Non-Banking Financial Companies (NBFCs) play a crucial role in broadening access to financial services and enhancing competition and diversification of the financial sector. They are increasingly being recognized as complementary to the banking system, capable of absorbing shocks and disperse risks in times of financial distress. The application of different levels of regulations to the activities of banks and NBFCs has given rise to some issues. RBI has tried to plug the loopholes in these issues and has recently modified the regulatory framework.

Non-Banking Financial Companies (NBFCs), defined as financial institutions under Section 45-I (f) of the RBI Act, are companies with a principal business of receiving deposits and/or lending money in tiny manner. They play a crucial role in the economy of the country by expanding the access and geography of the financial services (more in the non-urban and non-metro centers) as well as increase the benefits for the customers by enhancing the competition in the financial sector.

It is true that NBFCs closely compete with the banks but at the same time they complement the banking sector. There have been times when they have shown to the world that they have the capacity and capability to absorb shocks and disperse the risk when the situations so demanded and stood firm in times of financial crisis.

NBFCs can even undertake certain activities, which are either permitted to be undertaken by banks in a restricted manner or not permitted at all, such as financing of acquisition and mergers, capital market activities etc.

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