|
| Most NBFCs (investment, loan, asset finance, MFI, etc.) | Reserve Bank of India (RBI) |
| Venture Capital Funds, Merchant Banking, Stock Broking companies | SEBI |
| Insurance companies | IRDAI |
| Nidhi Companies (Sec 620A Companies Act) | Ministry of Corporate Affairs (MCA) |
| Chit companies (Chit Funds Act 1982) | State Governments |
| Housing Finance Companies (HFCs) | National Housing Bank (NHB) — though RBI is now overseeing |
| Stock Exchange or Mutual Benefit Company | SEBI |
Classification of NBFCs — Three Bases
| Classification Basis | Categories | Key Features |
|---|---|---|
| Liability-Based | NBFC-D (Deposit-taking) = Category A | NBFC-ND (Non-Deposit taking) = Category B | NBFC-D: min 12 months, max 60 months deposits; max interest 12.5% pa; deposits NOT insured; NOT guaranteed by RBI; only investment grade rating can accept deposits up to 1.5× NOF |
| Activity-Based | AFC, LC, IC, IFC, CIC-ND-SI, IDF-NBFC, NBFC-MFI, RNBFC, NBFC-Factor, NOFHC, MGC, NBFC-AA, NBFC-P2PL | See type details below |
| Size-Based | Systemically Important Non-Deposit taking NBFCs (NBFC-ND-SI) = assets ≥ Rs 500 crores | Subject to capital adequacy, exposure norms, reporting requirements |
Key NBFC Types — Activity Based
| NBFC Type | Key Criterion | Special Features |
|---|---|---|
| Asset Finance Company (AFC) | 60% of total assets + income from financing physical/real assets | Finances automobiles, tractors, generators, earthmoving equipment |
| Loan Company (LC) | Activity = providing finance (loans/advances) for any activity other than its own (not AFC) | Q3 PYQ: Loan Company = Activity based classification |
| Infrastructure Finance Company (IFC) | 75% assets in infrastructure loans | Min NOF Rs 300 crore | Min credit rating ‘A’ | CRAR 15% | Finances infrastructure projects |
| CIC-ND-SI (Core Investment Company) | 90% assets in group company investments | 60% in equity of group companies | Asset size ≥ Rs 100 crore | Accepts public funds | Holding company for group |
| NBFC-MFI | 75% assets in qualifying assets (microfinance loans) | Min NOF Rs 5 crores | Non-deposit taking | CRAR 15% | Largest category of MFIs |
| NBFC-Factor | 50% assets in factoring business | 50% gross income from factoring | Factoring = financing against receivables |
| MGC (Mortgage Guarantee Company) | 90% business/income from mortgage guarantee | Min NOF Rs 100 crores | Guarantees mortgage loans |
| NOFHC (Non-Operative Financial Holding Company) | Holding company through which promoters set up a new bank | Holds capital of bank + other regulated FIs |
| IDF-NBFC | Facilitates long-term debt into infrastructure projects | Issues bonds min 5-year maturity | Only IFCs can sponsor IDF-NBFCs |
Capital Concept
Net Owned Funds (NOF)
“Owned Funds minus investments in group/subsidiary NBFCs exceeding 10%”
Min NOF: Rs 2 crores
Owned Funds = Paid-up equity capital + Compulsorily convertible preference shares + Free reserves + Balance in share premium account + Capital reserves (excluding revaluation surplus) MINUS accumulated losses, deferred revenue expenditure, intangible assets. Net Owned Fund (NOF) = Owned Fund MINUS quantum of investments in shares of subsidiaries + companies in same group + all other NBFCs + debentures/bonds/loans/deposits with subsidiaries and group companies to the extent it exceeds 10% of Owned Funds. Minimum NOF to commence business: Rs 2 crores. Q5 PYQ: Owned Funds includes = All of the above (equity + compulsorily convertible preference shares + share premium).
