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Banking in India - Part 6 (NBFC)

Bankers Corner

Non-Banking Financial Companies (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 (other than securities) or providing any services and sale/purchase/construction of immovable property. 
  • The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the [Reserve Bank of India Act, 1934] (Chapter III-B) and the directions issued by it.
  • Committees related with NBFCs in India
    • James S. Raj Committee
    • Chakravarty Committee
  • NBFCs are essentially banks, since they perform the basic twin functions of attracting deposit from the public and making loans. But they do not allow depositors to issue cheque and withdraw their money from deposits. Also, unlike commercial banks, they are not incorporated as a bank and are not governed by the provisions of the Banking Regulation Act, 1949. However, with the enactment of RBI( Amendment) Act, 1997, the RBI now control the functioning of NBFCs.

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

Different types/categories of NBFCs registered with RBI

  • NBFCs are categorized Into:-
    1. In terms of the type of liabilities into
      1. Deposit accepting NBFCs and
      2. Non-Deposit accepting NBFCs,
        1. Non deposit taking NBFCs by their size into:-
          1. Systemically important (NBFC-NDSI) and
          2. Other non-deposit holding companies (NBFC-ND)
    2. By the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows.
      1. Asset Finance Company (AFC)
      2. Loan Company (LC)
      3. Infrastructure Finance Company (IFC)
      4. Systemically Important Core Investment Company (CIC-ND-SI)
      5. Infrastructure Debt Fund
      6. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
      7. Non-Banking Financial Company – Factors (NBFC-Factors)
      8. Mortgage Guarantee Companies (MGC)
      9. NBFC- Non-Operative Financial Holding Company (NOFHC)
  • Capital to risk weighted assets ratio (CRAR) norms were made applicable to NBFCs - D in 1998. The CRAR norm for NBFC - D is 12% (15% in case of unrated NBFCs – D)
  • Under RBI Act, 1934, the NBFCs have to get registered with RBI. However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI such as:-
    1. Venture capital fund
    2. Merchant banking companies, Stock Broking Companies registered with SEBI.
    3. Insurance Company holding a valid certificate of registration issued by IRDA.
    4. Nidhi companies under the Companies Act, 1956.
    5. Chit companies under the chit fund Act, 1982.
    6. Housing finance companies regulated by National Housing Bank (RBI).
    7. Insurance market in India includes both the public and private sector organizations.

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