NBFCs In India
NBFCs in India: Role, Risks and Regulations
NBFCs, or non-banking financial companies, have become the first stop for many Indian borrowers and small businesses. They are nimble, they specialize in niche segments, and they often meet customers where banks do not. According to the Reserve Bank of India’s December 2024 Financial Stability Report, NBFCs entered 2025 with strong capital buffers and improving asset quality even after a sharp rise in retail credit. That stability is vital because NBFCs now play a central role in financing vehicles, consumer durables, small merchants, and affordable housing.
Here’s the thing: NBFCs aren’t banks. They cannot offer demand deposits or issue cheques, and when a subset of NBFCs do accept public deposits, those deposits are not protected by deposit insurance. So, supervision and transparency matter a lot. Over the last few years, the Reserve Bank of India has modernized NBFC oversight with scale-based regulation, extended the Prompt Corrective Action framework to NBFCs, tightened norms for classifying and upgrading non-performing assets, introduced a standard Key Fact Statement for loans, clarified digital lending responsibilities, and set explicit limits on default loss guarantees.
What does that mean for you? If you’re a borrower, it means clearer pricing and standardized disclosures before you sign. If you’re an investor in NBFC debentures or deposits, it means better information and stronger buffers. If you run or work at an NBFC, it means stronger governance, cleaner funding, and a closer eye from the supervisor. In this guide, we unpack what NBFCs do, how the rules work, and how to navigate this space with confidence—using verified information and practical steps you can put to work today.
What NBFCs Are and Why They Matter
NBFCs are companies registered under the Companies Act that are in the business of providing finance—think loans, advances, leasing, or investment in securities—without being banks. They include investment and credit companies, microfinance institutions, housing finance companies, infrastructure finance companies, factors, peer-to-peer platforms, and account aggregators. According to the Reserve Bank of India’s public guidance, NBFCs require registration, must meet minimum capital thresholds, and are governed by activity-specific directions and a common scale-based framework.
Core Functions And Categories
NBFCs provide vehicle loans, consumer and durable financing, loans against property, small business and working capital loans, gold loans, microfinance, and housing finance. Investment and Credit Companies serve broad lending needs; NBFC-Microfinance Institutions lend to low-income households under a defined regulatory framework; Housing Finance Companies focus on mortgages; Infrastructure Finance and Infrastructure Debt Funds serve longer-tenor projects; Factors purchase receivables to improve cash flows for small businesses; Account Aggregators facilitate secure, consent-based data sharing; peer-to-peer platforms connect borrowers and lenders under RBI rules.
How NBFCs Differ From Banks
NBFCs cannot accept demand deposits or issue cheques drawn on themselves. Only a limited set of NBFCs are permitted to accept public deposits, and even then, deposit insurance coverage does not apply. As a result, NBFCs rely heavily on bank borrowings, debentures, securitization, and co-lending for funding. That funding mix—and the linkages with banks—makes prudential regulation and stress testing especially important.
Where NBFCs Add The Most Value
NBFCs are often closest to the customer in segments where speed, specialization, and last-mile delivery matter. According to the Reserve Bank of India’s analysis of the sector for 2023–24, industry and retail together accounted for a large share of NBFC credit, while agriculture and allied activities grew from a low base. That pattern reflects how NBFCs help expand formal credit beyond metros and deepen access in smaller towns.
The Regulatory Architecture Shaping NBFCs
India regulates NBFCs using a scale-based regulation (SBR) that places companies into layers—Base, Middle, Upper, and an empty Top Layer—based on size, activity, and risk profile. The framework took effect in October 2022 and aligns governance, capital, and disclosure norms with the systemic footprint of each NBFC.
Scale-Based Regulation Layers
In the Base Layer, smaller non-deposit taking NBFCs operate under lighter prudential norms. The Middle Layer covers larger entities and those in sensitive activities such as housing finance and core investment companies. The Upper Layer contains systemically significant NBFCs identified by RBI for enhanced regulation, including stronger governance and supervisory scrutiny. The Top Layer remains empty and would only be populated if the supervisor sees substantial, concentrated risk that warrants bank-like norms. Each year, RBI publishes the Upper Layer list for a fixed period, which keeps firms focused on sustained compliance.
