Non-banking financial companies (NBFCs) are an essential component of the financial industry and play an important role in the Indian economy. With rising demand for lending and financial services, the NBFC sector has expanded rapidly in recent years. Despite their relevance, many individuals remain uninformed of the fundamentals of NBFCs. This article will offer a detailed review of NBFCs, including their definition, services, regulation, and function in the financial sector.
What are Non-Banking Financial Companies (NBFCs)?
NBFCs are financial firms that offer a variety of financial services and products, such as loans, insurance, and asset management, but do not hold a banking license. Additionally, unlike banks, NBFCs cannot take public deposits. Nevertheless, they can take deposits from a limited number of people, including directors, shareholders, and family. This distinction in deposit-taking capabilities sets them apart from traditional banks, providing both advantages and limitations to NBFCs in the financial landscape.
Types of NBFCs
1. Investment Companies (ICs):which focus on acquiring securities.
2.Asset Finance Company (AFC): AFCs primarily finance assets such as autos, machinery, material equipment, generators, and industrial machines.??????????????????????????
3.Loan Companies (LC): Loan Companies provide finance to the public, either through loans or advances. It excludes equipment leasing, hire-purchase, and asset financing companies.
4.CIC-ND-SI NBFCs : It invest at least 90% of their assets in debt instruments, shares, or loans in group firms.
5. Infrastructure Finance Companies (IFCs) own funds of at least ?300 crore and invest 75% of their total assets in infrastructure loans. LCs must have a CRAR of 15% and a credit rating of A or above.
6. Nonbanking Financial Company Micro Finance Institutions (NBFC-MFIs) must use at least 85% of their assets for micro-finance loans to individuals with an annual income of ?120,000 (urban) and ?60,000 (rural). These loans require no collateral, a maximum loan amount of ?50,000, and a loan duration of at least 24 months. The borrower must repay the loan in weekly, monthly, or fortnightly payments, as agreed.
7. NBFC-factoring companies must have a minimum net owned funds (NOFs) of ?2 crore. The financial assets of the factoring business should account for at least 75% of its NOF; this ensures a robust financial foundation and underscores the significance of maintaining a substantial portion of financial assets relative to the Net Owned Funds (NOF). These companies receive bills by selling companies at a discount.
Services provided by NBFCs
NBFCs provide a variety of financial services, includng:
Personal loans
Home Loans
Vehicle loans
Gold loans
Microfinance
Leasing and hire purchase services
Credit Card Services
Insurance Services
Investment and asset management services.
Regulation of NBFCs
The Reserve Bank of India (RBI), India’s central bank, regulates non-bank financial institutions. The RBI has the ability to provide licenses to NBFCs, oversee their activities, and ensure that they follow set standards and rules.
Role of NBFCs in the financial market
NBFCs play an important role in the financial industry by offering credit and other financial services to consumers who cannot access traditional banking services. They also give investors with alternative investment alternatives, particularly in rural and semi-urban regions where banks may not be well represented.
Benefits of NBFCs:
1. Provide a variety of financial services to persons who cannot access standard banking services. ????????????????????2. Offer alternative investment alternatives to investors.??????3. Offer speedy and straightforward loan disbursement.
4. Provide flexible repayment choices.
5. Provide insurance services for individuals and corporations.
What is the distinction between NBFCs and banks?
Although NBFCs lend money and make investments in the same way that banks do, there are several key distinctions between the two.?
– NBFCs cannot receive demand deposits.
– NBFCs cannot issue checks drawn on themselves, and depositors are not covered by the Deposit Insurance and Credit Guarantee Corporation, unlike banks.????????????????????????????? – Additionally, NBFCs do not participate in the payment and settlement system.