It does indeed stand for naughty, but I've always found this a bit of a misnomer really. It was coined when nfic was almost exclusively fluffy and fun romps and vignettes and although there are still nfic like that written today, I think the genre has expanded some over the years to include nfic which is more sensual and waffy and even poignant at times.
These days too nfic really means any story which is beyond pg13, so the occasional fanfic which has a violent theme will find it's way into the nfic folder too.
LabRat