The Indian financial system has historically been dominated by banks, yet Non-Banking Financial Companies (NBFCs) have emerged as crucial players in bridging the credit gap for businesses and individuals. Banks are licensed intermediaries empowered to accept deposits, grant credit, clear cheques, and provide a wide array of financial services under the Banking Regulation Act of 1949. In contrast, NBFCs are companies registered under the Companies Act, 1956 or 2013 and regulated by the Reserve Bank of India (RBI). While they cannot accept demand deposits or issue cheques, NBFCs engage in activities such as loans and advances, credit facilities, investment in shares and bonds, leasing, hire-purchase, housing finance, and insurance-related services.
The classification of NBFCs covers a wide range of activities, including microfinance institutions, infrastructure finance companies, core investment companies, mortgage guarantee companies, and housing finance companies (HFCs). RBI registration requirements include a minimum net owned fund of ₹2 crore, proper documentation, and adherence to prudential norms. Regulatory guidelines stipulate limits on interest rates, mandatory credit ratings, maintenance of 15% liquid assets against public deposits, and regular submission of statutory returns.
Historically, NBFCs evolved to meet credit needs unmet by banks, especially during the 1960s when banking infrastructure was inadequate. Their popularity surged in the 1980s and 1990s due to their customer-friendly nature and ability to mobilize deposits. The RBI strengthened its regulatory framework through amendments to the RBI Act in 1997, introducing stricter supervision and mandatory registration.
Between 2005 and 2015, NBFCs’ share of total credit rose from 10% to 13%, with even sharper growth in niche segments like home loans and commercial vehicle (CV) financing. HFCs’ share of home loans increased from 26% in FY09 to 38% in FY15, while NBFCs’ share in CV financing rose from 42% to 46% over the same period. The decline in PSU banks’ credit share, due to rising non-performing assets and capital constraints, allowed NBFCs and private banks to capture more market share.
NBFCs have also embraced digital transformation, using surrogate data to make faster and more accurate credit decisions, thus serving self-employed and informal sector borrowers excluded from traditional banking. This agility has made them a driving force in sectors like microfinance, consumer durables, and two-wheeler financing.
Overall, NBFCs have become a critical component of India’s credit ecosystem, complementing banks by serving underserved markets and contributing to financial inclusion. Their growth trajectory suggests that NBFCs will continue to play a vital role in India’s economic development.
Dr. Adv. Harshul Savla
Managing Partner of M Realty,
Chairman-Statistics & Research,
CREDAI National
