Non-Banking Financial Company (NBFC)
July 23, 2019
Non-Banking Financial Company (NBFC)
NBFC’s are financial organisations that do not have full banking license but they provide financial services similar to that of banks.These companies are registered under Companies Act, 1956 and Companies Act,2013. NBFC’s provide financial services such as market brocking and acquisition of shares, bonds and debentures.
The meaning of NBFC is Non-Banking Financial
Company; these companies are involved in providing a wide range of financial services which includes insurance, stock-broking, loans for homes, machinery, mobile phones etc. they even accept deposits from people, but they do not provide conventional banking to them.
NBFC is defined as a company registered under Companies Act, 2013 and also under RBI act 1934 under section 45-IA. These type of companies provides banking services without holding any banking license.
NBFC does not include financial institutions which engage in agriculture activity, industrial activity, purchase or sale of any goods or providing any services and sale/purchase/construction of immovable property.
More on: Characterstics and Advantages of NBFC
Nature and Type OF NBFC’s
Non-banking financial companies can be divided into two categories based on their character which is depository and non-depository. If a company does not take any deposits, then they are suffixed with ND. Example of the deposit-taking institution is thrift stores, loans provider.
Five types of NBFC’s are in India based on their primary services:
The primary business of Investment Company is to hold and manage securities for investment purposes; they typically offer investors a variety of funds and investment services. This includes recordkeeping, accounting, tax management and portfolio management. Investment companies include further subcategory;
• Core investment companiesCore investment company is company holding shares, debentures and is categorizes as NBFC’s by the RBI. They can’t deal in trading of the instruments they hold. A core investment company needs to register itself with RBI if it is dealing in raising funds through commercial papers, debentures, inter-corporate deposits and by borrowing from financial institution however if core investment company doesn’t need to get a certificate of registration from RBI if companies asset is less than 100 crore.
• Asset finance companies – Asset finance companies are the financial institution which deals with the business of financing physical assets that correlates with any economic activity such as automobiles, power generators, and material handling equipment. According to RBI regulation, any NBFC can act as an asset finance company if the income arising out of it is less than 60% of its total revenue.
More: Difference Between NBFC and Commercial Banks
2. Loan Companies
Any company which is a financial institution and its principal business is providing finance by making loans, or an advance is a loan company under NBFC’s.
3. Infrastructure Finance Company
IFC provides infrastructure loan in specific infrastructure sector only that are energy, transport, water and commercial infrastructure. RBI guidelines regarding registering any IFC as an NBFC is that it should be a non-deposit accepting company.
4. Infrastructure Debt Fund
IDFs act essentially as vehicles for financing debt of infrastructure companies and through this, they create space for commercial banks to lend to another infrastructure project. They can be set up as a company or trust; only the company based IDF’s would come under the purview of NBFC and hence governed by RBI.
5. Micro finance Companies
Micro-financial companies offer small loans to individuals or any self-help groups with capital less than 50,000. Nowadays many financial organizations are applying for a license to RBI to attain the status of Micro-finance companies.
Related: Future of NBFC in India
The advantage of NBFC’s in Indian Economy
In India where 70% of the population lives in rural areas, incorporation of a non-banking financial firm is essential as they are small players who provide loans, chit–funds etc. Many companies have come forward and registered themselves with RBI to attain the status of NBFC. NBFC’s are an integral part of the Indian economy and financial sector as they enhance competition among the companies of the financial sector. NBFC with their low-cost operations, simple sanction procedure and flexibility has given it an edge over the commercial banking sector. It is an important financial mediator, particularly for the retail and small-scale sector.
More: Takeover of NBFC
The contribution of NBFC to Indian economy has increased 12%in the year 2015 moreover the ongoing stress in the public sector bank due to amounting bad debt has deteriorated their service and their contribution to the Indian economy. This mounting bad debt has driven commercial banks to decrease their grant of financial help to small-scale traders and the infrastructure sector.
NBFC recently contributed 12.5% to GDP this recent success of NBFC can be attributed to its lower cost, swiftness in providing strong risk management services and their reach in the sector where public sector bank doesn’t.