Non Banking Finance Companies

(NBFCs)

A Non-Banking Financial Company (NBFC) is a

company registered under the Companies Act, 1956.
It is engaged in the business of -
• Loans and advances
• Acquisition of shares/ stocks/ bonds/ debentures/
securities issued by Government or local authority
• • Leasing, hire purchase, insurance business, chit business etc.
Non Banking Finance Companies
(NBFCs)

A Non-Banking Financial Company (NBFC) is

a company registered under the Companies
Act, 1956.
It is engaged in the business of -
• Loans and advances
• Acquisition of shares/ stocks/ bonds/ debentures/
securities issued by Government or local authority
• • Leasing, hire purchase, insurance business, chit
business etc.
Non Banking Finance Companies
(NBFCs)
• NBFC does not include any institution whose principal
business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than
securities) or providing any services and sale/
purchase/ construction of immovable property.
• Microfinance provides small loans and other financial
services to poor and low-income households
Source of Financing for NBFCs
▪ • NBFCs have several sources of finances.
➢ Public Deposits (with specific approval of RBIs)
➢ Debentures
➢ Bank Borrowings
➢ Commercial Papers
▪ • Bank borrowings are a major source of funds for
NBFCs including NBFC-MFIs. This helps in widening
the reach of institutional credit to the sectors and
areas that are not fully covered by banks.
▪ • NBFCs largely cater to priority sectors, this channel
contributes to the priority sector lending of banks.
Bank Finance To NBFCs
• Banks may extend need based working
capital facilities as well as term loans to
all NBFCs registered with RBI and engaged
in infrastructure financing, equipment
leasing, hire-purchase, loan, factoring and
investment activities subject to the
guidelines.
• Banks may also extend finance to NBFCs
against second hand assets financed by
them.
 Bank Finance To NBFCs
All NBFCs including HFCs are required to register with RBI, except
few exempted categories:-
• Micro Finance Companies
• Asset Reconstruction Companies registered with the RBI under
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002
• Nidhi Companies
• Mutual Benefit Companies
• Chit Companies (under Chit Funds Act, 1982)
• Merchant Banking Companies (subject to conditions)
NBFC Activities Not Eligible for Bank Finance

• Bills discounted/ rediscounted by NBFCs.

• Investments of NBFCs both of current and long-term nature, in any
company/entity by way of shares, debentures
• Unsecured loans/ inter-corporate deposits by NBFCs to/ in any
company.
• All types of loans and advances by NBFCs to their subsidiaries, group
companies/ entities.
• Finance to NBFCs for further lending to individuals for subscribing to
IPOs and for purchase of shares from secondary market.
• Shares and debentures cannot be accepted as collateral securities for
secured loans to NBFC.
Prudential Ceilings for Exposure of Banks to NBFCS
Exposure to a single NBFC: Maximum 20% of the bank’s Tier I
capital.
• Exposure to a group of connected NBFCs: Maximum 25% of the
bank’s Tier I Capital.
• Exposure to a single NBFC predominantly lending against
collateral of gold Jewellery: Maximum 7.5% of the bank’s Tier I plus
Tier II Capital. The ceiling may go up to 12.5% if the additional
exposure is on account of funds on-lent by the NBFCs to infrastructure
sector.
• Aggregate exposure to NBFC Sector: Banks may fix internal limits
for their aggregate exposure to all NBFCs put together.
• Aggregate exposures to all NBFCs, having gold loans to the
extent of 50% or more of their total financial assets: Banks should
have an internal sub-limit on their aggregate exposures to all such
NBFCs.
 Bank Loans To NBFCs For On-lending
Banks can extend loans to NBFCs for the purpose of
on-lending to the priority sectors. This mode is not
applicable to RRBs, UCBs, SFBs and LABs.
• Loans to MFIs (NBFC-MFIs, Societies, Trusts, etc.)
• Loans to NBFCs for on-lending is eligible for
classification as priority sector under respective
categories subject to specified conditions.
• Loans to HFCs approved by NHB
• Bank credit to NBFCs (including HFCs) for on-lending,
should be within 5% of its total priority sector lending,
averaged across four quarters.
 NBFC-MFI

