Introduction to NBFCs in India
Updated: Jun 24, 2020
What is an NBFC? Are they similar to banks?
NBFCs are non-banking financial companies who provide loans like banks but do not provide any savings deposits for customers. They are regulated by RBI
How do they make money?
They usually borrow money at a lower interest rate from banks or raise money via commercial papers ( similar to bonds ) and re-lend to clients as loans at a higher interest rate. The interest earned on these loans is the source of revenue for the NBFCs. The more riskier the client, the higher is the interest rate they charge
Why do NBFCs exist if there are banks already?
Banks also provide loans, but they usually avoid risky clients and prefer clients with a good credit score. But NBFCs are more flexible in providing customized loans to clients with average/bad credit score as well. Also, the process of applying for a loan is easier & faster with flexible terms and conditions for an NBFC as compared to a bank
Who does the NBFCs lend to?
They could lend to anyone from large institutions, small and medium enterprises to small individual retail customers
There are NBFCs and there are MFIs. What is the difference between these two?
NBFCs and MFIs are similar, but MFIs (Micro finance institutions) operate at a much smaller level than a NBFC by providing loans to small individuals in the low income categories
Can a NBFC become a bank?
Yes, an NBFC can become a bank by applying for a bank license after fulfilling certain regulations set by the RBI
What are some of the major NBFCs in India?
Bajaj Finance, Muthoot Finance, Sundaram Finance, L&T Finance, Manappuram Finance are some of the major players in this segment
This is part 1 in a series of posts on NBFCs. Wait for the part 2 which is coming up shortly! Meanwhile if you wish to know anything specific about NBFCs do let us know in the comments.