Non-Banking Financial Companies (NBFCs)
What are NBFCs?
NBFCs or Non-Bank Financial Companies are financial institutions that are registered under the Companies Act, 1956 of India. They are engaged in providing a range of financial services.
NBFCs carry out functions similar to banks, but they are not banks.
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
What are the services provided by NBFCs?
NBFCs offer a range of product and services, which includes the following:
- loans and advances
- saving and investment plans
- credit facilities
- acquisition of shares
- insurance business
- bonds hire-purchase
- chit fund business
- money transfer service
It also includes retirement planning, private education funding, underwriting stocks and shares, trading in money markets, and other obligations.
NBFCs also provide wealth management services such as handling portfolios of stocks and shares and discounting services.
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 ₹ 5 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.