Banks are not the only lenders in India. A large share of loans for vehicles, gold, homes and small businesses comes from Non-Banking Financial Companies (NBFCs). For the smallest businesses, the government also runs the MUDRA loan scheme. Exams ask about how NBFCs differ from banks, who regulates them, and the Shishu, Kishore and Tarun categories of MUDRA. This post explains them in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- An NBFC is a company that lends or invests, but is not a bank.
- Most NBFCs are regulated by the RBI under the RBI Act, 1934.
- NBFCs cannot accept demand deposits or issue cheques drawn on themselves.
- MUDRA was launched on 8 April 2015 under the Pradhan Mantri MUDRA Yojana (PMMY).
- MUDRA loans are given in categories - Shishu, Kishore, Tarun and Tarun Plus.
1. What is an NBFC?
A Non-Banking Financial Company is a company registered under the Companies Act whose main business is financial - giving loans and advances, buying shares or bonds, leasing, hire-purchase and similar activities.
A company is treated as an NBFC when its financial assets are more than half of its total assets, and income from them is more than half of its total income. This is called the 50-50 principal business test.
A company whose main business is farming, industry, trading or buying and selling property is not an NBFC.
2. How NBFCs differ from banks
| Point | Bank | NBFC |
|---|---|---|
| Demand deposits | Can accept savings and current account deposits | Cannot accept demand deposits |
| Cheques | Issues cheques drawn on itself | Cannot issue cheques drawn on itself |
| Deposit insurance | Deposits insured by DICGC | No DICGC cover for deposits |
| Payment system | Part of the payment and settlement system | Not part of it in the same way |
| Licence | Banking licence under the Banking Regulation Act | Registration with RBI under the RBI Act |
3. Who regulates NBFCs?
Most NBFCs must register with the RBI under Chapter IIIB of the RBI Act, 1934. Some financial companies are regulated by other bodies:
- Insurance companies - IRDAI.
- Stock brokers, merchant bankers and mutual funds - SEBI.
- Chit fund companies - State governments.
- Nidhi companies - Ministry of Corporate Affairs.
Housing finance companies, earlier regulated by the National Housing Bank, came under the RBI in 2019.
4. Types of NBFCs and scale-based regulation
Common types include Investment and Credit Companies, NBFC-Microfinance Institutions, Infrastructure Finance Companies, Core Investment Companies, Account Aggregators and Peer-to-Peer lending platforms.
After the IL&FS crisis of 2018 showed how a large NBFC failure can hurt the system, the RBI brought in Scale-Based Regulation from October 2022. NBFCs are now placed in four layers based on size and risk:
- Base Layer - smaller NBFCs, lighter rules.
- Middle Layer - larger deposit-taking and non-deposit NBFCs.
- Upper Layer - large NBFCs named by the RBI, with bank-like rules.
- Top Layer - kept empty, for any NBFC that becomes very risky.
5. MUDRA
MUDRA stands for Micro Units Development and Refinance Agency. It was set up as a subsidiary of SIDBI and launched with the Pradhan Mantri MUDRA Yojana on 8 April 2015.
- It supports non-corporate, non-farm small and micro enterprises - shopkeepers, small manufacturers, food vendors, repair shops and similar units.
- MUDRA itself does not lend directly. It gives refinance to banks, NBFCs, microfinance institutions, regional rural banks and small finance banks, which give the loans.
- MUDRA loans are collateral-free, backed by a Credit Guarantee Fund for Micro Units.
6. MUDRA loan categories
| Category | Loan amount |
|---|---|
| Shishu | Up to ₹50,000 |
| Kishore | Above ₹50,000 and up to ₹5 lakh |
| Tarun | Above ₹5 lakh and up to ₹10 lakh |
| Tarun Plus | Above ₹10 lakh and up to ₹20 lakh, for borrowers who have repaid an earlier Tarun loan |
Tarun Plus was added after the 2024 Union Budget raised the MUDRA limit to ₹20 lakh. Borrowers can also get a MUDRA card, a RuPay debit card for working capital.
7. Why NBFCs and MUDRA matter
- They reach small towns and informal businesses that banks often find hard to serve.
- They support self-employment and women entrepreneurs, who form a large share of MUDRA borrowers.
- Concerns remain about bad loans in some segments and about NBFCs depending heavily on bank borrowing.
8. Previous year questions
- Under which Act are most NBFCs registered with the RBI? – RBI Act, 1934
- Can NBFCs accept demand deposits? – No
- Are NBFC deposits covered by DICGC insurance? – No
- Which body regulates chit fund companies? – State governments
- Which body regulates Nidhi companies? – Ministry of Corporate Affairs
- Since when have housing finance companies been regulated by the RBI? – 2019
- Which NBFC crisis of 2018 led to tighter rules? – IL&FS
- From when does RBI's Scale-Based Regulation for NBFCs apply? – October 2022
- How many layers are there in Scale-Based Regulation? – Four
- What does MUDRA stand for? – Micro Units Development and Refinance Agency
- When was the Pradhan Mantri MUDRA Yojana launched? – 8 April 2015
- MUDRA is a subsidiary of which institution? – SIDBI
- What is the loan limit under the Shishu category? – Up to ₹50,000
- What is the loan range under the Kishore category? – ₹50,000 to ₹5 lakh
- Up to what amount can a Tarun Plus loan be given? – ₹20 lakh
9. How to revise this topic
Start with the NBFC definition: company under the Companies Act, financial business, 50-50 principal business test.
Next, learn the differences from banks: no demand deposits, no cheques, no DICGC cover; registration under Chapter IIIB of the RBI Act.
Then fix the regulators: RBI for most, IRDAI, SEBI, State governments for chit funds, MCA for Nidhis; Scale-Based Regulation from October 2022.
Finally, remember MUDRA: 8 April 2015, SIDBI subsidiary, refinance only; Shishu ₹50,000, Kishore ₹5 lakh, Tarun ₹10 lakh, Tarun Plus ₹20 lakh.
10. Frequently Asked Questions
What is an NBFC?
An NBFC is a company registered under the Companies Act whose main business is lending, investing in securities, leasing or hire-purchase. It is a financial company but not a bank.
How is an NBFC different from a bank?
An NBFC cannot accept demand deposits, cannot issue cheques drawn on itself and its deposits are not insured by DICGC. Banks can do all of these.
Who regulates NBFCs in India?
Most NBFCs are registered with and regulated by the RBI under the RBI Act, 1934. Some, such as insurance firms, chit funds and Nidhi companies, are regulated by other bodies.
What is MUDRA?
MUDRA, the Micro Units Development and Refinance Agency, is a SIDBI subsidiary launched in 2015 under the Pradhan Mantri MUDRA Yojana. It refinances lenders who give collateral-free loans to small non-farm businesses.
What are the MUDRA loan categories?
Shishu covers loans up to ₹50,000, Kishore up to ₹5 lakh, Tarun up to ₹10 lakh, and Tarun Plus up to ₹20 lakh for those who have repaid a Tarun loan.
For more Economy topics in simple language, see our RBI and its Functions, Payments Banks and Small Finance Banks and MSME and Startup India posts, or browse the Economy section. Preparing for a bank exam? Start with the RBI Grade B guide or join the 100 Hour GS Course.