Non-Banking Financial Companies (NBFCs) are an integral part of the financial sector and play a significant role in the Indian economy. With the increasing demand for credit and financial services, the NBFC sector has witnessed rapid growth in recent years. However, despite their significance, many people are still unaware of the basics of NBFCs. This article aims to provide a comprehensive overview of NBFCs, including their definition, services, regulation, and role in the financial market.

What are Non-Banking Financial Companies (NBFCs)?

NBFCs are financial institutions that provide various financial services and products, including loans, insurance, and asset management, but do not have a banking license. Unlike banks, NBFCs do not have the authority to accept deposits from the public. However, they can accept deposits from a select group of individuals, such as directors, shareholders, and relatives.

Types of NBFCs

• Investment Company (IC): ICs primarily deal in securities and their acquisition.

• Asset Finance Company (AFC): AFCs majorly finance assets such as automobiles, machines, material equipment, generators, industrial machines, etc.

• Loan Companies (LC): Loan Companies provide finance to the public, whether by making loans or advances. It does not include an equipment leasing company or a hire-purchase, Asset Finance company.

• Systemically Important Core Investment Company (CIC-ND-SI): Such types of NBFCs have assets worth ₹ 100 Crore and above and deploy at least 90% of its assets to invest in debt instruments, shares or loans in group companies.

• Infrastructure Finance Company (IFC): IFCs have net owned funds of, at least, ₹ 300 Crore and have deployed 75% of its total assets in infrastructure loans. LCs need to have a CRAR of 15% and a credit rating of A or above.

• Non-Banking Financial Company Micro Finance Institution (NBFC-MFI): NBFC-MFI needs to deploy at least 85% of its assets in the form of micro-finance to be given as loans to those with an annual income of ₹ 120,000 (in urban areas) and ₹ 60,000 (in rural areas). These loans need to be sanctioned without collateral; should not exceed ₹ 50,000 and should not have a loan tenure of less than 24 months. The borrower has the repay the loan in weekly, monthly or fortnightly installments or as agreed.

• Non-Banking Financial Company Factors (NBFC-Factors): NBFC-factoring companies need to have a minimum net owned funds (NOFs) of ₹ 2 Crore. The financial assets in the factoring business should constitute at least 75% of its NOF. These companies receive invoices by selling companies at discount prices.

Services offered by NBFCs

NBFCs offer a wide range of financial services, including:

• Personal loans

• Home loans

• Vehicle loans

• Gold loans

• Microfinance

• Leasing and hire-purchase services

• Credit card services

• Insurance services

• Investment and asset management services

Regulation of NBFCs

NBFCs are regulated by the Reserve Bank of India (RBI), the central bank of India. The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure that they adhere to the established norms and regulations.

Role of NBFCs in the Financial Market

NBFCs play a crucial role in the financial market by providing credit and other financial services to people who are unable to access traditional banking services. They also provide alternative investment opportunities to investors, particularly in rural and semi-urban areas where banks may not have a strong presence.

Benefits of NBFCs

• Offer a range of financial services to people who are unable to access traditional banking services

• Provide alternative investment opportunities to investors

• Offer quick and easy loan disbursal

• Offer flexible repayment options

• Provide insurance services to individuals and businesses

What are the differences between NBFCs and banks?

Although NBFCs lend money and make investments, just like banks do, there are a few distinct differences between them.

• NBFCs cannot accept demand deposits

• NBFCs cannot issue cheques drawn on itself

• Unlike in case of banks, deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs

• NBFCs do not form part of the payment and settlement system