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