Bajaj Finance, Muthoot Finance, Mahindra Finance, Tata Capital — some of India's most active lenders are not banks. They are Non-Banking Financial Companies (NBFCs), a category of financial institution that can lend, invest, and offer a range of financial services without a full banking licence. The distinction matters because it affects what protections you have as a customer, how safe your deposits are, and what rates you might pay or receive. This article unpacks the key differences.
Key Takeaways
- NBFCs cannot accept demand deposits (current and savings accounts) — a fundamental banking right they do not have.
- NBFCs are regulated by RBI but under a different — and generally lighter — framework than scheduled commercial banks.
- NBFCs serve segments banks underserve: gold loans, microfinance, vehicle financing, housing loans for informal-income borrowers.
- NBFC deposits are not insured by DICGC, unlike bank deposits (insured up to ₹5 lakh per depositor per bank).
- Some large NBFCs (like HFCs) are regulated by the NHB rather than RBI directly.
What Is an NBFC?
A Non-Banking Financial Company is a company registered under the Companies Act 2013 and licensed by the Reserve Bank of India under Section 45-IA of the RBI Act. NBFCs can:
- Lend money (personal loans, gold loans, vehicle finance, business loans).
- Make investments (in shares, bonds, debentures).
- Accept certain types of deposits (non-demand deposits with a minimum tenure — only from certain categories of NBFCs).
- Provide hire-purchase, leasing, and insurance agency services.
They cannot, however, do several things that define a bank: accept demand deposits (savings and current accounts on which the depositor can demand withdrawal at any time), issue cheques drawn on themselves, or participate in the payment and settlement system as a full member.
What Banks Can Do That NBFCs Cannot
The three defining exclusions for NBFCs:
- Demand deposits: You cannot open a savings or current account at an NBFC. The ability to take demand deposits is the core of a banking licence and why banks can fund loans at very low cost (savings account interest is 2.5–4% vs. market rates of 7–9%).
- Payment system participation: Banks directly participate in RTGS, NEFT, and UPI as members. NBFCs access the payment system indirectly through their banking partners.
- Cheque issuance: Banks can issue cheques; NBFCs cannot draw cheques on themselves (though they can issue demand drafts or use bank instruments).
Because NBFCs cannot access low-cost demand deposits, they typically fund themselves through debentures, commercial paper, bank borrowings, and fixed deposits — at higher costs. This is why NBFC loan rates are often 1–3% higher than equivalent bank rates.
Comparison Table: NBFC vs Bank
| Feature | Scheduled Commercial Bank | NBFC |
|---|---|---|
| Demand deposits (savings/current) | Yes | No |
| DICGC deposit insurance (up to ₹5 lakh) | Yes | No |
| Cheque issuance facility | Yes | No |
| RTGS/NEFT/UPI direct membership | Yes | No (indirect via banks) |
| CRR/SLR maintenance required | Yes | No (different liquidity norms) |
| Primary regulator | RBI | RBI (or NHB for HFCs) |
| PCA framework applicability | Yes | Partial (since 2022 for large NBFCs) |
| Typical lending focus | Broad (retail, corporate, agri) | Niche (gold, vehicle, housing, micro) |
Types of NBFCs and What They Do
RBI classifies NBFCs by activity:
- NBFC-ICC (Investment and Credit Company): The most common type, covering lending and investment. Examples: Bajaj Finance, Tata Capital.
- HFC (Housing Finance Company): Focused on home loans and construction finance. Examples: HDFC Ltd (before its merger with HDFC Bank), LIC Housing Finance. Regulated by National Housing Bank (NHB).
- NBFC-MFI (Microfinance Institution): Lend to low-income borrowers in small tickets. Examples: CreditAccess Grameen, Spandana Sphoorty.
- NBFC-Factors: Provide factoring (financing against receivables).
- Infrastructure Finance Companies: Fund long-gestation projects.
