In this article, I have to cover important questions relating to Non-Banking Financial Companies (NBFC) in question-and-answer mode. I hope you increase your knowledge by reading this article. The article explains What is a Non-Banking Financial Company (NBFC), whether Are there types of Non-Banking Financial Companies (NBFCs), the Benefits of NBFCs, and other more knowledgeable things. 

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 is a Non-Banking Financial Company (NBFC)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 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 or providing any services and sale/purchase/construction of the immovable property.

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

Types of Non-Banking Financial Companies (NBFC) in India regulated by the Reserve Bank of India (RBI) within these broad categories:-

Investment Company (IC)

IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

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 types of equipment, moving on its own power and general purpose industrial machines.

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.

Infrastructure Finance Company (IFC)

IFC is a non-banking finance company a that deploys at least 75% of its total assets in infrastructure loans, b has a minimum Net Owned Funds of ₹ 300 crores, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

Systemically Important Core Investment Company 

NBFCs have assets worth >₹ >100 Crore and above and deploy at least 90% of their assets to invest in debt instruments, shares, or loans in group companies.

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

NBFC Example

LIC Housing Finance Limited is an example of a non-banking financial company in India. It is a subsidiary company of the Life Insurance Corporation of India (LIC). Established in 1989, it became a listed company in 1994; it’s the leading entity in the “housing finance mortgage loan sector” in India. Its primary function is to supply consumers with home loans and mortgage loans. In addition, it also provides financial assistance for building repairs and renovations.

Importance Of NBFCs In The Indian Economy

The RBI states that Non-Banking Financial Companies complement the traditional banking system in the process of financial intermediation throughout the world. In a nation like India, where traditional lending methods are still used, there is a sizable population without access to official loans, and they have taken on special relevance. According to a report from the RBI. published last year, NBFCs were responsible for the majority of loans (60%) approved through digital platforms.

The role of NBFCs in the economy is significant, as they cater to the unbanked and underbanked population of the country. NBFCs provide financial services to individuals, small and medium-sized enterprises, and other businesses not served by traditional banks. They are crucial in financial inclusion, a key component of sustainable economic growth.

Financial organizations like NBFCs, whose primary duty is to move excess savings into deficit units, can be extremely important for our nation. By offering a variety of products tailored to the needs of SMEs, NBFCs have also provided financing to these businesses. The NBFCs offer many services to the MSMEs of our country in addition to loans secured by property. As a result, in a developing nation like India, NBFCs play a very important role in addition to banks

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
• Asset Financing
• Infrastructure Financing
• Housing finance

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What is the 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:

• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves;
• The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.

FAQs

What are an NBFC and its functions?

Non-banking financial companies are financial institutions offering specific financial services, including some banking services. However, they do not have a banking license and generally don’t have to provide the demand deposit account (DDA) to the public.

What is the difference between banks and 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.