All that you need to know about-NBFCs


What are Non-Banking Financial Companies (NBFCs)?

Non-Banking Financial Companies are financial institutions that provide financial services to the banks just like the banks. However, both the entities are different from each other in terms of the license category and the limit of monetary acceptance, offered to the customers.

NBFCNBFCs principal business comprises of accepting deposits under any scheme or arrangement either in totality or in installments by way of contributions or in any other manner.

What is the regulatory authority for NBFCs?

In India, NBFCs (Except few categories)are regulated by the Reserve Bank of India (RBI) as per RBI Act, 1934 (Chapter III B).

As per the Section 45-IA of the RBI Act, 1934, no NBFCs can start its operation without obtaining a certificate of registration from the RBI. It is mandatory for the entity to have a Net Owned Funds of Rs 25 lakhs.

However, certain categories of NBFCs that are regulated by other regulators are exempted from the requirement of registration with RBI  namely Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.

What do NBFCs offer?

NBFCs are 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 and many more.

Which services are not offered by NBFCs?

NBFC does not offer service to institutions dealing with agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property as its principal business.

What is the difference between NBFCs and banks?

There are a lot of similarities between NBFCs and banks as both the entities deal in lending services. However, there are a few differences as given below:

  1. NBFCs are not allowed to accept demand deposits;
  2. NBFCs cannot issue cheques drawn on itself
  3. NBFCs do not form part of the payment and settlement system
  4. NBFCs do not offer deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation to its depositors of NBFCs, unlike banks.

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