Chapter 8
NBFCs and Housing Finance
Learning Outcomes
After studying this chapter, you should be able to:
• Understand the basic concept of Banks and NBFCs.
• Know the services provided by NBFCs.
• Understand the essentials of Housing Finance.
8.1 NBFCs (Non-Banking Financial Companies)
Definition:
A company registered under the Companies Act 1956/2013, engaged in:
• Loans and advances
• Acquisition of shares/stocks/bonds
• Leasing, hire-purchase, insurance, etc.
Excludes: Institutions engaged in agriculture, industry, purchase/sale of
goods/services, or real estate business.
Key Takeaways:
• NBFCs offer banking-like services without a banking license.
• Not subject to all banking regulations.
• Crucial for serving underbanked sectors.
• Examples: Bajaj Finserv, Power Finance Corp, Muthoot Finance, Shriram
Transport Finance, etc.
Pros:
• Alternate source of credit
• Direct client interaction (no intermediaries)
• Higher investor yields
• Adds liquidity to the system
Cons:
• Less regulated than banks
• Lacks transparency
• Poses systemic risk if not well-managed
8.1.3 Functions of NBFCs
• Retail lending to those without access to banks
• Infrastructure project financing
• Asset purchase services (lease, hire purchase)
• Trade finance (letters of credit, factoring)
• Wealth management
• Microfinance for rural & semi-urban areas
• Investment banking services
• Enabling remittances & payments
• Providing insurance-linked services
8.1.4 Types of NBFCs (by RBI Classification)
Type Description
AFC Asset Finance Company – finances physical assets like vehicles,
machinery
IC Investment Company – invests in securities, stocks, debt
instruments
LC Loan Company – provides loans but doesn’t meet AFC criteria
IFC Infrastructure Finance Company – funds infrastructure sectors
(transport, power, telecom)
CIC-ND-SI Core Investment Company – invests 90% of assets in group
companies
IDF-NBFC Infrastructure Debt Fund – funds infrastructure via long-term
bonds
NBFC-MFI Micro-Finance Institution – lends small amounts to low-income
households
NBFC- Offers factoring services (sale of receivables)
Factors
MGC Mortgage Guarantee Company – guarantees housing loans
NOFHC Non-Operative Financial Holding Company – forms a new bank
8.1.5 Growth of NBFC Sector
• Expanded due to unmet demand by traditional banks.
• Quicker processing, flexible structures, and tech adoption.
• Reaches semi-urban and rural markets.
8.1.6 Scope of NBFCs
NBFCs offer:
• Personal loans
• Business loans
• Housing finance
• Credit cards
• Equipment finance
• Other financial services
8.1.7 NBFCs vs Commercial Banks
Aspect NBFC Commercial Bank
License No banking license Licensed under Banking
Regulation Act
Deposits Cannot accept demand deposits Can accept demand deposits
Regulation Regulated by RBI, limited scope Heavily regulated by RBI
Services Loans, leasing, hire purchase, Full-fledged financial services
investments
Reach Focuses on underserved segments Broader service base
8.2 What is a Bank
• Accepts public deposits
• Provides loans
• Regulated under Banking Companies (Regulation) Act, 1949
• Functions:
o Accepting deposits
o Lending loans
o Interest payments
o Investment services
o Draft and cheque services
8.2.1 Services Provided by NBFCs
NBFCs provide various financial services without being a bank, such as:
• Loans & advances
• Credit facilities
• Savings & investment plans
• Acquisition of shares/stocks
• Hire purchase/Bond hire
• Insurance/chit fund services
• Money transfer services
• Private education funding
• Retirement planning
• Underwriting of shares/stocks
• Trading in money markets
• TFCs (Term Finance Certificates)
Comparison: Banks vs NBFCs
Parameter Banks NBFCs
License & Regulation Governed by RBI Act 1934 + Only RBI Act, follow
Banking Regulation Act Companies Act
Services Loans, deposits, credit cards
Loans, insurance, chit
funds, etc.
Deposit Function Accept demand deposits Cannot accept demand
deposits
Acceptance of Foreign Restricted by law Allowed up to 100%
Investment under FDI
CRR/SLR Required Not applicable
DICGC Facility Covered Not covered
Credit Creation Yes No
Transactional Services Yes (cheques, online banking, No
etc.)
