NBFC

Non-banking Financial Company (NBFC) and their evolution in the present financial market

Non-banking financial company is a financial institution, or a company registered under the Companies Act 2013. Unlike a traditional bank, it provides banking services without a legal banking license. Non-banking financial company provide various financial services, mostly engaged in advances, loans and shares, stocks, bonds, debentures, and securities accusation, which is issued by the government or any local authority if available. Non-Banking Financial Company(NBFC) plays a crucial role in the evolution of the financial market in the present financial sector. The principal business of the Non-banking financial company is receiving deposits under any scheme, unlike the traditional bank. Non-banking financial company, unlike traditional banks, does not include any institution engaged in agriculture activity, industrial activity, or purchase or sale of any such goods other than securities.

In the present scenario, in India, a financial institution like Non-banking Financial Company  has evolved at an exponential rate, bringing a huge impact on the financial sector, becoming more and more visible across the globe, making it easier for the public to get a loan without any hustle to the public with better and quick response. The reason behind the Non-banking financial companies  financial evolution in the present financial market is driven by increased demand for loans by small market players such as MSMS(Micro, Small and medium enterprises). Unlike traditional banks, Non-banking financial company  does not have stringent eligibility criteria.

What is a Non-banking Financial Company (NBFC)?

NBFC bank stands for Non-Banking Financial Company. Unlike traditional banks, NBFC banks offer financial services and products without holding a banking license. Non-banking financial company banks play a very crucial role in the present financial market, providing finance and credit facility services to different sectors of the economy.

Non-banking Financial Company (NBFC) in India

Non-Banking Financial Companies (NBFC) in India play a significant role in the financial sector, providing various financial services without meeting the legal definition of a bank. However, one should never forget that the financial sector is dynamic, and there may be changes over time; therefore, it keeps on evolving. Here are some well-known Non-banking financial company  banks in India:-

1. Bajaj Finance Limited.
2. HDFC Ltd.
3. LIC Housing Finance Limited.
4. Muthoot Finance Limited.
5. Shriram Transport Finance Company Limited.
6. Mahindra & Mahindra Financial Services Limited.
7. Tata Capita Financial Services Limited.
8. Power Finance Corporation Limited (PFC).
9. Rural Electrification Corporation Limited (REC).
10. Sundaram Finance Limited.
11. L&T Finance Holdings Limited.
12. Cholamandalam Investment and Finance Company Limited.
13. Reliance Capital Limited.
14. India Bulls Housing Finance Limited.
15. Edelweiss Financial Services Limited.

RBI approved Non-banking Financial Company(NBFC)

1. The list of NBFC banks approved by RBI is subject to changes. RBI regularly updates its list of NBFC banks and provides relevant information on its website. A few of the RBI-approved NBFC banks are as follows:
2. Bajaj Finance Ltd.
3. Tata Sons Private Limited (Formerly: Tata Sons Limited) CIC.
4. Cholamandalam Investment and Finance Company Limited.
5. L&T Finance Limited.
6. Mahindra & Mahindra Financial Services Ltd.
7. Aditya Birla Finance Limited.
8. Tata Capital Financial Services Limited.
9. HDB Financial Services Limited.
10. Muthoot Finance Limited.

Different types of Non-Banking Financial Companies (NBFC)

Non-banking financial company banks are categorized by the kind of activity they conduct. Within the broad categorization, the different types of Non- banking financial company  banks are as follows:-

Asset Finance Companies (AFC)

AFC focuses on financing the purchase of assets involved in physical activity supportive economic growth, and therefore, it is said that the income arising from such activity should not be less than 60% of total income & assets, respectively.  

Investment Companies (ICs)

Investment Companies (ICs) primarily engaged in the acquisition of securities.

Loan Companies (LCs)

Loan Companies (LCs) primarily offer finance in terms of loans or advances or for an activity other than its own but do not include Asset Finance Companies.

Infrastructure Finance Companies (IFCs)

 Infrastructure finance Companies (IFCs) specialize in financing infrastructure projects such as roads, bridges and power plants.

Microfinance Companies (MFCs)

Microfinance Companies (MFCs) focus on providing financial services, including small loans, to low-income individuals or micro-entrepreneurs.