RBI further classifies NBFCs by size into Base, Middle, and Upper Layer — with the Upper Layer (systemically important NBFCs) subject to near-bank-level regulation since 2021.
Safety Considerations: Depositing Money with an NBFC
The most important practical difference for retail customers is deposit safety. Bank deposits are insured up to ₹5 lakh per depositor per bank by the Deposit Insurance and Credit Guarantee Corporation (DICGC). NBFC deposits carry no such insurance.
This does not mean all NBFC deposits are unsafe — large, well-capitalised NBFCs like Bajaj Finance have strong credit ratings and consistent track records. But the risk profile is categorically different. IL&FS (2018), DHFL (2019), and several smaller NBFCs illustrate the consequences when liquidity or solvency strains hit.
Considerations before depositing with an NBFC:
- Credit rating of the NBFC (AA or above indicates strong safety).
- Whether it is a registered deposit-taking NBFC (not all are).
- The NBFC's capital adequacy ratio and NPA levels (disclosed in annual reports).
- Whether the higher interest rate (typically 0.5–1.5% above bank FD rates) justifies the risk premium.
For comparisons with bank-only options, see fixed deposits vs debt mutual funds.
When an NBFC Loan Might Be Better Than a Bank Loan
NBFCs exist because banks leave gaps, and for many borrowers those gaps are significant:
- Informal income earners: Self-employed individuals, small traders, and gig workers often lack the salary slips and ITRs banks require. NBFCs have developed underwriting models based on cash flows, assets, or alternative data.
- Gold loans: NBFCs like Muthoot Finance and Manappuram dominate gold lending, with faster disbursal and lower documentation than most banks.
- Used vehicle loans: Banks largely avoid old vehicles; NBFCs have developed expertise in pricing the risk.
- Credit score below 700: Many NBFCs will lend to borrowers banks reject, at higher rates that reflect the risk.
If you are considering an NBFC loan, compare the all-in cost: interest rate, processing fee, prepayment penalty, and insurance bundling. Understanding the EMI calculation helps you compare offers accurately.
Frequently Asked Questions
Is Bajaj Finance a bank?
No. Bajaj Finance Limited is an NBFC (specifically an NBFC-ICC) registered with RBI. It cannot take savings/current deposits. It does offer fixed deposits (non-demand) which are not insured by DICGC. Bajaj Finance's parent, Bajaj Finserv, has applied for a banking licence, but as of the latest public information, no licence had been granted.
Are NBFC loans reported to CIBIL?
Yes. Most RBI-regulated NBFCs are members of at least one credit bureau (CIBIL, Experian, CRIF, Equifax) and report loan performance monthly. A missed EMI on an NBFC loan will hurt your credit score just as much as a missed bank EMI.
Can an NBFC become a bank?
Yes — RBI has a process for on-tap bank licensing. IDFC First Bank and Bandhan Bank, for example, converted from NBFCs. The conversion requires meeting stringent capital, governance, and operational criteria, and not all applicants are approved.
Are NBFC interest rates higher than banks?
Generally yes, because NBFCs fund themselves at higher costs (no access to low-cost demand deposits). The premium varies by NBFC size and credit profile of the borrower — a well-rated borrower might find an NBFC only 0.5–1% more expensive than a bank; a lower-rated borrower might face 3–5% more.
Is my money as safe in an NBFC as in a bank?
NBFCs are regulated by the RBI, but deposits with them are not covered by DICGC deposit insurance (the cover that protects up to ₹5 lakh of bank deposits). Only specific deposit-taking NBFCs can accept public deposits. Before placing money, check the NBFC's RBI registration and credit rating, and prefer well-rated, established names.
Can an NBFC offer a savings account or issue cheques?
No. NBFCs cannot accept demand deposits such as savings or current accounts, cannot issue cheques drawn on themselves, and are not part of the payment and settlement system in the way banks are. They mainly provide loans and, in some cases, accept fixed-term deposits.