NBFCs are termed as Non-banking financial companies that offer financial resources to the people just like bank offers, but NBFCs are not exactly banks. NBFC is not reviewed as a bank or has a bank license in India. NBFC comes under the regulations that the Reserve Bank of India sets down. The significant distinction that separates NBFC from a recognised bank is legal recognition. Secondly, the bank is the government-authorised identity, while NBFCs are the companies that provide banking services without holding a license. A noted difference between NBFCs and bank is that NBFCs don’t accept traditional demand deposits.
Who operates NBFC in India?
NBFCs in India are regulated and managed by the securities exchange board of India (SEBI) along with the Reserve Bank of India (RBI). NBFCs dealing in stock broking, merchant banking etc., are regulated by SEBI, while RBI manages others. The significant financial needs of India are taken care of by NBFCs. They play an initial role in boosting the financial sector as they account for a 12.5% rise in the GDP of India.
How Many types of NBFCs are there?
Non-Banking financial corporation are of different types depending on the services they provide and whom they provide like ShriRam Transport finance Ltd provide finances for commercial vehicles and is highly focussed on financing vehicles only. Similarly, Muthoot finance is one of the prominent finance corporations and the largest gold loan NBFC. The above two are some examples of NBFCs that dominate their finance market. A few others are the following types of NBFC.
Housing Finance company
Housing finance NBFC generally provides finances for building residential, purchasing, constructing, and renovating properties and are secured loans. They are secured against the property being financed.
Mortgage Guarantee Company
A mortgage guarantee company usually credits the loan amount against the mortgage. These types of NBFCs generally sells mortgage in case of loan default by the customer, depending on legal terms and agreement.
Asset Finance company
NBFCs specialise in financing assets such as machinery, equipment and other fixed and moveable assets. These kinds of NBFCs generally ensure secured loans and assets are sold in case of default on loan.
Loan company
NBFCs offer loans to understand the finance and money requirements of the people. Providing loans is one of the primary operations of the NBFC. Distinct types of loans are provided by NBFCs depending on and determining the ask of the customers verifying all the sufficient documents.
Core Investment company
Core investment companies (CIC) are a specific kind of Non-banking financial corporation that undergoes NBFC registration per the RBI guidelines.
A core investment company generally has an asset size of Rs 100 crore and above; they carry on share acquisition and securities business.
Investment company
An investment company is an NBFC/Financial institution principally acquiring securities. If you are willing to start a private equity business or venture capital fund NBFC -Investment is suggested. Tata capital finance ltd is an example of NBFC – Investment.
Microfinance company
A microfinance NBFC is a type of Non-deposit taking company. Microfinance companies generally have Rs 2 crore as minimum net owned funds and 85% assets as qualifying.
Infrastructure finance company
The infrastructure finance company is a Non-banking financial company that assures 75% of its worth into infrastructure loans. The minimum net owned funds of Rs 300 crore and the credit rating of “A” or equal.
What role do NBFCs play in financial markets?
NBFCs play a vital role in framing and assuring the needs of finance in the country’s GDP. Non-banking financial corporations fulfil the diverse credit needs of various sectors of the economy. Non-banking financial corporations ensure financial products and services to all segments of society and leave positive after-effects on the economy.
A significant contribution to the growth of microfinance in India, NBFCs have reached every corner of India. This initiative has increased the availability of credit in India to a great extent. Since the last few years, the role of NBFC has positively increased due to government focus and increased demand for credit in the economy.
Which Businesses are excluded from NBFCs?
Non-banking financial corporations do not include businesses whose prime activities are
- Operations related to agriculture
- Dealing with industrial activities
- Sale and purchase of goods other than securities
- Construction, selling and purchasing of other immovable properties.
The central bank has given clarification regarding NBFCs that the prime business should be financing/financial activities.
The company’s financial assets must account for 50% of the total assets, and income from those financial assets must constitute 50% of the total income.
Scope and growth of NBFC
Over the past few decades, the importance and significance of NBFC have increased at a reasonable rate. Most people looking for finances prefer NBFCs over banks as they provide a wide range of financial services to customers. The range of financial products that the NBFC provides includes loans, investments, insurance, and hire purchases.
Challenges faced by NBFCs in India
The scope and nature of NBFCs are vast and diverse. They play a very notable role in boosting the economy of the country. They are very needful in supporting the MSME sector of the country. Some specific challenges that NBFCs face are improper regulatory compliance, operational inefficiency, and access to funding. To ensure the sustainable growth of NBFC, it is necessary to approach, identify and resolve these addressing issues.
Conclusion
Non-Banking financial corporation have significance in the financial sector and is beneficial when it comes to structuring the financial status of the economy. In India, NBFCs have their prime importance when there is a high need for credit. NBFCs are the most prominent option people choose. People often choose NBFCs over banks because of the financial services offered by them, as they are regulated by the central bank and SEBI. NBFCs only ensure secured loans and distinct categories of them are available depending upon the nature of their work and to whom they offer finances. There are some conditions to get recognised as NBFC, as 50% of assets account for financial assets. If compared to the past decade, prime growth is witnessed in the NBFC sector, but there are also some challenges that should be fixed.
FAQs
Which is the largest NBFC in India?
Shriram has become India’s largest Non-Banking financial corporation after the merger of Shriram transport finance company and Shriram city union finance. A net worth of 5 billion US dollars and Asset under management (AUM) of around 20 billion US dollars.
How is Bank different from NBFC?
The significant difference that separates NBFCs from Banks is that banks are government-authorised entities that provide banking services. On the other hand, NBFCs are the companies that guarantee banking services without actually holding a banking licence.
How does NBFC make a profit?
The primary source through which NBFCs make a profit is accepting-chequable deposits and borrowing money from other financial institutions.
Why are NBFCs better than banks?
NBFC offer greater flexibility and offers competitive rates to customers. The base interest rate of NBFC is based on the prime- lending rate, which RBI does not regulate.
Who started NBFC in India?
In the year 1964, the Reserve Bank of India amended the previous act of 1934, and the new segment of NBFC was introduced that year.
