When Bajaj Finance crossed Rs 2 lakh crore in assets, it became larger than most scheduled commercial banks in India. It lends to consumers, finances businesses, and manages a balance sheet that would make a mid-size bank envious. Yet it cannot issue a chequebook, cannot offer a savings account, and its depositors have no access to the Deposit Insurance and Credit Guarantee Corporation's safety net. The question this raises is not academic: if an NBFC walks like a bank and lends like a bank, what exactly makes it not a bank?
The answer runs through four distinct regulatory boundaries — deposit restrictions, capital adequacy requirements, NPA recognition, and governance mandates — each constructed for a specific reason and each of which converged under the RBI's Scale Based Regulation framework (since withdrawn — superseded by the November 2025 entity-specific directions).
What can an NBFC not do that a bank can?
The single most important regulatory distinction between a bank and an NBFC is the deposit franchise. A bank can accept demand deposits — current accounts, savings accounts — that depositors can withdraw at will. An NBFC cannot. This prohibition is not a technicality; it is the structural foundation on which the entire regulatory divide rests, because demand deposits create the fractional reserve dynamics that necessitate banking regulation in the first place.
The restrictions go further. NBFCs cannot participate in the payment and settlement system, cannot issue cheques drawn on themselves, and cannot access the RBI's lender-of-last-resort facility. Their depositors receive no DICGC insurance — the Rs 5 lakh cover that protects bank depositors simply does not extend to NBFC deposits.
"an asset finance company or a loan company or an investment company... may accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one-half times of its NOF."
— Revised Regulatory Framework for NBFCs, March 2015 (since withdrawn)
Even for the shrinking number of NBFCs still permitted to accept public deposits, the ceiling is 1.5 times Net Owned Funds — a fraction of what banks can mobilise. The RBI stopped granting fresh deposit-taking authorisation after 1997, which means every deposit-accepting NBFC operating today holds legacy permission. The direction of regulation is unmistakable: NBFC deposit-taking is a feature the RBI wants to phase out, not expand. The November 2025 Acceptance of Public Deposits Direction tightened the remaining conditions further, including linking dividend declaration to deposit compliance.
Why do NBFCs need more capital than banks?
Here is the counterintuitive fact: NBFCs must maintain a higher capital adequacy ratio than banks. The minimum CRAR for banks is 9 per cent. For NBFCs across all four SBR layers, it is 15 per cent, with a Tier 1 minimum of 10 per cent.
"Every non-banking financial company shall maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 percent of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items."
— NBFC Prudential Norms Direction, March 2015 (since withdrawn)
The reasoning is straightforward. Banks have three safety nets that NBFCs lack: deposit insurance, access to the RBI's liquidity window, and participation in the interbank market. Without these backstops, capital must serve as the primary shock absorber. A bank facing a sudden liquidity squeeze can approach the RBI's Marginal Standing Facility or tap the call money market overnight. An NBFC facing the same squeeze has only its own balance sheet to fall back on — exactly the dynamic that destroyed IL&FS in September 2018.
For Upper Layer NBFCs, the October 2022 capital requirements circular layered additional requirements: a Common Equity Tier 1 minimum of 9 per cent and a leverage ratio. These mirror the Basel III standards applied to banks, narrowing the capital gap even as the headline CRAR remains higher. The RBI's first Upper Layer list identified 16 NBFCs — including Bajaj Finance, Tata Sons, and Muthoot Finance — that must meet these enhanced requirements.
How does NPA recognition differ?
Both banks and NBFCs now follow the 90-day overdue rule for classifying a loan as non-performing. This alignment happened in stages — before 2015, many NBFC categories used a 180-day window, meaning a borrower could miss six months of payments before the NBFC had to acknowledge the loss. The March 2015 revised framework (since withdrawn) phased this down to 90 days by March 2018, finally placing NBFCs on the same recognition timeline as banks.
But provisioning rates still differ, and for good reason. NBFC asset portfolios look fundamentally different from bank portfolios. A gold loan NBFC like Muthoot Finance holds collateral with daily observable market prices and near-zero loss-given-default. A microfinance NBFC holds unsecured loans to low-income borrowers with high default frequency but predictable loss curves. An infrastructure NBFC holds long-gestation project loans where a single default can be catastrophic. Applying uniform bank provisioning rates to these portfolios would either over-capitalise gold lenders or under-provision infrastructure lenders.
