NBFC Meaning

NBFC stands for Non-banking Financial Company that offers different types of financial services.


They are also known as non-bank financial institutions (NBFIs) and shadow banks. They operate outside the traditional banking system by engaging in and providing various activities like offering loans, retail sector-housing finance, issuing securities, marketing and selling insurance, hire purchase finance, equipment lease finance, and investments.

NBFC (Non-Banking Financial Company)

NBFC’s in India, non-banking financial companies have succeeded in increasing the range of financial services offered to the public during their growth period. However, there is a significant NBFC crisis in India at certain times due to the liquidity crunch faced by such companies. Hence, governments are taking the initiative to impose strict rules and regulations for controlling the activities of shadow banking while preserving their growth potential because they are critical to a nation’s economic development.

Non-banking financial companies benefit a nation in many ways, specifically for developing countries. It creates economic efficiencies through financial innovations and performs supplementary to banking activities. It facilitates financial inclusion by creating easy access to credit and useful and affordable financial products and services delivered in an ethical and sustainable means.

It is different from the formal banking system. Commercial banks are confronted with stringent regulatory constraints; in such cases, NBFCs play a complementary role for commercial banks by connecting the financing needs of the consumers to customized financial products. A comparison between commercial banks and non-banking financial companies discloses the following:

  • Unlike the banks, NBFCs are not subjected to stringent and substantial regulations. 
  • Lack of transparency in non-banking financial companies’ business operations
  • Non-banking financial companies don’t derive funds from public deposits, but they issue securities, borrow from banks, etc.
  • The liabilities of non-banking financial companies are not insured, but commercial bank deposits are often guaranteed to a limited extent by the government.
  • During a financial crisis, banks have easy access to central bank liquidity.
  • Non-banking financial companies are doing more fee-based activities than fund-based ones.
  • Non-banking financial companies have more flexible structures than banks in the organized sector.
  • Non-banking financial companies bridge the credit gap.


Based on the security provided, loans can be classified into two main categories:

Secured loan refers to loans where you have to pledge collateral. A prime example of secured loans would be home loans. In the case of a home loan, your house acts as a security to the lender. In case you default on your loan, the lender holds the right to seize your property to recover the loan dues. 

Generally, secured loans have lower interest rates than unsecured loans because of the collateral involved. 

An unsecured loan is a loan where you don’t have to pledge collateral. Your loan eligibility and interest rate is decided based on your credit worthiness – your income, repayment capacity and credit score. A personal loan would be the best example for unsecured loans.

Interest rates for unsecured loans could be slightly higher than secured loans because of the higher risks involved due to the absence of collateral.

Difference Between Secured and Unsecured Loans


Secured Loans

Unsecured Loans

Collateral requirement


Not required

Interest rates

Could be relatively lower than unsecured loans

Could be relatively higher than secured loans

End-usage restrictions

Usually restricted (like in a home loan, car loan, etc.) but exemptions there (like loan against FD, gold loan, loan against property, loan against mutual fund, etc.)

Usually no restrictions except an unsecured education loan

Maximum loan amount

Usually a percentage of the security

Depending on loan type and applicant’s income and credit score among other eligibility factors

Credit score impact

Medium to low

Very High

Secured vs Unsecured Loan – Advantages and Disadvantages

Loan Category



Secured Loans

1. Lower applicable interest rates

1. Loan amount linked to value of collateral

2. Better option if your credit score is low

2. Risk of losing collateral if unable to repay loan

3. Can be approved quickly depending on loan type and lender


Unsecured Loans

1. No need to worry about collateral

1. Typically higher interest rates than secured loans

2. High loan quantum for eligible applicants

2. Credit score could be severely impacted if unable to repay loan

3. Can be approved quickly if credit score is high