• An NBFC-MFI is defined as a non-deposit taking NBFC

(other than a company licensed under Section 25 of the
Companies Act, 1956 - Section 8 of the Companies Act,
2013) that fulfills the following conditions:
• Minimum Net Owned Funds: Minimum Rs. 5 crore.
(Registered in the North Eastern Region, Minimum Rs. 2
crore).
• Qualifying Assets Share: Not less than 85% of net assets
to be “qualifying assets.”
 NBFC-MFI
Qualifying Asset: A loan which satisfies the following criteria: −
• Household Income Ceiling: Borrower with annual income not
exceeding Rs. 1,25,000 (rural household) or Rs. 2,00,000 (urban and
semi-urban household).
• Ceiling on Loan Amounts: Maximum loan amount Rs. 75,000 (first
cycle) and Rs. 1,25,000 (subsequent cycles).
• Total indebtedness: Maximum Rs. 1,25,000. Education and medical
expenses are excluded for total indebtedness.
• Tenure of Loan: Not less than 24 months for loan more than `30,000
with prepayment without penalty.
• Collateral: Any loan should be extended without collateral
 NBFC-MFI
Loan Portfolio: Aggregate of loans for income generation to be at
least 50% of the total loans of the NBFC-MFI, and the rest can be for
other purposes (housing repairs, education, medical and other
emergencies).
• Repayment Mode: Weekly, fortnightly or monthly instalments at the
choice of the borrower.
• Other Income: Income from remaining 15 percent assets to be as
per the regulations.
• Restriction on Micro-finance: An NBFC not qualifying as an NBFC-
MFI to extend loans to micro finance sector not exceeding 10% of total
assets.
 NBFC-MFI

Certain MFIs which fulfill the following criteria are exempted from
registration with RBI:
• Purpose and Quantum of Credit: Providing credit not exceeding Rs.
50,000 for a business enterprise and Rs. 1,25,000 for a dwelling unit to
any poor person; and
• Licensing: Under Sec. 25 of the Companies Act, 1956 (Sec. 8 of the
Companies Act, 2013); and
• Public Deposits: It does not accept public deposits as defined in RBI
Directions
 MFIs Exempted from Registration

Certain MFIs which fulfill the following criteria are exempted from
registration with RBI:
• Purpose and Quantum of Credit: Providing credit not exceeding Rs.
50,000 for a business enterprise and Rs. 1,25,000 for a dwelling unit to
any poor person; and
• Licensing: Under Sec. 25 of the Companies Act, 1956 (Sec. 8 of the
Companies Act, 2013); and
• Public Deposits: It does not accept public deposits as defined in RBI
Directions.
 Prudential Norms
Capital Adequacy
Tier I and Tier II Capital to be not less than 15% of aggregate risk weighted assets. Tier II Capital not
to exceed Tier I Capital.
Asset Classification Norms:
• Standard asset: No default in repayment of principal or payment of interest is perceived.
• Non-performing asset: Interest/principal payment remained overdue for a period of 90 days or
more.
Provisioning Norms:
Aggregate loan provision to be not less than the higher of:
• 1% of the outstanding loan portfolio, or
• 50% of the aggregate loan instalments overdue for more than 90 days and less than 180 days, and
100% of the aggregate loan instalments overdue for 180 days or more.

