NBFCs/NBFIs

Non-Banking Financial Companies

NBFCs are the companies that offer financial services and products but they are not officially
recognized as a bank with a banking license.
The Reserve Bank of India defines NBFC as ‘a company registered under the Companies Act,
1956/2013 engaged in the business of loans, advances, acquisitions of government securities,
insurance etc’.
Some of the examples of Non-Banking Financial Company in India that offer investment options,
loans, fund transfer services, leasing, and hire-purchase options are Bajaj Finserv, Power Finance
Corporation Limited, Mahindra & Mahindra Financial Service, Shriram Transport Finance Company,
Muthoot Finance Ltd, etc.
The functions of the NBFCs are managed by both the Ministry of Corporate Affairs and the Reserve
Bank of India. However, certain entities are involved in the business of financial activities but do not
require obtaining a registration with the Reserve Bank of India (RBI). As these entities are regulated
by other financial sector regulators, they do not need either the NBFC registration or the NBFC
regulations of RBI. These entities are as follows:

 Insurance Companies which are regulated by Insurance Regulatory and Development

Authority of India (IRDA)
 Housing Finance Companies which are regulated by the National Housing Bank
 Stock Broking Companies, Merchant Banking Companies, Mutual funds, Venture capital, and
collective investment scheme companies which are regulated by Securities and Exchange
Board of India
 Chit Fund Companies which are regulated by the respective State Governments
 Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)

Requirements to be fulfilled in order to obtain NBFC license:

The fundamental requirements which are to be fulfilled in order to apply for NBFC license are as
follows:

 The company has to be registered under the Companies Act. That is the company should
either be a Limited Company or a Private Limited Company (PLC).
 The minimum Net Owned Fund of the company must be Rs.2 crore.

History of NBFC
1. NBFCs were first started in India in the 1960s as an alternative for individuals whose financial
needs were not sufficiently met by the existing banking system.
2. The Non-Banking Financial Companies were initially small organizations and did not make much
impact on the financial industry.
3. In December 1964, The Reserve Bank of India amended the RBI Act 1934 and a new chapter of
dealing with NBFCs was introduced. This act paved the way for the establishment of NBFCs in India.
Later, the government of India established two committees to review the structure and working of
NBFCs in India.

 James S Raj Committee: James S Raj Committee was established in the 1970s to study the
framework of NBFCs. The committee recommended uniform chit fund legislation for the
entire nation.
 Chakravarty Committee: The Chakravarty Committee was established in 1982 to review
the monetary system in India. The committee recommended the complete evaluation of
interlinking between the banking sector and NBFCs.
Today NBFCs have grown significantly in terms of operations, range of instruments and market
products, technological advancement, etc. At present approximately 10,000 NBFCs are operating in
Indian Financial market.

Types of NBFCs in India

There are two types of Non-banking Financial Companies in India
1. Deposit Accepting Financial Companies: Deposit Accepting Financial Companies are the NBFCs
which accept deposits from the public like investment companies, asset management companies, etc.
2. Non- Deposit Accepting Financial Companies: Non- Deposit Accepting Financial Companies are
the NBFCs which do not accept deposits from the public. They are only allowed to lend money to the
public and take repayment of loans.

Role and Objectives of NBFC

Roles of NBFCs
1. NBFCs play an important role in promoting inclusive growth in the country as it provides tailor
made solutions to diverse customer needs.
2. NBFC plays a significant role in building financial strength as it provides credits to Micro, Small,
and Medium Enterprises.
3. NBFCs are a major source of funding for new businesses.
4. NBFCs play a pivotal role in the overall development of the country which includes - generation of
employment, transport development, wealth creation opportunities, etc.