The NBFC Capital Adequacy Direction of November 2025 consolidated the provisioning and capital adequacy norms across NBFC types, but retained calibration by asset class — an acknowledgment that one-size-fits-all NPA treatment does not work for a sector this diverse. For a detailed walkthrough of NBFC capital, NPA, and provisioning norms, see NBFC Prudential Norms: Capital, NPA, Deposits, and Governance.
Where did the governance gap come from — and how did IL&FS expose it?
Before Scale Based Regulation, NBFC governance requirements were minimal for non-systemically-important entities. The RBI's July 2007 corporate governance guidelines applied only to deposit-taking NBFCs with deposits above Rs 20 crore and non-deposit NBFCs with assets above Rs 100 crore. Everything below those thresholds operated with virtually no governance mandates — no independent directors, no audit committee, no risk management function.
IL&FS proved why this mattered. Infrastructure Leasing & Financial Services was a Core Investment Company with over Rs 91,000 crore in debt, 348 subsidiaries, and a board that failed to flag the deteriorating asset quality of its infrastructure portfolio. When IL&FS defaulted on commercial paper in September 2018, the contagion spread instantly through mutual funds, banks, and the broader NBFC sector. The DHFL fraud followed. The lesson was unambiguous: an NBFC with systemic footprint but bank-lite governance is a systemic risk.
"The framework categorises NBFCs in Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL) and Top Layer (NBFC-TL). It specifies that Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank based on a set of parameters and scoring methodology."
— RBI Press Release on Upper Layer NBFCs, September 2022
The November 2025 Governance Direction now imposes escalating requirements by layer. Base Layer NBFCs need board experience requirements and a Risk Management Committee. Middle Layer entities add independent directors, audit and nomination committees, a Chief Risk Officer, and a Chief Compliance Officer. Upper Layer NBFCs face the most stringent mandate: compulsory stock exchange listing and enhanced disclosures that bring them to near-parity with bank governance standards. The full timeline of how this layered framework developed is traced in Scale Based Regulation: The NBFC Tiering Framework.
Is the NBFC becoming a bank in all but name?
The convergence is real and accelerating. The RBI's January 2021 discussion paper on scale-based regulation stated the core premise plainly: NBFCs that pose bank-like risks should face bank-like regulation. Since then, Upper Layer NBFCs have been required to adopt bank-equivalent capital buffers, bank-equivalent governance, and bank-equivalent large exposure limits. The February 2026 draft amendment went further in the opposite direction for the smallest entities — proposing to exempt NBFCs below Rs 1,000 crore with no public funds and no customer interface from registration altogether.
The regulatory architecture is splitting into two worlds. At the top, entities like Bajaj Finance and HDB Financial Services operate under a regime that differs from banking regulation only in the deposit franchise — they cannot accept demand deposits and their fixed deposits carry no DICGC insurance. At the bottom, thousands of small NBFCs are being deregulated entirely.
The remaining question is whether the deposit franchise distinction can hold. HDB Financial Services — HDFC Bank's NBFC subsidiary — filed for an IPO in 2024, a mandatory listing requirement under SBR's Upper Layer governance norms. It operates with bank parentage, bank-like capital, bank-like governance, and bank-like supervision. The only thing it does not have is a banking licence. For a comprehensive view of how NBFC regulation evolved from the 1996 deposit crisis to the present four-layer structure, see NBFC Regulation: The Complete Timeline. For the practical question of depositor safety, see Is Your Money Safe in an NBFC?
The regulatory chain tells the story: the 1997 deposit freeze (since withdrawn) → the 2016 Master Directions (since withdrawn) → the 2021 SBR framework RBI/2021-22/112 (since withdrawn) that superseded the old binary classification → the November 2025 entity-specific directions that consolidated everything. Each step replaced the prior framework and tightened the alignment between NBFC and bank regulation.
The deposit restriction is the last wall. Everything else has converged or is converging. Whether that wall holds — or whether the largest NBFCs eventually convert to universal banks — will determine the shape of Indian financial regulation for the next decade.
Last updated: April 2026