Non-Banking Financial Companies (NBFC) provides loans, acquires financial securities and offers leasing and insurance services. However it excludes companies primarily engaged in agriculture, industrial activities, trading, or real state.
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.
A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
About:
- Registration under Companies Act, 1956.
- Can accept public deposits for 12-60 months (no demand-deposits).
- Do not have a banking license:
- Not part of the payment system.
- Cannot issue cheques.
- Insurance by deposit insurance and Credit Guarantee Corporation : not available for NBFC depositors.
- NBFC require an investment-grade credit rating.
- Personal loans, Home Loans, Gold Loans, Vehicle Finance…etc are some of the key services offered.
Features:
- NBFC cannot accept demand deposits.
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.
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.
Classification:
- NBFC are categorized:
- In terms of the types of liabilities into Deposit and Non-Deposit accepting NBFCs,
- Non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
- By the kind of activity, they conduct.
- By Major Activity:
- Asset Finance Company:
- Finishing physical assets supporting productive/economic activities, such as machinery, automobiles, etc.
- Investment Company:
- Primarily involved in the acquisition of securities.
- Loan Company:
- Provides loans and advances other than those related to asset financing or investment in securities.
- Infrastructure Finance Company:
- : Invests at least 75% of its total assets in infrastructure loans and has a minimum net-owned fund of ₹300 crores.
- Core Investment Company:
- 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.
- Micro-Finance Institution:
- 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.
- Asset Finance Company:
- By Deposits:
- Deposit-taking NBFCs
- Non-Deposit taking NBFCs-
- Systemically Important (NBFC-NDSI)
- Other non-deposit holding (NBFC-ND)
- Systemically Important NBFCs:
- Assets of RS.500 crores or more
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.
| Type of Institution | Regulatory Authority |
| NBFCs registered with RBI | RBI |
| Housing Finance Institutions | National Housing Bank |
| Merchant Banking Companies, Venture Capital Fund Companies, Stock Broking, Collective Investment Schemes (CIS) | SEBI |
| Nidhi Companies, Mutual Benefit Companies | Ministry of Corporate Affairs (MCA) |
| Chit Fund Companies | State Government |
| Insurance Companies | IRDAI |
| Non-Banking Non-Financial Companies | Statute: Companies Act 1956 Regulator: Ministry of Corporate Affairs Enforcement Agency: State Governments |
Challenges Faced by NBFCs:
- Funding Costs:
- Higher funding costs compared to banks can affect the profitability and sustainability of NBFC operations.
- Asset Quality and Credit Risk:
- Maintaining asset quality is a significant challenge, especially in sectors like microfinance and small business lending.
- 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.
Benefits of NBFCs:
- Financial Inclusion
- Innovative Products
- Liquidity
- Support of MSMEs
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.
