NBFCs or Non-Bank Financial Companies are financial institutes that provide all types of financial services just like banks do with two major differences – they do not hold a banking license and they cannot accept monetary deposit from individual customers. However, these institutes operate according to the country’s banking regulations. In India, it is the RBI (Reserve Bank of India) that overlooks the operations of NBFCs according to the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it.
NBFCs are registered under the Companies Act, 1956 of India. They offer a range of products and services. The number of NBFCs has increased immensely in the last few years as the venture capital companies, retail and industrial companies have entered the lending business.
Services Provided by NBFCs
Since NBFCs are similar to banks, they offer most types of banking services. These include loans and advances, credit facilities, saving and investment plans, acquisition of shares, stock, bonds hire-purchase, insurance business or chit business and money transfer services. It also includes private education funding, retirement planning, underwriting stocks and shares, trading in money markets, TFCs (Term Finance Certificate) and other obligations.
Apart from this, NBFCs also provide wealth management services such as handling portfolios of stocks and shares and discounting services. However, it does not include organisations involved in agriculture or industrial activity or the sale, purchase or construction of immovable property. NBFCs also, periodically, back investments in property and prepare reports for companies on market or industry and feasibility. Thus, they are involved in majority of banking services with certain exceptions, which are as follows:
NBFCs cannot accept demand deposits
NBFCs are not a part of the payment and settlement system
NBFCs cannot issue cheques drawn on itself
NBFC depositors do not have deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation, unlike banks
In November 2014, RBI released stricter rules for NBFCs for better regulation and functioning. According to the new guidelines, NBFCs will need higher minimum capital, have lesser time to declare bad loans, and have clearly defined criteria for appointment of directors. These were made applicable to NBFCs which manage capital worth Rs 500 crore.
Types of NBFCs
Asset Finance Company (AFC)
The major role of these companies is to finance the assets such as machines, automobiles, generators, material equipments, industrial machines etc.
Investment Company (IC)
These companies deal in securities and its acquisition.
Loan Companies (LC)
The main business of such a company is to provide finance by making loans or advances or otherwise for any activity other than its own. It does not include an AFC (Asset Finance Company).
Infrastructure Finance Company (IFC)
IFCs are companies with net owned funds of, at least, Rs. 300 Crore and those who have deployed 75% of its total assets in infrastructure loans. It needs to have a credit rating of A or above and a CRAR of 15%.
Systemically Important Core Investment Company (CIC-ND-SI)
Such NBFCs have an asset of Rs. 100 crore and above, and have deployed at least 90% of its assets in the form of investment in shares, debt instruments or loans in group companies.
Non-Banking Financial Company Micro Finance Institution (NBFC-MFI)
NBFC-MFI has a minimum of 85% of its assets in the form of micro-finance. This micro finance needs to be in the form of loan given to those with an annual income of Rs. 60,000 (in rural areas) and Rs. 120,000 (in urban areas). These loans must not exceed Rs. 50,000 and the tenure should not be less than 24 months. Also, the loan needs to be sanctioned without collateral. Here, the burrowers need to repay the loans in installments weekly, fortnightly or monthly, as agreed.
Non-Banking Financial Company Factors (NBFC-Factors)
NBFC factors are companies that receive invoices by selling companies at discount prices. An NBFC-Factoring company needs to have a minimum NOF of Rs. 5 Crore with the financial assets in the factoring business constituting, at least, 75 percent of its total assets. It also should have income derived from the factoring business more than 75 percent of its gross income.