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.
Why Are Non-Banking Financial Companies Important?
Non-Banking Financial Companies (NBFCs) play a significant role in the Indian economy by providing financial services and bridging the gap between the formal banking sector and the unbanked or underserved sections of society. NBFCs are financial institutions that are engaged in activities similar to banks but do not hold a banking license. They are regulated by the Reserve Bank of India (RBI) under the RBI Act, of 1934.
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.
What is the Difference Between Banks & NBFCs?
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 the case of banks, the 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
What Are Examples of Nonbank Financial Companies?
There are many types of NBFC. Some of the most familiar are:
- Casinos and card clubs
- Securities and commodities firms (e.g., brokers/dealers, investment advisers, mutual funds, hedge funds, or commodity traders)
- Money services businesses (MSB)
- Insurance companies
- Loan or finance companies
- Operators of credit card systems
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
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%.
Role of NBFCs in the Indian Financial System
NBFC’s role in the Indian financial system by catering to the diverse credit needs of various sectors of the economy. Their ability to provide customized financial products and services tailored to the specific needs of different segments of society makes them a vital component of the financial system.
The role of NBFCs can be summarized as follows:
Mobilizing Savings: NBFCs mobilize savings from different sources, such as retail investors, high-net-worth individuals (HNIs), and institutional investors, and they use these savings to finance various activities.
Providing Payment Services: NBFCs also provide payment services such as issuing debit and credit cards, electronic fund transfers, and mobile banking. NBFCs also play a key role in supporting infrastructure development by providing long-term finance to infrastructure projects.
Providing Credit: NBFCs credit various population segments, including individuals, small and medium enterprises (SMEs), and large corporations. NBFCs are generally more flexible than banks in terms of lending criteria.
NBFCs aid economic development in the following ways
- Mobilization of Resources – It converts savings into investments
- Capital Formation – Aids to increase the capital stock of a company
- Provision of Long-term Credit and specialized Credit
- Aid in Employment Generation
- Help in the development of Financial Markets
- Helps in Attracting Foreign Grants
- Helps in Breaking the Vicious Circle of Poverty by serving as the government’s instrument
Future Of NBFCs
In spite of the difficulties, NBFCs in India appear to have a bright future. Between 2021 and 2026, the industry is projected to expand at a very fast rate. Several factors, including the rising demand for credit, the government’s initiatives to support financial inclusion, and the rise of digitalization, are anticipated to fuel the growth.
NBFCs are often used by the borrower as compared to the banks as they are quite efficient in meeting financial requirements. In the article, we will discuss the Future of NBFCs in India, how technologies are uplifting the growth of NBFCs, and how the Government is taking measures to uplift the growth of NBFCs.
Why Are Non-Banking Financial Companies Important?
India’s financial services sector is huge. It is not just comprised of commercial banks, but also non-banking financial companies (NBFCs). These firms offer a wide array of financial services like loans, and chit-funds, and are different from banks. NBFCs are often small players that largely go unnoticed. However, they are still important to the economy, especially in a developing country like India where 70% of the population lives in rural areas.
Non-Banking Financial Companies Important?
It is not just comprised of commercial banks, but also non-banking financial companies (NBFCs). These firms offer a wide array of financial services like loans, and chit-funds, and are different from banks. NBFCs are often small players that largely go unnoticed.
Financial Inclusion
NBFCs play a crucial role in promoting financial inclusion by providing financial services to individuals and businesses who have limited or no access to traditional banking services. They reach out to underserved and unbanked populations, particularly in rural areas, and provide them with credit, insurance, savings, and other financial products.
Profitability
NBFCs are more profitable than the banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth – the increase in the amount of money being lent to customers – is higher than that of the banking sector. Credit grew an average of 24.3% per year for NBFCs as against 21.4% for banks.
Sectoral Focus: NBFCs often specialize in specific sectors or industries, which allows them to understand the unique needs and challenges of those sectors. This specialization enables them to offer customized financial products and services tailored to the requirements of the sectors they serve.
Promoting Inclusive Growth
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.
What Is The Role Of NBFCs In The Indian Economy
Job Creation and Economic Growth
NBFCs contribute to job creation and economic growth. As NBFCs expand their operations, they create employment opportunities across various functions and sectors. The availability of credit from NBFCs enables businesses to invest, expand, and create more jobs.
Size Of Sector
The NBFC sector has grown considerably in the last few years despite the slowdown in the economy. As of March 2013, it accounted for 12.5% of the country’s Gross Domestic Product (GDP) – a measure of the size of the economy. This is up from 8.4% in March 2006. However, this only counts NBFCs with assets of more than Rs 100 crore.
FAQs
What is NBFC?
NBFC or Non-Banking Financial Company is a financial institution that provides banking services without requiring to hold a bank license. NBFC is a company registered under the Companies Act, and regulated by RBI.
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.
Examples are housing finance companies, merchant banking companies, stock exchanges, companies engaged in the business of stock-broking/sub-broking, currency exchanges, venture capital fund companies, and insurance companies.
