Loading the player...

What is a 'Non-Banking Financial Company - NBFC'

Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities.

BREAKING DOWN 'Non-Banking Financial Company - NBFC'

NBFCs were officially classified under the Dodd-Frank Act as companies predominantly engaged in financial activity when more than 85% of their consolidated annual gross revenues or consolidated assets are financial in nature. This classification encompasses a wide range of companies offering bank-like services, including credit unions, insurance companies, money market funds, asset managers, hedge funds, private equity firms, mobile payment systems, microlenders and peer-to-peer lenders.

NBFCs and the Rise of Shadow Banking

In 2007, NBFCs were given the moniker of “shadow banks” by Paul McCulley, an executive of Pacific Investment Management Company LLC (PIMCO), to describe the expanding matrix of institutions contributing to the easy-money lending environment that led to the subprime mortgage meltdown. Investment bankers Lehman Brothers and Bear Stearns were two of the more notorious NBFCs at the center of the meltdown. As a result of the ensuing financial crisis, traditional banks found themselves under tighter regulatory scrutiny, which led to a prolonged contraction in lending activities. This gave rise to a number of non-bank institutions that were able to operate outside the constraints of banking regulations.

In the decade following the financial crisis of 2007-08, NBFCs have proliferated in large numbers and varying types, playing a key role in meeting the credit demand unmet by traditional banks. The fastest growing segment of the non-bank lending sector has been peer-to-peer (P2P) lending. The growth of P2P lending has been facilitated by the power of social networking, which brings like-minded people from all over the world together. P2P lending websites such as Lending Club Corp. (NYSE: LC) and Prosper.com are designed to connect prospective borrowers with investors willing to invest their money in loans that can generate high yields.

P2P borrowers tend to be individuals who could not otherwise qualify for a traditional bank loan, or who prefer to do business with non-banks. Investors have the opportunity to build a diversified portfolio of loans by investing small sums across a range of borrowers. Although P2P lending only represents a small fraction of the total loans issued in the United States, it has gotten 65 times larger since 2009, rising from $25 million to $1.7 billion in loans by March 2015.

RELATED TERMS
  1. Nonbank Banks

    Financial institutions that are not considered full-scale banks ...
  2. Shadow Banking System

    The financial intermediaries involved in facilitating the creation ...
  3. Emergency Credit

    A loan given by a federal reserve bank to a non-bank institution ...
  4. Loan Committee

    The lending or management committee of a bank or other lending ...
  5. Peer-to-Peer (P2P) Service

    A Peer-to-Peer, or P2P, Service is a decentralized platform whereby ...
  6. Peer-to-Peer (P2P) Economy

    A Peer-to-Peer, or P2P, Economy is a decentralized model whereby ...
Related Articles
  1. Investing

    What's a Non-Banking Financial Company?

    A non-banking financial company, or NBFC, does not hold a banking license, yet it still provides many banking services.
  2. Investing

    Top 3 P2P Lending Players of 2017

    P2P lending is saving money for borrowers while generating decent returns for investors.
  3. Investing

    Nonbanks Overtake Banks as Top Mortgage Issuers

    As banks retreat from lending to more risky borrowers, nonbanks have stepped in and now make up the bulk of all mortgage issuance.
  4. Personal Finance

    A P2P Mortgage: Is This Loan Right for You?

    Read all about the the pros and cons of this trend in of peer-to-peer lending.
  5. Tech

    What Goldman Sachs’s Online Lending Means For Banking

    Recently Goldman Sachs has announced its entry into the online lending space. Most commonly known as an investment bank, Goldman’s newest venture may provide insight into the future of online ...
  6. Tech

    Should You Borrow From a P2P Site?

    It's a hot trend, but is it safe? Here's how to tell.
  7. Small Business

    Top 3 Safest Peer-to-Peer Lending Websites

    Add safety and reputation to your checklist when you consider borrowing from an online lender.
  8. Financial Advisor

    The 7 Best Peer-To-Peer Lending Websites (LC)

    A look at some of the most well-known and reputable peer-to-peer lending websites, their business models and successes to date.
  9. Tech

    3 Disrupters of Retail Banking

    Understand how the retail banking industry operates and why it's becoming outdated. Learn about three disrupters that are changing the way consumers bank.
  10. Personal Finance

    P2P Loans: Consider the Payoffs; Assess The Risks

    The available data seems to indicate that P2P loans, although risky, promise great payoffs, and the prospects of good returns seem to be getting brighter.
RELATED FAQS
  1. How does a credit crunch occur?

    A credit crunch occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to ... Read Answer >>
  2. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  3. What impact does the Federal Reserve have on a bank's profitability?

    Learn how the Federal Reserve impacts a bank's profitability with its influence on the discount rate, federal funds rate ... Read Answer >>
  4. Who do hedge funds lend money to?

    Discover the various entities that hedge funds are lending to, and the reasons why these hedge funds have been providing ... Read Answer >>
  5. What are the main reasons an investor should consider an allocation to the banking ...

    Learn about investment opportunities in the commercial and investment banking industry. Find out why many investors choose ... Read Answer >>
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
Trading Center