Scale Based Regulation (SBR) — RBI October 22, 2021
| Layer | Name | What Goes Here |
|---|---|---|
| Base Layer | NBFC-BL | NBFC-P2P, NBFC-AA, NOFHC, NBFCs without public funds and customer interface — ALWAYS in Base Layer. Government-owned NBFCs placed here or Middle Layer. |
| Middle Layer | NBFC-ML | SPD and IDF-NBFC — ALWAYS in Middle Layer. NBFC-D, CIC, IFC and HFC included in Middle Layer or Upper Layer (not Base Layer). |
| Upper Layer | NBFC-UL | Based on size, activity and perceived riskiness. NBFC-D, CIC, IFC, HFC may be here. |
| Top Layer | NBFC-TL | Ideally expected to be empty — extreme cases only |
Chapter 25 — Exam Points and PYQs
✅ Must-Know NBFC Facts
- Chapter IIIB added to RBI Act in: 1997 (Q1 PYQ: answer = 1997)
- Regulator for Housing Finance Companies: NHB (Q2 PYQ: PDF answer = (a) RBI — check carefully; HFCs regulated by NHB but PYQ answer in PDF = (a). Read PDF: answer given as (a) RBI)
- Loan Company classification: Activity based (Q3 PYQ: answer = Activity based)
- Max period for NBFC-D deposits: 60 months (Q4 PYQ: answer = 60 months)
- Owned Funds includes: All of the above — equity shares + compulsorily convertible preference shares + share premium (Q5 PYQ: answer = All of the above)
- NBFCs are NOT part of payment and settlement system — cannot issue cheques on itself, cannot borrow from RBI
- NBFC registration: Section 45-IA of RBI Act | CoR from RBI | Min NOF Rs 2 crores
- NBFC-D deposits: Min 12 months, Max 60 months | Max interest 12.5% pa | Deposits NOT insured | NOT guaranteed by RBI
- IFC qualification: 75% assets in infrastructure | Min NOF Rs 300 crore | Min rating ‘A’ | CRAR 15%
- CIC-ND-SI: 90% assets in group company investments | 60% in equity | Asset size ≥ Rs 100 crore
- NBFC-MFI: 75% qualifying assets | Min NOF Rs 5 crores | CRAR 15%
- MGC (Mortgage Guarantee Co.): 90% business in mortgage guarantee | Min NOF Rs 100 crores
- Ombudsman Scheme 2021 covers NBFCs | Executive Director of RBI = appellate authority | Excludes CIC, IDF-NBFC, NBFC-IFC
- Fair Practice Code: Transfer of borrowal account consent within 21 days | Changes to interest rate prospectively only | Release securities on full repayment | Display Grievance Redressal Officer details
- Scale Based Regulation (SBR): 4 layers — Base, Middle, Upper, Top (ideally empty) | NOFHC, NBFC-P2P, NBFC-AA always in Base Layer
📝 Chapter 25 — All 5 PYQs
Q1: When was Chapter III-B added to the RBI Act, 1934? (a) 1947 (b) 1977 (c) 1997 (d) 2001
Answer: (c) 1997 — Major amendments made in January 1997
Q2: Which of the following is the regulator for Housing Finance Companies? (a) RBI (b) SEBI (c) Ministry of Corporate Affairs (d) NHB
Answer: (a) RBI [PDF PYQ answer = (a) RBI — note that NHB supervises HFCs but RBI is overarching regulator under RBI Act]
Q3: A Loan Company is an NBFC, as per which type of classification? (a) Liability based (b) Activity based (c) Size based (d) None of the above
Answer: (b) Activity based — Loan Companies are classified under activity-based classification
Q4: What is the maximum period for which an NBFC-D can accept deposits? (a) 12 months (b) 36 months (c) 60 months (d) 120 months
Answer: (c) 60 months — maximum period is 60 months; minimum is 12 months
Q5: Which of the following can be considered as part of Owned Funds for an NBFC? (a) Equity shares (b) Compulsory convertible Preference shares (c) Balance in share premium A/c (d) All of the above
Answer: (d) All of the above — all three are components of Owned Funds
Memory Tricks — Chapters 23, 24 and 25
DFI Founding Years
IFCI 1948 → ICICI 1955 → IDBI 1964 → NABARD/EXIM 1982 → NHB 1988 → SIDBI 1990 → NaBFID 2021
“I’ll Identify Institutions: 1948, 1955, 1964, 1982, 1988, 1990, 2021!”
First DFI = IFCI 1948 (Q1 PYQ). ICICI = 1955 (World Bank initiative). IDBI = 1964 (RBI subsidiary, transferred to Central Govt in 1976). NABARD = July 1982 (B Sivaraman committee). Exim Bank = March 1982 (also 1982). NHB = July 9, 1988. SIDBI = April 2, 1990. NaBFID = 2021 (5th AIFI). LIC = 1956 (Investing Institution — Q2 PYQ). ICICI → Universal Bank: March 2002. IDBI → Bank: October 1, 2004.
SHG Models (Q4 PYQ)
Model I (No NGO) | Model II (NGO facilitator — most popular) | Model III (NGO intermediary)
“One = No NGO. Two = NGO helps. Three = NGO handles money!”
Model I: NABARD-Bank-SHG — no NGO at all, bank does everything directly. Model II: NGO promotes and links SHGs but does NOT touch money — most popular model. Model III: NGO is financial intermediary — funds flow Bank → NGO → SHG. Q4 PYQ answer = Model III (NGO as financial intermediary). SHG size: 10-20 (min 5 in hilly). Savings:Loan ratio = 1:1 to 1:4. No collateral from SHGs. 100% NABARD refinancing.
NBFC 1997 Amendment (Q1 PYQ)
Chapter IIIB added to RBI Act in 1997
“In 1997, NBFCs got their Rules — Chapter IIIB RBI Act!”
Q1 PYQ answer = 1997. Chapter IIIB was added to RBI Act in 1997 (January). This gave RBI comprehensive powers: mandatory CoR, minimum NOF, reserve fund, income recognition standards, special audit powers, winding up petition power. Before 1997: James Raj Study Group (1975), Shah Committee (1992) — only recommendations. 1997 = actual comprehensive legislation. NBFCs started in 1960s. Cannot issue cheques on itself. Cannot borrow from RBI. Not part of payment system. Min NOF = Rs 2 crores.
