NBFC Explained: Types, Risks, and Analysis

NBFCs are financial institutions licensed by the Reserve Bank of India (RBI) that provide banking-like services — loans, deposits, investment products, and insurance — without holding a full banking license. They fill the credit gap left by banks, especially for small businesses, MSMEs, startups, fintech companies, and borrowers in rural and semi-urban areas.

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NBFC vs Bank: Services Comparison

Demand deposits are exclusive to banks — NBFCs cannot offer them. RBI regulations for NBFCs are less strict compared to those for banks, but certain high-risk activities are still off-limits for NBFCs — industrial activity, agricultural operations, and the purchase, sale, and construction of real estate.

NBFCs offer higher fixed deposit rates than banks because deposits are one of the primary ways they raise money to lend. Unlike banks, NBFCs do not have CASA (Current Account and Savings Account) deposits, so they rely on higher FD rates to attract funds. The RBI has placed a ceiling on these rates to prevent smaller NBFCs from offering unsustainably high rates.

If an NBFC fails or shuts down, depositors cannot claim any money back. For banks, depositors are covered up to Rs 5 lakh under deposit insurance (DICGC). NBFCs can accept deposits for 12 to 60 months, while banks can accept deposits from 15 days to 10 years.

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Key Differences at a Glance

For NBFCs, asset quality and cost of funds matter more than revenue growth. Unlike banks, NBFCs do not have access to cheap CASA deposits.

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Finance Companies That Do Not Need an NBFC License

Housing Finance Companies were previously regulated by the National Housing Bank (NHB). Since August 2019, they are classified as NBFC-HFCs and regulated directly by the RBI.

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Types of NBFCs

NBFCs are classified in two ways:

By activity — 10 types listed below.

By deposit structure:

• NBFC-D (Deposit Taking): Accepts public deposits.
• NBFC-ND (Non-Deposit Taking): Raises funds from markets and banks.

The 10 Types

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Top 10 NBFCs in India

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Top NBFCs by Category

All 10 categories above are NBFC-ND (Non-Deposit Taking). They raise money from banks, capital markets, and institutional borrowings. NBFC-D (Deposit Taking) is a separate category where the NBFC can accept public deposits. The RBI has significantly reduced this category, and only a handful of legacy NBFC-Ds remain active today.

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How to Analyze NBFC Stocks

Core difference: NBFCs depend on market borrowing — cost of borrowing is everything. Banks depend on public deposits — CASA and the deposit franchise are everything. Replace "CASA and deposit growth" (for banks) with "cost of borrowing and ALM" (for NBFCs). That is the only structural difference. The rest — growth, quality, and returns — is the same.

For a detailed explanation of the financial ratios mentioned above, refer to the profitability ratios guide and the banking stocks analysis guide.

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Growth vs Risk

Can NBFCs grow faster than private banks? Yes — in credit upcycles, NBFCs can grow their AUM 1.5x to 2x faster than private banks.

Is that growth sustainable? Not always — NBFC growth is cyclical. Every 4 to 5 years, a liquidity or NPA shock resets the sector.

Who wins the next decade? Hybrid winners — NBFCs with strong parent or bank backing for cheap funds, AI-first underwriting, diversified liabilities, and co-lending tie-ups. Single-product NBFCs without a funding moat will struggle.

Best bet for investors? Large diversified NBFCs (Bajaj Finance, Shriram) plus digital-first small NBFCs with niche dominance. Avoid mid-sized NBFCs that have neither scale nor niche.

NBFCs offer higher growth with higher volatility. Private banks offer lower growth with lower volatility. Pick based on your risk appetite — or hold both for a balanced portfolio.

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Major NBFC Crises in India

IL&FS: IL&FS was one of India's top infrastructure finance companies and carried an AAA credit rating. It funded long-term projects with short-term loans. When the rupee fell and crude oil prices surged in 2018, it could not roll over its short-term borrowings and defaulted.

DHFL: DHFL was one of India's top five housing finance companies, targeting middle-income and lower-income groups for home loans. Its NPAs started rising, and by June 2019, it could not repay most of its loans. After the IL&FS crisis, lenders had become more cautious, and DHFL faced a severe liquidity crunch. Investigations later revealed a Rs 31,000 crore scam involving fake borrowers and shell companies.

When one large NBFC fails, it triggers panic across the market, and other NBFCs feel the ripple effects. Many NBFCs, operating under lighter regulations, hand out riskier loans chasing higher interest rates and end up with large NPAs. In 2024, Fusion Finance faced a similar crisis, which hurt other microfinance companies as well.

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How to Verify an NBFC

To check the list of NBFCs registered with the RBI, visit:

https://www.rbi.org.in/scripts/bs_nbfclist.aspx

RBI — List of Registered NBFCs and ARCs

Click on the Excel file that shows the list of NBFCs and ARCs registered with the RBI. There are more than 8,000 NBFCs in India. A second link shows the NBFCs whose licenses have been canceled by the RBI. If you are planning to borrow from an NBFC that is not as well known as Bajaj Finance or Cholamandalam Finance, it is worth visiting this page and verifying first.

To verify an NBFC's credit rating, visit a SEBI-registered credit rating agency's website and search for the NBFC name. For example:

https://www.crisilratings.com/en/home.html

CRISIL Ratings — Bajaj Finance Credit Rating

Type the NBFC name in the search bar to view its credit rating page. You can also check the rating on the NBFC's own website.

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Which Is Better for Taking a Loan — Bank or NBFC?

Most NBFCs are not interested in large-ticket assets like home loans, which tie up significant capital at lower interest rates. They prefer personal loans, vehicle loans, and similar products where the ticket size is smaller, interest rates are higher, and capital can be recovered faster.

Compared to banks, NBFCs charge 2% to 4% higher interest rates on loans. Processing fees run around 2% to 4% and may include hidden charges. Some NBFCs also charge prepayment penalties, which banks generally do not. Banks usually require a CIBIL score of 700 or above, while NBFCs are more flexible with lower scores.

If you have a strong CIBIL score and can wait 2 to 4 days, banks are the better choice for personal loans. If you need money right away and are willing to pay higher fees and rates, NBFCs are the faster option.

SBI vs Bajaj Finance — Personal Loan Comparison

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Conclusion

Banks come with lower interest rates, no prepayment penalties, and deposit insurance. NBFCs deliver faster processing, larger loan amounts, and easier approval for lower credit scores. For long-term, high-value loans such as home loans, banks remain the stronger choice. For quick, short-term needs, NBFCs are more convenient.

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References

• Reserve Bank of India — NBFC Regulations — List of registered NBFCs and ARCs
• RBI — Master Direction for NBFCs — Regulatory framework for NBFCs
• DICGC — Deposit Insurance — Deposit insurance coverage for banks
• CRISIL Ratings — NBFC credit rating verification
• SEBI — Registered Credit Rating Agencies — List of SEBI-registered rating agencies
• SBI — Personal Loan — SBI personal loan rates and terms
• Bajaj Finance — Personal Loan — Bajaj Finance personal loan rates and terms
• Screener.in — NBFC Peer Comparison — Financial data for listed NBFCs

All data is sourced from publicly available company filings, RBI disclosures, and financial data providers. Rates and AUM figures are approximate as of August 2026.

This analysis is for educational purposes only and does not constitute investment advice.