A Non-Banking Financial Company (NBFC) is a financial entity registered under the Companies Act, 1956. It offers services ranging from loans to advances, acquisition of shares/stocks/bonds/debentures/securities, that are issued by Government or local authority or other marketable securities of similar nature involved in leasing, hire-purchase, insurance business, and chit fund business.
However, it does not include any institution that is primarily involved in agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or any services and sale/purchase/construction of immovable property.
An NBFC’s principal business is accepting deposits for scheme or arrangement either in installments or in one lump sum, is also a Non-Banking Financial Company.
The Banking, Financial Services and Insurance (BFSI) sector in India is undergoing a massive transformation due to technology. A large portion of this paradigm shift in terms of adaptation of technology is happening due to rising Non-Performing Assets (NPAs).
Emerging as a leader in the BFSI sector, the Non-Banking Financial Companies (NBFCs) have emerged as a big relief and they are offering a great help in meeting the lending demands of consumers.
How NBFCs differ from banks?
- NBFCs are primarily responsible for making investments and hence their role in this regard is quite similar to that of banks, however, some traits differentiate both the entities:
- NBFCs do not have the authority to accept deposits
- NBFCs cannot form part of the payment and settlement system
- NBFCs 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.
Different types/categories of RBI registered NBFCs
NBFCs are categorised as follows:
- Asset Finance Company (AFC): Principal business of AFC companies is offering finance of physical assets in support of productive/economic activity namely automobiles, tractors etc.
- Investment Company (IC) : IC means is a financial institution with a principal business the acquisition of securities.
- Loan Company (LC): LC means financial institution whose principal business is providing.
- Infrastructure Finance Company (IFC): IFC deploys at least 75 per cent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs 300 crore. It should hold a minimum credit rating of ‘A ‘or equivalent and a CRAR of 15 per cent.
- Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI carries business of acquisition of shares and securities.