Core Investment Companies (CICs)

Core Investment Companies (CICs) focus on the acquisition of shares and securities with certain conditions. The Core Investment companies should not hold less than 90% of the net assets the central bank provides. These net assets should be in the form of investments such as equity shares, preference shares, debenture, bonds, etc.

Non Banking Financial Company- Factors

Non Banking Financial Company- Factors engaged in the principal business of factoring.

Mortgage Guarantee Companies (MGC)

 Mortgage Guarantee Companies (MGC) are financial institutions for which at least 90 per cent is of the mortgage guarantee of the business turnover, or at least gross income is 90% from the mortgage guarantee, and the net owned fund should be Rs.100 core.

NBFC- Non-Operative Financial Holding Company (NOFCH)

A financial company where a promoter/group of promoters are permitted to set up a new bank according to the Reserve Bank of India¹ or other financial regulators to the extent permissible under the applicable regulatory prescriptions.

Nature of Non-banking Financial Company(NBFC) activities

Non-Bank Financial Companies (NBFC), also known as non-bank financial institutions (NBFIs), are entities that provide certain bank-like financial services but do not have a banking license.

NBFC banks are kinds of banks not subject to the regulations of traditional banks and oversight by federal and state authorities adhered to by traditional banks.

Since the Great Recession, NBFC (Non Banking Financial Companies) banks have increased rapidly. Hence, the evolution of Non-banking financial company  plays a key role in meeting the credit demand that traditional banks do not fulfil.

Difference between Non-banking Financial Company(NBFC) and Bank

Sr.No.	Bank	NBFC banks
1.	Regulated by the RBI under the Banking Regulations Act, 1949	Regulated by the RBI under the Companies Act, 1956
2.	Offer a wide range of banking services.	Engage in lending and investment activities.
3.	Accept deposits from the public.	Do not accept demand deposits from the general public.
4.	Issue and accept cheques.	Cannot issue or accept cheques.
5.	Require a banking license to operate.	Do not require a banking license to operate.
6.	Have the power to create credit through fractional reserve banking.	Cannot create credit like banks.
7.	Are members of the clearing house.	No clearing house membership
8.	Government insurance schemes may guarantee deposits.	No government guarantee on deposits.
9.	Access to various facilities the RBI provides, such as borrowing money and access to payment systems.	No access to such facilities.
10.	Mandated to allocate a certain percentage of their lending to priority sectors as per regulatory requirements.	Not mandated to follow priority sector lending norms.

Difference between Residuary non-banking and non-banking Financial Companies (NBFC)

Differences between RNBCs and NBFC are as follows:–

Sr.No	NBFC banks	RNBC banks
1.	It is a diverse financial institution that provides a wide range of financial services, such as loans and advances, acquisition of shares/stocks/bonds/debenture, leasing, hire purchase, insurance business, etc. Non-banking financial company  banks don’t hold a banking license, but plays crucial financial intermediation.	RNBC is a class of NBFC banks. These companies primarily engage in accepting deposits and investing in approved securities. They were initially set up to provide small depositors’ needs and channel their savings into productive investments.
2.	The RBI also regulates these companies, but their regulatory frameworks are diverse and depend on the activities and types of NBFC banks. The regulatory framework of the NBFC banks is more extensive due to its wide-ranging operations.	These companies are regulated by RBI (Reserve Bank of India), and their activities are governed and regulated by specific regulations and guidelines given by the RBI.
3.	These companies have broader aspects because of their versatility in financial activities.	Their operations scope is limited compared to NDFC as they primarily focus on deposit-related activities and specific investments.

Salient Features of Non-banking Financial Company(NBFC)

Some of the important regulations relating to acceptance of deposits by NBFC banks are as follows:-

• RBI doesn’t guarantee the repayment of deposits by NBFC banks.
• NBFC banks don’t accept deposits.
• The NBFC banks are allowed to accept/renew public deposits for 12 months and a maximum of 60 months.
• Offering gifts/incentives and other additional benefits is not allowed by NBFC banks.
• NBFC banks should maintain minimum investment-grade ratings.
• The deposits with NBFC banks are not insured.
• NBFC banks should make certain mandatory disclosures in the application form sanctioned by the company soliciting the deposits.

