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• A Non-Banking Financial Company (NBFC) is registered under the Companies Act, 1956 of India.
• NBFCs engage in loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance, or chit-fund businesses.
• Institutions whose principal business is agriculture, industrial activity, purchase/sale of goods (other than securities), providing services, or sale/purchase/construction of immovable property aren't NBFCs.

History of NBFCs in India

• Various committees have reviewed the framework of NBFCs.
• In the early 1970s, The Government of India asked Banking Commission to study the functioning of Chit Funds and examining activities of Non-Banking Financial Intermediaries.
• In 1972, the Banking Commission recommended Uniform Chit Fund Legislation nationwide.
• The Reserve Bank of India prepared a Model Bill to regulate chit funds, referring it to a study group under James S. Raj.
• In June 1974, a study group recommended banning Prize Chit and other Schemes and the Parliament to enact a bill ensuring uniformity in chit fund provisions.
• Parliament enacted the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, and the Chit Funds Act, 1982.
• During the planning era, the Reserve Bank of India aimed to manage money and evolve a sound monetary system but with limited social objective success.
• In December 1982, Dr. Manmohan Singh (Governor of RBI) appointed a committee under Prof. Sukhamoy Chakravarty to review India's monetary system.
• The Chakravarty Committee recommended assessing links between the Banking Sector, Non-Banking Financial Institutions, and the unorganized sector to evaluate monetary and credit policy instruments.
• The number of NBFCs grew from 7,000 in 1981 to approximately 30,000 in 1992.

Types of NBFCs in India

• Asset finance companies (AFC)
• Loan companies (LC)
• Investment companies (IC)
• Investment and Credit Company (ICC): Merges AFCs, LCs, and ICs into a new category called NBFC-ICC.
• An ICC is a financial institution whose principal business is asset financing, providing finance through loans/advances for activities other than its own, and not acquiring securities.
• Infrastructure finance companies (IFC) deploys a minimum of three-fourths of their total assets in infrastructure loans.
• IFCs must have net owned funds exceeding 3 billion and a minimum 'A' credit rating, with a Capital to Risk-Weighted Assets Ratio of 15%.
• Infrastructure Debt Fund: Non-Banking Financial Company (IDF-NBFC) facilitate the flow of long-term debt into infrastructure projects.
• IDF-NBFCs raise resources through multiple-currency bonds with a minimum 5-year maturity.
• Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
• NBFC Factors' principal business is factoring which is a financial transaction and a type of debtor finance.
• Gold loan NBFCs have seen growth in the Indian financial market due to gold price appreciation and increased gold loan demand.
• Roughly 95% of gold loan business is handled by Kerala-based companies: Muthoot Finance, Manapuram Finance, and Muthoot Fincorp.
• Gold loan NBFC growth is due to factors like Asset Under Management (AUM), branches, and customer numbers.
• Growth in the size of the gold loan NBFC balance sheets has caused reliance on public funds via bank finance and non-convertible debentures.
• Uncomplicated gold loan processes and higher Loan to Value (LTV) ratios contribute to the growth of Gold Loan NBFCs.
• Residuary Non-Banking Companies (RNBCs) are NBFC that primarily receive deposits under schemes/arrangements, excluding Investment, Asset Financing, and Loan Companies.
• RNBCs must maintain investments as per RBI directions, alongside liquid assets.
• Account Aggregators (AA) are a new NBFC class instituted by the Reserve Bank of India in 2016.
• An account aggregator NBFC does account aggregation for a fee.
• NBFCs registered with the RBI should only provide account aggregation/data to financial institutions based on customer consent that follows RBI architecture.
• Account aggregators aim to simplify loan applications by allowing data access to financial institutions.
• The RBI has granted operating licenses to four account aggregators and in-principle approvals to three NBFC account aggregators.

AAs with an operating license include

• CAMS FinServ
• Cookiejar Technologies Pvt Ltd. (Finvu)
• FinSec AA Solutions Private Limited (OneMoney)
• NESL Asset Data Limited

AAs with In-Principle Approval include

• Jio Information Solutions Limited
• Perfios Account Aggregation Services Pvt Ltd
• Yodlee Finsoft Pvt Limited

New Categorization of NBFCs

• In October 2021, the Reserve Bank of India categorized NBFCs into three layers.
• The base layer includes non-systematically important NBFCs with less financial impact, peer-to-peer lending platforms, Account Aggregators, and non-operative financial holding companies.
• The asset size for NBFCs in the base layer has been increased from INR 500 crores (~US$66.45 MM) to INR1000 crores (~US$132.90 MM).
• The middle layer covers systematically important non-deposit taking and deposit taking NBFCs with assets exceeding INR1000 crores (~US$132.90 MM).
• The middle layer also includes NBFC-HFCs, NBFC-IFCs, IDF-NBFCs, and Core Investment companies (CICs).
• The upper layer includes the top ten NBFCs based on asset size, and other systematically important NBFCs assessed by size, interconnectedness, complexity, and liabilities.