What is an NBFC? Meaning, Types, and How It Differs from a Bank
Financial institutions play a vital role by helping individuals and businesses get credit, manage their investments and meet urgent financial needs. However, access to capital is no longer restricted to traditional banks. Non-Banking Financial Companies (NBFCs) also provide financial services, such as loans and financing.
Understanding the NBFC meaning is simple. It is a company registered under the Companies Act that provides finance-related services similar to a bank but operates under a different regulatory framework. They don’t need a license like banks and operate under strict regulation by the Reserve Bank of India to protect customers and maintain financial stability.
What is an NBFC?
The NBFC definition by RBI is simple. An NBFC is a registered company that carries out financial activities, such as lending, financing, investment or other financial services.
NBFCs provide loans and financing solutions, such as gold loans, personal loans, vehicle finance, housing finance, and microfinance for individuals, self-employed individuals and businesses.
The RBI regulates NBFCs under the Reserve Bank of India Act, 1934. Companies that meet the set criteria must register with the RBI to operate as an NBFC.
How is an NBFC Different from a Bank?
- Incorporation: While banks are governed by the Banking Regulation Act, 1949, NBFCs are registered under the Companies Act and regulated under the RBI Act, 1934.
- Demand deposits: Banks accept demand deposits, such as savings and current account deposits. NBFCs cannot accept demand deposits payable on demand.
- Payment system: Banks are a crucial part of India’s payments and settlement system and can issue cheques drawn on themselves. NBFCs do not have these banking functions.
- Deposit insurance: Bank deposits up to ₹5 lakh are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), while deposits in NBFCs do not have the same insurance protection.
- Credit creation: Banks can create credit through deposit expansion, but NBFCs cannot create credit through demand accounts.
Types of NBFCs in India
NBFCs are typically classified based on the financial activity they undertake. Some categories of NBFCs are as follows:
- Asset Finance Company (AFC): AFCs primarily finance physical assets that support economic or industrial activities, such as automobiles, machinery and tractors.
- Investment Company (IC): ICs are involved chiefly in acquiring securities, such as shares, bonds and debentures, for investment purposes.
- Loan Company (LC): The main business of loan companies is to provide loans or advances for activities other than asset acquisition.
- Infrastructure Finance Company (IFC): IFCs deploy a majority of their net total assets in infrastructure loans and hold higher credit rating thresholds.
- Micro Finance Institution (NBFC-MFI): Micro finance institutes are specialised NBFCs that provide small, collateral-free credit to low-income households and self-help groups.
- Housing Financing Companies (HFC): These provide financing options for housing-related purposes or for the construction of housing.
- NBFC-Factors: These are non-banking entities whose main business is factoring services, helping businesses manage receivables and obtain funds against eligible invoices.
Is Manappuram an NBFC?
Yes. Manappuram Finance is an RBI-registered NBFC. Established in 1949 in Valpad, Kerala, by V.C. Padmanabhan, Manappuram has grown into a trusted financial powerhouse with branches across India.
Gold loans are an important part of Manappuram Finance’s business. Borrowers pledge their gold jewellery as collateral in exchange for an eligible loan amount. In this context, the NBFC loan meaning is simple. It’s a loan given by a non-banking financial company rather than a bank.
Manappuram’s gold loan interest rates vary depending on the scheme, loan amount, tenure, loan-to-value ratio and repayment frequency. Currently, interest rates start at 9.90% p.a.