Non-Banking Financial Companies (NBFCs)

Non banking financial companies, or NBFCs, are financial institutions registered under companies Act 1956 (now 2013) that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public. NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities. They are 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 does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognized as complementary to the banking sector due to their customer-oriented services; simplified procedures; flexibility and timeliness in meeting the credit needs of specified sectors; etc.

To commence operations a company must obtain a certificate of registration from RBI and must have a minimum Net Owned Fund (NOF) of Rs. 2cr (as increased from 1999). For the foreign investors and companies, this minimum amount is Rs.5 cr. Some prominant NBFCs in india are: National Bank of Agricultural and Rural Development (NABARD), LIC Housing Finance, Bajaj Holdings, Reliance Capital, Rural Electricity Corp., Indiabulls etc.

Difference between Banks & NBFCs

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

  1. NBFC cannot accept demand deposits; unless specifically authorised by the central bank.
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
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Types/categories of NBFCs

  • Asset Finance Company(AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
  • Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.
  • Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
  • Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs. 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
  • Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
  • Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85%of its assets in the nature of qualifying assets.
  • Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 75 percent of its total assets and its income derived from factoring business should not be less than 75 percent of its gross income.
  • Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-
    • It holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies.
    •  Its asset size is Rs 100 crore or above.
    • It accepts public funds.
    • NBFCs complement banks in the financial services industry. They have catered to a class of borrowers who are often considered unbankable.
    • NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. All these help promote inclusive growth in the country.

ROLE/IMPORTANCE OF NBFCs

NBFCs contribute largely to the economy by lending to infrastructure projects, which are very important to a developing country like India. NBFCs have contributed more to infrastructure lending than banks.

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