An advance covered by Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH)
guarantee becomes non-performing: No provision for guaranteed portion. Provision for the excess
outstandings as per the norms.
 Membership of CIC
Every NBFC-MFI has to be a member of all Credit Information Companies
(CICs), provide timely and accurate data to them and use the data available
with them.
Pricing of Credit:
▪ • Margin cap: Difference between the rate to the borrower and the cost of
funds - Maximum 10% for large MFIs (portfolio exceeding Rs. 100 crore)
and 12% for others.
▪ • Interest Rates Charged: Shall be the lower of the following (a) The cost
of funds plus margin or (b) The average base rate of the five largest
commercial banks by assets multiplied by 2.75.
▪ • Variance in Interest rate: On individual loans not more than 4%.
▪ • Processing Charges: Not more than 1% of gross loan amount.
▪ • Insurance Cost: To recover only the actual cost of insurance.
Administrative charges, where recovered, shall be as per IRDA guidelines.
 Co-lending By Banks and NBFCs To Priority Sector
In November, 2020 RBI revised its guidelines for co-origination as “Co-
Lending Model” (CLM) that is available to banks (excluding SFBs, RRBs, UCBs
and LABs), with a view to providing greater operational flexibility to the lending
institutions. The CLM shall not be applicable to foreign banks with less than 20
branches.
• Banks are permitted to co-lend with all registered NBFCs (including HFCs) based
on a prior agreement. Co-lending banks will take their share of the individual
loans on a back-to-back basis in their books. NBFCs shall be required to retain
a minimum of 20% share of the individual loans on their books.
• The bank retains the discretion to reject certain loans after their due diligence
prior to taking in their books, subject to the conditions specified.
• The NBFC shall enter into a loan agreement with the borrower, containing the
features of the arrangement and roles and responsibilities of the NBFC and the
bank.
• Suitable arrangement must be put in place by the co-lenders to resolve any
complaint registered by a borrower with the NBFC within 30 days.
 Reserve Bank of India (Co-Lending Arrangements) Directions, 2025
Aspect Guideline / Requirement Purpose / Impact
Notification Comprehensive revised framework
August 6, 2025
Reference replacing the 2020 Co-Lending circular.
Effective Date January 1, 2026, or earlier as per internal policy Applies to all new co-lending arrangements
Applicable to:• Commercial Banks (excluding SFBs, LABs,
Broader scope — covers all lending
Applicability RRBs)• All India Financial Institutions• NBFCs (including
activities beyond PSL.
HFCs)
Co-Lending Arrangement (CLA): Pre-agreed arrangement
Enables joint participation in lending across
Definition between an originating RE and a partner RE to jointly fund
secured/unsecured loans.
loans with shared risk/revenue.
Minimum Loan Each RE must retain minimum 10% of individual loans in its Ensures risk-sharing and avoids full
Retention books. offloading of exposure.
REs must include co-lending provisions in credit policy,
Credit Policy covering:• Internal exposure limits• Due diligence of Integrates co-lending risk management
Requirement partners• Target borrower segments• Customer grievance within institutional framework.
redressal
Loan agreement must specify:• Each RE’s role &
Customer Enhances transparency and customer
responsibility• Customer interface entity• Grievance
Disclosures protection.
mechanism
Priority Sector Banks may claim PSL classification only for their share of
Maintains PSL integrity.
Eligibility credit under CLA.
 Reserve Bank of India (Co-Lending Arrangements) Directions, 2025
Blended Interest Borrower charged a blended interest rate, weighted by Ensures fair pricing and uniformity
Rate each RE’s funding share. for customers.
Fees/charges must be disclosed in Key Facts Statement Promotes transparency and
Fees & Charges
(KFS) and form part of Annual Percentage Rate (APR). responsible lending.
• Partner RE must take its share within 15 days of
Operational disbursement.• All disbursements and repayments Strengthens operational discipline
Arrangement routed through escrow account maintained with a and transparency.
bank.• Both REs maintain separate borrower accounts.
Default Loss Originating RE can provide DLG up to 5% of outstanding Caps credit enhancement and
Guarantee (DLG) loans. promotes prudent risk sharing.
Asset Classification If one RE classifies exposure as SMA/NPA, the same Ensures uniform asset classification
Norms classification applies to the other RE. and transparency.
Each RE must report its share to Credit Information Prevents data inconsistency and
Reporting to CICs
Companies. supports borrower credit discipline.
Transfer of loans under CLA must follow Master
Transfer of Maintains regulatory control over
Directions on Transfer of Loan Exposure (MD-TLE,
Exposure loan sales/transfers.
2021).
REs must:• Publish list of active CLA partners on
Improves market transparency and
Disclosures website.• Include aggregate CLA details (quantum,
public accountability.
interest, fees, sectors, DLG) in financial statements.
The earlier Co-Lending by Banks and NBFCs to Priority Integrates co-lending under a single
Repeal
Sector circular (dated Nov 5, 2020) is repealed. regulatory direction.
Aspect Key Provision / Requirement Purpose / Impact
The revised co-lending framework comes into
Effective Date January 1, 2026
force for all lending activities from this date.
Minimum Loan Each participating lender must retain at least 10% Ensures both lenders share credit risk
Retention of every individual loan on its books. proportionately.
Default Loss
Originating lender can provide a DLG up to 5% of Limits credit enhancement exposure;
Guarantee (DLG)
the outstanding loan amount. promotes prudent risk sharing.
Cap
Uniform Asset If one lender classifies a loan as SMA or NPA, the Promotes transparency and consistency in
Classification other must do the same for its exposure. asset quality reporting.
All disbursements and repayments to be routed
Escrow Account Enhances transaction transparency and
through an escrow account maintained with a
Requirement accountability.
bank.
Borrower to be charged a blended rate based on
Blended Interest Provides fair and transparent pricing to
contractual agreement between lenders and
Rate borrowers.
regulatory norms.
Regulated entities (REs) must include co-lending
Credit Policy provisions in their credit policies, including: - Embeds co-lending risk management within
Provisions Internal limits for co-lending portfolios. - institutional policy framework.
Procedures for partner due diligence.
Co-lending framework now applies to all lending Expands reach of co-lending and supports
Extended Scope
activities, not just priority sector lending. broader credit flow.
 Framework For Scale Based Regulation (SBR) For NBFCs
Layer / Category Types of NBFCs Included Key Points / Characteristics Examples