Objectives of NBFCs
1. NBFCs thrive to create more job opportunities in the country by lending loans to private industries,
which increase the demand for manpower, eventually creating employment opportunities.
2. NBFCs help in mobilizing funds by the distribution of money which leads to income regulation,
thereby shaping economic development of the country.
3. NBFCs aim to strengthen the financial markets as it provides funds to the SMEs.
4. NBFCs make substantial contributions to India’s infrastructure development, a fundamental
requirement for a rapidly growing nation. These projects demand substantial funds and yield profits
over extended periods, making them inherently risky for traditional banks. In recent years, NBFCs
have surpassed banks in financing infrastructure projects, playing a pivotal role in shaping India’s
future.
5. Compared to the banking sector, NBFCs are renowned for their cost-efficient operations, resulting
in increased profitability. Lower operational costs enable NBFCs to offer competitive interest rates on
loans, making them an attractive option for borrowers.

Functions of NBFCs in India

Non-Banking Financial Companies offer a wide range of financial services. Some of the essential
functions of NBFCs in India are:
1. Retail Financing
NBFCs provide short-term funds to individuals and businesses for various purposes, such as loans
against gold, shares, and property, primarily for consumption needs. These loans cater to the
immediate financial requirements of borrowers and this forms one of the primary functions of NBFCs
in India.
2. Infrastructural Funding
One of the most significant sectors where leading NBFCs are actively involved is infrastructural
funding. A substantial portion of funds is allocated to this sector, encompassing projects like railways,
metros, real estate developments, ports, flyovers, airports, and more. One of the most important
functions of NBFCs in India is that they contribute significantly to the growth and development of
critical infrastructure in the country.
3. Hire Purchase Services
NBFCs facilitate hire purchase services, a method by which sellers provide products or goods to
buyers without transferring ownership. Buyers make payments in instalments, and once all payments
are completed, ownership of the goods automatically transfers to the buyer. This service helps
individuals and businesses acquire essential assets without a large upfront payment.
4. Trade Finance
Another one among the important functions of NBFCs in India is that they offer trade finance
solutions, particularly distributor or dealer finance, to support businesses in managing their vendor
finance, working capital requirements, and other business loans. These services enable businesses to
maintain liquidity and manage their supply chains efficiently.
5. Asset Management Companies
NBFCs operate as Asset Management Companies, which include fund managers responsible for
investing funds pooled from small investors. These fund managers actively manage the investments,
primarily in equity shares, to generate returns for investors. AMCs play a vital role in the mutual fund
industry, offering investment opportunities to a broad range of investors.
6. Venture Capital Services
Certain NBFCs engage in venture capital services by investing in small businesses at their initial
stages. While these investments carry higher risks, they also have the potential for substantial returns
in the future. NBFCs provide crucial funding to startups and early-stage companies, fostering
entrepreneurship and innovation.
7. Leasing Services
Among the major functions of NBFCs in India is also that NBFCs offer leasing services, analogous to
renting but with distinct features. They provide properties and assets to small and sometimes larger
businesses that may not have the resources to purchase them outright. Leasing contracts typically have
fixed durations, allowing businesses to access assets for a specified period, enhancing their
operational capabilities.

What are the Difference between NBFC and a Bank?

BASIS FOR NBFC BANK
COMPARIS
ON

Meaning An NBFC is a company without a

banking license. A bank is a government authorized company
which provides banking services to the
public

Incorporated Companies Act 1956

Banking Regulation Act, 1949
under

Foreign Allowed up to 100%

Allowed upto 74% for the private banks
Investment

Maintenance Not required

Compulsory
of Reserve
Ratios

Insurance of Not available Available upto Rs. 500,000

your deposits

Default by NBFCs
In case the NBFC defaults and fails to make the payment of the amount taken, the depositor can file a
suit against the company to the Banking Ombudsman, Consumer Forum or the National Company
Law Tribunal.

Conclusion
NBFCs can be regarded as a non-banking financial company that does not hold a banking license.
However, it does work similar to a bank as it provides all of the services which are similar to the
services provided by the banks. These companies do not have a banking license; they are required to
follow the banking rules and regulations. This proves that NBFCs are critical for the economy as they
grant credit to the weaker section of the society starting from Small and Medium Enterprises to the
leasing and hire purchase. Since banks have multiple rules governing its lending activities, NBFCs are
the faster alternative for raising funds for weaker sections of the society or budding startups etc.
Hence, the government is also constantly taking measures to come up with collective rules for the
betterment of these NBFCs and the citizens.