Non-Banking Financial Companies (NBFCs)
In this post, we shall discuss Non-Banking Financial Company (NBFC) and how they are different from Banks. We shall discuss the most important points about NBFCs that are important from the exam point of view.
A non-banking financial company is that financial institution which provides the banking services to the customers without having a banking license. An NBFC needs to be compulsorily registered under the Companies Act 1956 however, it can be owned privately or by the government.
Bajaj Finserv Ltd. is the NBFC belonging to Bajaj Finance Limited. It provides different types of loans, such as capital for small and medium enterprises, corporate finance, vehicle loan, insurance, home loan, wealth management, etc.
- Power Finance Corporation Limited.
- Shriram Transport Finance Company Limited.
- Bajaj Finance Limited. …
- Mahindra & Mahindra Financial Services Limited.
- Muthoot Finance Ltd.
- HDB Finance Services.
- Tata Capital Financial Services Ltd.
Some more important points about 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
- Insurance business
- Chit business
A non-banking institution NBFC which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
It 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.
NBFCs are doing functions similar to banks. What is 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 itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
Objectives of NBFCs
NBFCs serve the financial needs of individual customers as well as business organizations. The various other purposes of the non-banking financial companies are as follows:
Provides Long-Term Credits: NBFCs facilitate lengthy credit periods to suit the long term financial needs of the commerce, trade, infrastructure and construction companies, for accomplishing massive projects.
Growth of National Income: They provide capital to various private companies, accelerating the growth of industries and thus improving the Gross Domestic Product (GDP) of the country.
Generate Employment Opportunities: By promoting and supporting small and medium enterprises (SMEs), NBFCs indirectly develops job opportunities in the country.
Movement of Funds: NBFCs are always good for the economy since it mobilizes the funds by transforming the savings into investments and utilizing these funds to provide loans to the companies.
Better Living Standard: With the growth of industrialization and loans provided by the NBFCs increases the purchasing power of the individuals, ultimately enhancing the standard of living.
Strengthening the Financial Market: The NBFCs are the soul of the financial market. Most of the startups and SMEs solely rely upon the NBFCs to acquire loans for meeting the capital requirement.
Types/categories of NBFCs
NBFCs are categorized
a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
c) by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:
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 equipment’s, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
Investment Company (IC) :
IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,
Loan Company (LC):
LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
Infrastructure Finance Company (IFC):
IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
Systemically Important Core Investment Company (CIC-ND-SI):
CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-
- it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;
- its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;
- it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
- it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.
- Its asset size is ₹ 100 crore or above and
- It accepts public funds
Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) :
IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI):
NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:
- loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;
- loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;
- total indebtedness of the borrower does not exceed ₹ 1,00,000;
- tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;
- loan to be extended without collateral;
- aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
- loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
Non-Banking Financial Company – Factors (NBFC-Factors):
NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.
Mortgage Guarantee Companies (MGC) –
MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.
NBFC- Non-Operative Financial Holding Company (NOFHC)
NOFHC is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.
Chit Fund companies
Chit Fund companies are regulated under the Chit Fund Act, 1982, which is a Central Act, and is implemented by the State Governments. RBI has prohibited chit fund companies from accepting deposits from the public in 2009. In case any Chit Fund is accepting public deposits, RBI can prosecute such chit funds.
Advantages of NBFCs
NBFCs work parallelly with the banking organizations and function to facilitate loans and advances along with accepting deposits. The various benefits of an NBFC are as follows:Advantages of NBFCs
Borrower’s Evaluation: NBFCs usually verify the credibility of the customer by going through the credit scores and business history of the companies. Thus, making the loans more reliable.
Unsecured Loans: These financial companies also provide unsecured loans which let the borrower to avail loans without mortgaging any asset or property.
Lenient Credit Condition: NBFCs offer loans to customers at easy terms and fewer formalities, making it suitable for small business enterprises.
Facilitates Small Loans: Usually, banks provide high-value business loans, but NBFCs also entertain the smallest of the credit to meet the customer’s needs.
Drawbacks of NBFCs
There are certain limitations which differentiate an NBFC from a bank. These drawbacks are discussed below: Drawbacks of NBFC
Cannot Accept Demand Deposits: Since NBFCs lies within the dimension of commercial banks and therefore, they are not liable to accept demand deposits.
No Deposit Insurance Facility: The depositor cannot avail any insurance facility on the sum deposited with the NBFCs.This is because such financial organizations are not covered under the regulations of Deposit Insurance and Credit Guarantee Corporation.
Cannot Issue Cheques Drawn on Itself: The country’s payment and settlement system do not cover NBFCs. Thus, not letting them issue the cheques drawn on itself.
In Case of NBFC Non-Payment or Default
The depositor can approach the Consumer Forum or the National Company Law Tribunal and take legal action by filing the suit against the defaulter NBFC.
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Guidelines prescribed by the Reserve Bank of India (RBI) that are to be followed by the Non-Banking Financial Corporations (NBFC):
The functions of the NBFCs in India are supervised by the Reserve Bank of India (RBI). Hence, the NBFCs have to abide by the guidelines put forward by the RBI in Chapter III B of the RBI Act of 1934. The regulations prescribed by the RBI are as follows:
- NBFCs cannot accept demand deposits from public depositors or investors as it is not authorized by law.
- The minimum time period for which the public deposits can be taken by the company is 12 months, while the maximum tenure can be 60 months.
- The Reserve Bank of India will not guarantee the repayment of any amount which is taken by the NBFCs.
- The Company cannot charge an interest rate which is more than the rate prescribed by the Reserve Bank of India.
- NBFCs can issue cheques to their customers in order to make payments or settlements.
- The company has to furnish a record of the statutory return on the deposits taken by the company in the form NBS- 1 every year.
- The company has to furnish a quarterly return on the liquid assets of the company.
- The audited balance sheet of the company has to be submitted every year.
- The company has to ascertain its credit ratings every 6 months and submit the same to the RBI.
- The companies which have a Public Deposit of Rs.20 Crore or more or have assets worth Rs.100 Crore or more will have to submit a half-yearly ALM return.
- The depositors of the NBFCs cannot avail the securing facility of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- Only the NBFCs that have been duly rated and matches the recommended Minimum Investment Grade Credit (MIGC) rating, are eligible to accept conditional deposits from public depositors.
- The RBI has restricted the NBFCs from providing additional benefits, extra incentives, or gifts to the customers or depositors, than those which are offered by the banks.
- The company has to maintain a minimum of 15% of the Public Deposits in its Liquid Assets.