Prompt Corrective Action For NBFCs
India extended the Prompt Corrective Action (PCA) framework to NBFCs effective October 1, 2022. PCA monitors capital, asset quality, and leverage (for core investment companies) and triggers supervisory actions when metrics breach thresholds. The logic is simple: intervene early, require time-bound corrective steps, and restore financial health before risks spread. For market participants, PCA signals discipline and reduces the chance of sudden failures.
Net Owned Funds And Capital Norms
The Reserve Bank of India raised the minimum Net Owned Fund requirement for Investment and Credit Companies, Microfinance NBFCs, and Factors to ten crore rupees, with a glide path for existing entities to meet the threshold by March 2027. Specialized NBFCs have higher floors—such as three hundred crore rupees for Infrastructure Finance Companies and Infrastructure Debt Funds—while Account Aggregators and peer-to-peer platforms continue with lower minimums as set by their specific directions. These floors improve resilience and filter out thinly capitalized entities from sensitive customer-facing activities.
Prudential Rules, Asset Quality and Funding
Capital And Leverage Requirements
NBFCs generally maintain a minimum capital to risk-weighted assets ratio of fifteen percent, split between Tier I and Tier II capital as specified. The purpose is to ensure that as risk-weighted assets grow—especially in unsecured retail lending—core capital keeps pace. RBI’s stress-test commentary in late 2024 noted that NBFC buffers remained adequate under adverse scenarios, which supports confidence in the sector’s ability to absorb shocks.
NPA Recognition And Upgrades
Loan classification follows a simple rule: a loan overdue for more than ninety days becomes a non-performing asset. RBI further clarified that once a loan is classified as non-performing, it can be upgraded back to standard only after the borrower clears all arrears of principal and interest across all facilities. Partial payments or interest-only payments do not change the status. This clarity reduces evergreening and creates consistent signals for both lenders and investors.
Bank Exposures, Risk Weights, And Liquidity
Because NBFCs rely on banks for a meaningful share of funding, changes in bank risk weights can influence NBFC growth. In November 2023, RBI increased risk weights on unsecured consumer credit and credit card exposures, and raised the risk weight on certain bank exposures to NBFCs. In February 2025, RBI reviewed and restored the risk weights on bank exposures to NBFCs based on external ratings, which eased a temporary funding headwind for well-rated entities. The message is balanced: curb exuberance in riskier retail segments, but avoid blanket constraints on intermediation when buffers and ratings support it.
Digital Lending, Default Loss Guarantees and Data Integrity
The Digital Lending Rulebook
India’s digital lending directions require that regulated entities provide clear, standardized information and maintain direct control over loan disbursals and servicing even when they use lending service providers. A Key Fact Statement (KFS) must be shared in a standard format before loan execution, with an all-in Annual Percentage Rate and a clean breakup of fees. These rules apply across banks and NBFCs and have tightened the quality of information borrowers receive.
Default Loss Guarantee Limits
Default loss guarantees—often called first-loss default guarantees—are permitted within explicit boundaries. RBI has capped the default loss guarantee cover provided by third parties to a small percentage of the loan portfolio being guaranteed, and it must be activated proportionately as loans are disbursed. This reduces hidden risk transfer and aligns incentives, especially in originate-to-distribute models involving fintech partners.
Data, Consent, And LSP Responsibilities
Whether through Account Aggregators or digital loan apps, consent is the anchor. Data sharing requires explicit borrower consent, and regulated entities remain responsible for customer protection, grievance redressal, and fair collection practices. Standardization of the KFS and tighter oversight of lending service providers have reduced mis-selling and surprise charges.
Co-Lending and Microfinance
Co-Lending Mechanics And New Guardrails
Co-lending lets a bank and an NBFC jointly originate a loan, each keeping a share on their books while offering a blended rate to the borrower. RBI’s framework aligns origination, servicing, and risk-sharing responsibilities, with clearer retention requirements and faster recognition of each lender’s share. Recent refinements have emphasized transparent sharing of responsibilities and timely booking of each party’s share of assets and risks. For borrowers, the benefit is access to lower-cost bank funds with the NBFC’s last-mile capability.
