A Non-Banking Financial Company (NBFC) is a financial institution that offers various banking services but does not hold a banking license. Read here to learn more about NBFCs.
Unlike traditional banks, NBFCs cannot accept demand deposits and are not part of the payment and settlement system.
However, they play a crucial role in the financial system by providing credit and other financial services.
Non-Banking Financial Company (NBFC)
A Non-Banking Financial Company (NBFC) is registered under the Companies Act, 1956.
- It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
- But it does not include any institution whose principal business is agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construction of immovable property.
- A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).
Types of Non-Banking Financial Company
NBFCs in India can be classified based on their activities, liabilities, and size. Here are some common types:
- Asset Finance Company (AFC): Finishing physical assets supporting productive/economic activities, such as machinery, automobiles, etc.
- Investment Company (IC): Primarily involved in the acquisition of securities.
- Loan Company (LC): Provides loans and advances other than those related to asset financing or investment in securities.
- Infrastructure Finance Company (IFC): Invests at least 75% of its total assets in infrastructure loans and has a minimum net-owned fund of ₹300 crores.
- Core Investment Company (CIC): Holds at least 90% of its net assets in the form of investments in equity shares, preference shares, bonds, debentures, debt, or loans in group companies.
- Microfinance Institution (MFI): Provides financial services to low-income groups, particularly in rural and semi-urban areas.
- Housing Finance Company (HFC): Specializes in providing finance for housing.
- NBFC-Factors: Engages in the business of factoring, which involves purchasing receivables from companies at a discount.
- Peer-to-Peer (P2P) Lending Platforms: Facilitate direct lending between individuals and businesses through an online platform.
Examples of NBFC in India
Some of the examples of Non-Banking Financial Companies in India that offer investment options, loans, fund transfer services, leasing, and hire-purchase options are:
- Bajaj Finserv
- Power Finance Corporation Limited
- Mahindra & Mahindra Financial Service
- Shriram Transport Finance Company
- Muthoot Finance Ltd, etc.
Differences Between Banks and a Non-Banking Financial Company
- Acceptance of Demand Deposits:
- Banks: Can accept demand deposits (e.g., savings and current accounts).
- NBFCs: Cannot accept demand deposits.
- Payment and Settlement System:
- Banks: Part of the payment and settlement system, enabling them to issue cheques, and participate in clearing and settlement.
- NBFCs: Not part of the payment and settlement system and cannot issue cheques.
- Regulation:
- Banks: Regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.
- NBFCs: Regulated by the RBI under the Reserve Bank of India Act, 1934, and specific guidelines issued by the RBI.
- CRR and SLR Requirements:
- Banks: Must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
- NBFCs: Do not have to maintain CRR and SLR.
- The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
Role and Significance of NBFCs
- Credit Access: Non-Banking Financial Companies provide credit to underserved and unbanked segments of the population, including small and medium enterprises (SMEs), rural areas, and low-income households.
- Financial Inclusion: They play a critical role in promoting financial inclusion by offering a wide range of financial products such as personal loans, vehicle loans, housing finance, and microfinance.
- Flexibility and Innovation: NBFCs are often more flexible and innovative compared to traditional banks. They offer tailored financial products and services to meet the specific needs of their customers.
- Complementary to Banks: NBFCs complement the banking sector by providing alternative financing options and catering to niche markets that may not be served by banks.
- Economic Growth: By facilitating credit flow to various sectors of the economy, NBFCs contribute to economic growth and development.
Regulation and Supervision
- Registration: NBFCs must register with the RBI to operate legally. They are required to have a minimum net owned fund of ₹2 crore (₹5 crore for NBFC-MFIs).
- Prudential Norms: NBFCs must adhere to prudential norms, including capital adequacy requirements, provisioning norms, and asset classification standards.
- Corporate Governance: The RBI mandates robust corporate governance practices for NBFCs to ensure transparency, accountability, and sound management.
- Periodic Reporting: NBFCs are required to submit periodic reports to the RBI on their financial health, compliance with regulations, and other operational aspects.
- Risk Management: NBFCs must implement effective risk management systems to manage credit risk, market risk, and operational risk.
Which Companies are Exempt from RBI Registration?
Certain entities are involved in the business of financial activities but do not require obtaining a registration with the Reserve Bank of India (RBI).
As these entities are regulated by other financial sector regulators, they do not need either the NBFC registration or the NBFC regulations of RBI.
These entities are as follows:
- Insurance Companies that are regulated by the Insurance Regulatory and Development Authority of India (IRDAI)
- Housing Finance Companies which are regulated by the National Housing Bank
- Stock Broking Companies which are regulated by the Securities and Exchange Board of India
- Merchant Banking Companies which are regulated by the Securities and Exchange Board of India
- Mutual Funds which are regulated by the Securities and Exchange Board of India
- Venture Capital Companies are regulated by the Securities and Exchange Board of India
- Companies that run Collective Investment Schemes which are regulated by the Securities and Exchange Board of India
- Chit Fund Companies which are regulated by the respective State Governments
- Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)
Challenges Facing NBFCs
- Liquidity Issues: Non-Banking Financial Companies often face liquidity challenges due to their reliance on market borrowings and the lack of access to demand deposits.
- Regulatory Arbitrage: Differences in regulatory frameworks between banks and NBFCs can lead to regulatory arbitrage, impacting the competitive landscape.
- Asset Quality: Maintaining asset quality is a significant challenge, especially in sectors like microfinance and small business lending.
- Funding Costs: Higher funding costs compared to banks can affect the profitability and sustainability of NBFC operations.
Conclusion
Non-Banking Financial Companies play a vital role in the Indian financial system by providing credit and financial services to sectors and populations that are often underserved by traditional banks.
While they face several challenges, effective regulation and prudent management can help NBFCs continue to contribute to financial inclusion and economic growth in India.
Related articles:
-Article by Swathi Satish
Leave a Reply