Non-Banking Financial Company - NBFC

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. Shadow Banking System

    The financial intermediaries involved in facilitating the creation ...
  2. Peer-To-Peer Lending (P2P)

    A method of debt financing that enables individuals to borrow ...
  3. Emergency Credit

    A loan given by a federal reserve bank to a non-bank institution ...
  4. Peer-to-Peer (P2P) Service

    A Peer-to-Peer, or P2P, Service is a decentralized platform whereby ...
  5. Excess Loans

    A loan made by a state chartered or national bank to an individual ...
  6. Peer-to-Peer (P2P) Economy

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

    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. Markets

    Peer-To-Peer Lending Breaks Down Financial Borders

    Banks are no longer the only option for a loan - the P2P lending system operates without them.
  3. Retirement

    Retirees: Make More Money as a Peer-to-Peer Lender

    With interest rates keeping traditional investment returns low, peer-to-peer lending offers retirees a chance for higher returns – along with higher risk.
  4. Managing Wealth

    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. Markets

    Should You Borrow From a P2P Site?

    It's a hot trend, but is it safe? Here's how to tell.
  6. Markets

    Top 3 Safest Peer-to-Peer Lending Websites

    Add safety and reputation to your checklist when you consider borrowing from an online lender.
  7. Markets

    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.
  8. Markets

    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.
  9. Trading

    Eyeing a Loan? Consider Skipping the Banks

    Peer-to-peer lending platforms, such as Lending Tree, Lending Club and Prosper, offer borrowers newfound leverage. Here's a look.
  10. Personal Finance

    How Risky Is Borrowing Online?

    Peer-to-peer lending is a new but fast-growing market, but the ease and convenience of using online lenders can entice you to overspend. So how safe is it?
RELATED FAQS
  1. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
  2. 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 >>
  3. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  4. Can entities other than banks issue letters of credit?

    Obtaining a letter of credit from a non-bank is legally acceptable according to the ICC, but companies tend to prefer to ... Read Answer >>
  5. To what extent do banks have exposure to different business lines?

    Learn how banks are exposed to risk and what the different types of exposure mean. Find out about the 2014 U.S. commercial ... Read Answer >>
  6. What are the similarities and differences between the savings and loan (S&L) crisis ...

    Learn about some of the similarities and differences between the savings and loan crisis and the subprime mortgage crisis ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center