Microfinance Definitions, Caps, And Household Income Assessment
Microfinance lending is governed by a dedicated set of directions. These define eligible microfinance loans based on household income, require collateral-free lending, and mandate board-approved policies on repayment periodicity tailored to borrower cash flows. Lenders must assess household income carefully and keep pricing and non-credit charges within policy limits. The rules moved the sector away from a one-size-fits-all cap toward risk-based, borrower-centric assessment, with clear disclosures and credit bureau reporting.
Practical Implications For Borrowers
Two things matter most: know your all-in cost from the Key Fact Statement, and make sure your consent trail is clean. If you’re evaluating a co-lending offer, confirm who your lenders are, how repayments are split, and whom to contact for grievances. In microfinance, check that your household income has been assessed fairly and that repayment frequency matches your cash flows, not the other way around.
Conduct, Governance and Supervisory Actions
Governance And Board Oversight
Scale-based regulation raises the bar for board composition, related-party oversight, and risk management in larger NBFCs. Boards must approve policies on lending to insiders, manage concentration risks, and strengthen disclosures on exposures, related transactions, and customer complaints. Clear policies on products with higher risk—such as unsecured retail loans—are now standard expectations.
Key Fact Statement And Responsible Lending
A single-page Key Fact Statement now acts like a price tag for credit. It must highlight the Annual Percentage Rate, all fees, recovery practices, and cooling-off terms where applicable, before loan execution. Together with rules on resetting floating-rate loans and releasing original property documents upon closure, the KFS reduces friction and restores symmetry of information between lender and borrower.
What Recent Enforcement Shows
Supervisory interventions over the past two years have reinforced that rules on valuation, loan-to-value caps, cash disbursement limits, and fee transparency are non-negotiable. When lapses occur, RBI has restricted product lines, ordered special audits, and then lifted curbs where firms corrected systems and complied. The lesson for operators is straightforward: tight credit governance and transparent customer treatment are the baseline, not a bonus.
What You should Do
Borrower Checklist
Ask for and read the Key Fact Statement before signing. Confirm the Annual Percentage Rate and every fee.
If you’re offered a co-lending loan, note both lenders and save the repayment and grievance contacts.
For digital loans, use official apps and portals, and never share OTPs or consent blindly. Keep a copy of your consent and KFS.
For gold or secured loans, check the valuation method and loan-to-value ratio. Ensure disbursal respects legal cash limits and that charges are disclosed.
Investor Checklist
Remember that NBFC public deposits, where permitted, are not insured by deposit insurance. Assess the NBFC’s capital ratio, asset quality trends, and auditor notes in annual reports.
For debentures, review rating histories, covenants, and concentration in riskier retail segments. Track RBI enforcement actions and stress-test commentary.
Diversify across issuers and maturities; avoid chasing yield without understanding the underlying asset mix.
Operator Compliance Checklist
Map your company to the correct SBR layer and keep board minutes, risk appetite statements, and policies aligned.
Meet Net Owned Fund thresholds per the glide path and rehearse PCA triggers so there are no surprises.
Implement Key Fact Statement templates across products; audit fee practices; standardize APR computation.
For digital partnerships, document roles, cap default loss guarantees within limits, and ensure data consent and security end to end.
Key Takeaways
NBFCs extend credit where it’s needed most, and India’s updated rules have made that intermediation safer and more transparent. First, scale-based regulation and Prompt Corrective Action now align oversight with each firm’s systemic footprint. Second, clearer asset classification and upgrade rules have reduced evergreening and improved comparability across lenders. Third, digital lending is no longer a grey zone: standardized Key Fact Statements, annual percentage rate disclosure, and tight controls on default loss guarantees give customers a fair shot at comparing offers. Fourth, co-lending and microfinance frameworks blend reach with responsibility, but they demand strong governance and clean consent trails.
If you’re borrowing, insist on the Key Fact Statement and keep your consent records. If you’re investing, treat NBFC deposits and debentures like what they are—uninsured credit exposures—and do your homework on capital, asset quality, and governance. If you’re operating an NBFC, get ahead of your layer’s requirements, pressure-test your funding mix, and keep customer treatment at the center of your design and audits.
There’s still work to do. Retail credit cycles can turn fast, and bank–NBFC linkages need constant monitoring. But the direction of travel is clear: more sunlight, stronger buffers, and better outcomes for borrowers who know how to read the fine print. Share your questions or experiences; the more we learn together, the safer and smarter India’s credit market becomes.