- NBFC-P2P (Peer-to-Peer Lending)- - Lowest regulatory intensity.-

Finzy (P2P),
NBFC-AA (Account Aggregator)- NOFHC NBFCs with minimal systemic
CAMSfinserv (AA),
Base Layer (NBFC-BL) (Non-Operative Financial Holding risk.- Entities without public
NOFHC of small
Company)- NBFCs without public funds funds or direct customer
bank promoters
and without customer interface dealings.
- NBFC-D (Deposit-taking)- CIC (Core
- Moderate regulatory
Investment Company)- IFC HDFC Ltd (HFC),
oversight.- Larger balance sheet
(Infrastructure Finance Company)- HFC REC Ltd (IFC), IIFCL
Middle Layer (NBFC-ML) and greater public exposure.-
(Housing Finance Company)- SPD (IDF), LIC Housing
Always includes SPD and IDF-
(Standalone Primary Dealer)- IDF-NBFC Finance
NBFC.
(Infrastructure Debt Fund)
- Subject to enhanced
- Systemically significant NBFCs prudential norms.- Closer to Bajaj Finance, Tata
Upper Layer (NBFC-UL) (selected by RBI)- Large CICs, IFCs, HFCs banks in terms of regulation.- Sons (CIC), Shriram
with higher risk profile Identified by RBI based on size, Finance
complexity, interconnectedness.

- Ideally expected to remain empty.- - Highest regulatory scrutiny.- — (No entity

Top Layer (NBFC-TL) May include NBFCs with elevated For entities posing extreme currently in this
systemic risk identified by RBI. systemic risk. layer)
Framework For Scale Based Regulation (SBR) For NBFCs

Provision Description
Government- Shall be placed in Base Layer or Middle
owned NBFCs Layer depending on size and activity.
Some NBFCs (e.g., NBFC-ICC, NBFC-MFI,
Activity-based
NBFC-MGC) can lie in any of the four layers,
inclusion
depending on their scale and risk profile.
Fraud Risk Management in Non-Banking Financial Companies (NBFCs)
(including Housing Finance Companies)
▪ Applies to NBFCs ≥ ₹500 crore assets.
▪ 21-day reply period for Show-Cause Notice.
▪ Fraud Policy review every 3 years.
▪ SCBMF = CEO + 2 Independent Directors.
▪ EWS system within 6 months.
▪ Report fraud to RBI within 14 days of classification.
▪ Debarred entities = 5-year funding ban post-repayment.
▪ Legal audit mandatory ≥ ₹1 crore loan.
▪ Theft/Burglary report to RBI within 7 days.