NBFCs' Typical Funding Areas
• Construction equipment
• Cars, two-wheelers, commercial vehicles
• Gold loans, microfinance
• Loan against shares
• Project & trade finance
• Retail/personal loans
Deposit Regulations for NBFCs
Precautions:
1. Verify NBFC is registered with RBI.
2. Check Certificate of Registration (CoR).
3. NBFCs can’t offer more than 12.5% interest.
4. Depositor must take official receipts with:
o Date, Name, Amount, Interest rate, Maturity
5. Public deposits are unsecured.
6. RBI does not guarantee NBFC deposits.
7. NBFCs can accept deposits for 12–60 months only.
8. Interest cannot exceed RBI’s ceiling rate.
8.3 Housing Finance – Concept & Types
8.3.1 What is Housing Finance?
• It is financing for purchase, construction, renovation of houses.
• Offered through:
o Home loans
o Mortgage loans
o Equity loans
o NBFCs and housing finance companies
8.3.2 Need for Housing Finance
• A home is a critical life investment.
• People often cannot buy homes outright, so loans are required.
8.3.3 Types of Housing Finance in India
1. Home Loans
2. Home Equity Loans
3. Construction Loans
4. Home Improvement Loans
5. Reverse Mortgages
6. PMAY (Pradhan Mantri Awas Yojana)
Each type serves different borrower needs – e.g., new home buyers, renovation,
seniors, or economically weaker sections.
8.3.4 Housing Finance Institutions (HFIs)
These companies are registered with CoR and help people secure home loans.
Top Housing Finance Companies in India:
1. HDFC Housing Finance Ltd
2. LIC Housing Finance Ltd
3. Indiabulls Housing Finance Ltd
4. L&T Housing Finance Ltd
5. PNB Housing Finance Ltd
6. IIFL Housing Finance Ltd
7. GIC Housing Finance Ltd
8. Sundaram Home Finance
9. Tata Capital Housing Finance Ltd
[Link] Financiers Ltd
[Link] Home Finance
[Link] Star Housing Finance
[Link] Housing Finance
[Link] Home Loan Ltd
[Link] Housing Finance
[Link] (Deewan Housing Finance Ltd)
8.3.5 Advantages of Housing Finance Companies
(HFCs)
• Help non-bankable customers get housing finance
• More personalized services
• Flexible terms & eligibility
• Faster disbursement
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8.3.6 Advantages of Housing Finance Companies
(HFCs)
1. Specialization in Housing Finance
o HFCs are experts in home loans and understand customer needs
better.
o They offer personalized and customized loan solutions.
2. Flexibility in Loan Approval
o More lenient towards income proofs and credit scores.
o Suitable for borrowers rejected by banks due to rigid eligibility norms.
3. Serving Lower-Income Segments
o Banks prefer high-credit score customers.
o HFCs target lower-income, underserved populations, expanding home
ownership.
8.3.6 Disadvantages of Housing Finance
Companies
1. Higher Interest Rates
o HFCs may charge more than traditional banks.
o Leads to higher loan repayment burden for borrowers.
2. Limited Financial Products
o HFCs only offer housing-related financial services.
o Unlike banks, they do not act as a full-service financial institution.
8.3.7 Differences Between HFCs and Banks
Criteria Banks Housing Finance Companies
(HFCs)
Interest Rates Lower interest rates Slightly higher interest for
home loans
Flexibility Less flexible, more More flexible, easier approval
documentation
Credit Facility
Offer overdraft & additional Do not offer additional credit
credit
Documentation Lengthy and complex Streamlined and faster
Disbursement Slower processing Faster loan disbursement
CIBIL Score Strict CIBIL score More lenient on lower scores
requirements
MCQ Review Questions Summary (with
Answers):
1. Primary characteristic of NBFCs?
Answer: B. They provide loans and advances without a banking license
2. Which is NOT a function of NBFCs?
Answer: A. Accepting demand deposits
3. Key advantage of HFCs?
Answer: B. High flexibility in loan approval
This completes the entire chapter summary on NBFCs and Housing Finance,
covering:
• Definitions and types of NBFCs
• Their comparison with banks
• Housing finance concepts, institutions, and products
• Advantages and drawbacks of HFCs
• Tables and MCQs