NBFCs Explained!

Dear Aspirants,

Let us understand and explore the much in news term ‘NBFC’, in detail through this article.

According to RBI website, “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. A non-banking institution 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).”

Let us understand NBFC in detail.

1. NBFC is a company (registered under Indian Companies Act 2013 now!) and NOT a Bank
2. The main business is giving loans and advances.
3. It cannot be a company whose principle business is

• agriculture activity
• industrial activity
• purchase or sale of any goods (other than securities) or
• providing any services and sale/purchase/construction of immovable property

1.Differences between NBFCs and Banks

• 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.

2.Different types of NBFCs registered with RBI

1. Asset Finance Company (AFC) :Finances physical assets supporting productive/economic activity.
2. Investment Company (IC) :  Principle business is the acquisition of securities.
3. Loan Company (LC): Principal business the providing of finance whether by making loans or advances.
4. Infrastructure Finance Company (IFC): Principle business is providing finance to infrastructure business.
5. Systemically Important Core Investment Company (CIC-ND-SI): Business of acquisition of shares and securities(based on certain criteria fulfilment).
6. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): Facilitate the flow of long term debt into infrastructure projects.
7. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): Non-deposit taking NBFC mainly into financing.
8. Non-Banking Financial Company – Factors (NBFC-Factors): Engaged in the principal business of factoring.
9. Mortgage Guarantee Companies (MGC) – Financial institutions for which at least 90% of the business turnover is mortgage guarantee business.
10. NBFC- Non-Operative Financial Holding Company (NOFHC)– Financial institution through which promoter / promoter groups will be permitted to set up a new bank.

Some examples of NBFCs are L& T Finance , Muthoot Finance etc.

3. Regulation of NBFCs

We hope and believe that this article will surely deepen your understanding of NBFCs.

Happy Reading!!

Compiled by Kandarp Rai

( Courtesy: RBI website)