NBFC-D Deposit Rules (Q4 PYQ)
Min 12 months | Max 60 months | Max interest 12.5% | NOT insured | NOT guaranteed
“One year min, Five years max, Twelve point five percent — NBFC deposits!”
NBFC-D deposits: Minimum 12 months, Maximum 60 months (Q4 PYQ answer = 60 months). Maximum interest rate: 12.5% per annum. NBFCs cannot offer gifts/incentives. Must have minimum investment grade credit rating. Deposits are NOT insured (unlike bank deposits insured by DICGC up to Rs 5 lakh). Repayment NOT guaranteed by RBI. Only investment-grade rated NBFCs can accept deposits up to 1.5× Net Owned Funds.
Flash Cards and Master Summary
First DFI
IFCI — July 1, 1948
Initial capital Rs 10 crores | Set up MDI, ICRA, NSE, SHCIL
First Universal Bank
ICICI (merged with ICICI Bank) — March 2002
ICICI also first Indian company on NYSE (1999)
NABARD
July 1982 | B Sivaraman Committee
Took over Agricultural Refinance + RBI’s cooperative/RRB refinancing | Supervises rural cooperative banks
NaBFID 2021
5th AIFI | Authorised capital Rs 1 lakh crore
Regulated under Sec 45L and 45N RBI Act | Govt holds min 26%
Lead Bank Scheme
December 1969 (Q1 PYQ — microfinance)
Phase 2 of microfinance evolution
Grameen Bank
Bangladesh 1983 | Prof Yunus | Nobel Prize 2006
Experimented 1976 | Group of 5 | No documents | 99% repayment
SHG Loan Ratio
1:1 to 1:4 (matured SHGs can exceed 4×)
No collateral | 100% NABARD refinancing | Part of PSL
RBI 2022 Microfinance
Household income ≤ Rs 3 lakh | Repayment ≤ 50% monthly income
No pre-payment penalty | NBFC-MFI: 75% qualifying assets | CRAR 15%
NBFC Registration
Sec 45-IA RBI Act | CoR from RBI | Min NOF Rs 2 crores
Chapter IIIB added to RBI Act in 1997 (Q1 PYQ)
NBFC-D Max Deposits
60 months max | 12 months min | 12.5% max interest
NOT insured | NOT guaranteed by RBI | Up to 1.5× NOF (with investment grade rating)
Scale Based Regulation
4 Layers: Base → Middle → Upper → Top (ideally empty)
NOFHC, NBFC-P2P, NBFC-AA always in Base Layer
Net Owned Funds
Owned Funds minus investments in group/subsidiaries exceeding 10%
Owned Funds = equity + convertible preference shares + free reserves + share premium (Q5 PYQ: All of above)
⚡ Chapters 23–25 Complete — DFIs, Microfinance and NBFCs
- DFIs bridge the gap for long-term finance that commercial banks (short-term deposits) cannot easily provide
- IFCI = first DFI (July 1, 1948) | Initial capital Rs 10 crores | ICICI (1955) → first Universal Bank (2002)
- IDBI (1964) → transferred to Central Govt 1976 → converted to Bank October 1, 2004
- SIDBI (1990) = principal FI for MSME | Exim Bank (March 1982) = principal FI for export-import financing
- NABARD (July 1982) = B Sivaraman Committee | Supervises rural cooperative banks under Section 35 BR Act
- NHB (July 9, 1988) = apex institution for housing finance | Now fully owned by GoI (RBI divested 2019)
- NaBFID (2021) = fifth AIFI | Authorised capital Rs 1 lakh crore | Govt holds min 26% | Regulated under Sec 45L and 45N RBI Act
- Microfinance = micro-savings + micro-credit + micro-insurance + micro-pensions
- Grameen Bank: Prof Yunus, experimented 1976, established 1983 in Bangladesh, Nobel Prize 2006
- SHG-Bank Linkage Programme: formally launched NABARD 1992 | Three models: I (no NGO), II (NGO facilitator — most popular), III (NGO intermediary)
- NBFC-MFIs regulated by RBI | 75% qualifying assets | Min NOF Rs 5 crores | CRAR 15%
- NBFCs: not part of payment system | Cannot issue cheques on itself | Cannot borrow from RBI
- Chapter IIIB added to RBI Act in 1997 | CoR from RBI + min NOF Rs 2 crores mandatory
- NBFC-D: min 12 months, max 60 months | max 12.5% interest | NOT insured | NOT guaranteed by RBI
- Three classification bases: Liability (D vs ND) | Activity (AFC, LC, IFC, NBFC-MFI, etc.) | Size (ND-SI ≥ Rs 500 crore)
- Scale Based Regulation (SBR) 2021: 4 layers — Base, Middle, Upper, Top (ideally empty)
Banky completes Module C Chapters 20–25! All 15 DFI/MFI/NBFC PYQs answered! 🎉
DFIs mastered, SHG models locked, NBFC types clear, NOF formula understood, Scale Based Regulation mapped! Module C complete! 💪
← Chapter 24: Micro Finance Institutions
Chapter 25 of 28 • Module C
Chapter 26: Insurance Companies →