What are NBFCs?

NBFC stands for Non Banking Financial Companies. Non banking financial companies (NBFCs) are institutions that facilitate financial services like a bank but don’t hold a banking license.
NBFCs cannot accept traditional demand deposits from the public, such as checks or savings accounts.
An NBFC is also known an NBFI, a Non-Banking Financial Institution.
A non banking financial company is not a bank but is a company which is registered under the Indian Companies Act, 1956. NBFCs are known for their approval of loans and advances but they cannot accept deposits from the public like a normal commercial bank.
NBFCs performs various functions like accepting deposits, forwarding loans and advances, leasing, hire-purchase.

Note: It is legally mandatory for an NBFC to get itself registered with the RBI as a deposit taking company. For registration of NBFC it has to be a company which is incorporated under the Companies Act 1956 and should have a minimum NOF (Net Owned Fund) of Rs 2 Crores.

Difference between Banks and NBFCs

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Features of NBFCs:

NBFC cannot accept demand deposits from the general public like a normal commercial bank.
NBFCs do not form a part of the banking payment and settlement systems hence, cannot issue cheques to their customers.
Deposit insurance facility provided by the Deposit and Credit Guarantee Corporation is only available to bank customers. This facility of insurance proves to be very important in case of bankruptcy. However, NBFCs do not provide such facility.
Cannot offer interest rates higher than the ceiling rate as prescribed by the RBI.
Should acquire minimum investment grade credit rating.
Allowed to accept and revenue term deposits for a minimum period of 12 months to maximum period of 60 months, but cannot accept demand deposits.
NBFCs are registered and governed under the Companies Act, 1956.
NBFCs mobilize the savings of the nation and further channelise it to better avenues.
This era is of technology, NBFCs are no exception to it. It has resulted in a significant growth of technology in the country.

Type of NBFCs

NBFCs are further classified by their size and the volume of activity they undertake:

Asset Finance company: This type is a popular and well known type of NBFCs. These institutions sanction credit related to purchase of assets and contribute significantly to the economic development.

Investment company: These companies are specifically linked with financing of buying of various financial securities like shares, bonds, etc.

Infrastructure Finance company: They are the special type of NBFCs which are required to deploy at least 75% of their assets in infrastructure loans. Mostly, high net worth projects are financed through the Infrastructure Finance company (NBFCs).

Loan company: A different kind of NBFC which is into sanctioning all types of loans which are not covered under the Asset Finance company.

To provide with greater ‘operational flexibility’ to the NBFCs , the RBI has announced a policy:Existing 3 classes of the NBFCs ( Asset finance companies, Investment companies and loan companies) were merged into one category know as “NBFC- Investment and Credit Companies” ( NBFC-ICCs).

Significance of NBFCs

NBFCs play an integral part in promoting an all inclusive growth by providing for different financial needs of business enterprises which is not a part of regular mainstream banking.
NBFCs create the trend when it comes to creating unique efficient and innovative financial products and services. The by-product of this process is the creation of a huge amount of employment opportunities.
Helps in the development of financial markets as they finance buying of various securities. The power to raise capital leads to increase in the capital stock of the company.