Evolution of Non-Banking Financial Companies (NBFC) in India

India is a developing country, and Non-banking financial company banks have played a very important role in boosting the economy so far, especially in backward rural and semi-urban areas. They cater to the financial needs of small and medium businesses, individuals, entrepreneurs, and farmers who are deprived of access to traditional banking services. Unlike banks with a lengthy approval process, NBFC banks approve loans faster. NBFC banks have become increasingly important in India with the advent of new technology to reach wider audiences.

The evolution of NBFC has also greatly impacted a digital platform that facilitates customers applying for loans online. Ongoing stress in public sector banks (PSUs) because of increasing bad debt and the deterioration of lending in rural areas has allowed NBFC banks to increase their presence. NBFC banks have remarkable growth and success in the passenger and commercial vehicle finance segments and growing AUM (Assets Under Management) in the personal loan and housing finance sector.

After the pandemic decline, 2023 has brought a next-level evolution in NBFC banks. It has shown how non-traditional banks can bring a boom to the present financial market with such demonstrative and innovative growth over the years. NBFC has also shown how they can adopt the unprecedented pandemic COVID-19 protocols efficiently and, therefore, avoid the revolving credit landscape in the financial industry across the globe. NBFC banks have also become the most preferred option in this present financial sector since NBFC meets the credit requirement based on the low cost of operations, which has provided these NBFC banks an edge over other banks.

Regulatory Changes in NBFC Bank by RBI for Non-Banking. Financial Company in India

Regulatory changes are common and often implemented to ensure the stability and integrity of the financial system. Following are the current regulatory changes in NBFC by RBI.

• The Non-banking Financial Company(NBFC) must have a reserve of more than 5% but less than 25% of deposits outstanding on the last working day when a business closes in the second preceding quarter.
• It is specified by the Reserve Bank of India (RBI) that the NBFC banks have to invest a certain number of reserves into approved securities, and these securities should have a value less than the current market price.
• Non-banking Financial Company(NBFC) does not require banking licenses, but they do need to obtain a   registration certificate from RBI to carry out their business.
• The Non-Banking Financial Company (NBFC) will have to create a reserve fund of an amount that is more than 20% of its net profit. Before any dividend is declared, such an amount shall be created.
• For Non-Banking Financial Companies (NBFC), the deposit period is up to 60 months.
• The NBFC banks must comply with the policy guidelines on fair practices code issued by the Reserve Bank of India (RBI).

Factors leading NBFC Banks Sector Growth in India

The NBFC bank sector in India has evolved and put its presence with extraordinary transformation over the past few years, creating significant growth in India’s financial system. Some of the factors for NBFC Growth in India are as follows:-

• SeverplayedFCs have focused on a limited line to serve the target customer agent.
• NBFC is now reaching out to Tier-2, Tier-3 and Tier-4 markets, distributing loans to several customer touchpoints.
• NBFC has been tying up with multiple alternative lenders with digital platforms and commercial banks, adding to their targeted customer base.

What precautions should a depositor take before placing a deposit with an NBFC bank?

Check the NBFC Registration

Make sure that NBFC Bank has received a Certificate of Registration (COR) from the Reserve Bank of India. This certification confirms that an NBFC has received a particular permit from RBI to take deposits.

Credit rating

Credit rating basically shows the stability and creditworthiness of the institutions; the higher the rating, the lower the risk of the institution. 

Background Check

Research the background and reputation of the NBFC bank. Look for reviews, testimonials, and any negative news or reports about the company. A well-established and reputable NBFC bank is more reliable.

Read the Terms & Conditions

Carefully read and understand the terms and conditions of the deposit scheme or financial product offered by the NBFC banks. Be aware of the interest rates, maturity periods, withdrawal terms, and any associated fees.

Legal Documentations

Ensure all the documents are legally binding. Read and understand the documents before entering into any agreements with the NBFC banks.

Customer Service

Evaluate the customer service provided by NBFC banks. Responsive and transparent customer service is important for addressing queries and concerns and resolving issues promptly.

Checklist of Compliances of Non-Banking Financial Company (NBFC)

• Non Banking Financial Companies (NBFC) need to maintain a capital adequacy minimum ratio (CAR) of 15%.
• Non-Banking Financial Companies (NBFC) are required to form their assets in a number of categories based on their credit quality, and RBI has prescribed guidelines for the same.
• Non Banking Financial Companies (NBFC) should obtain a credit rating from the registered credit agency.
• Non Banking Financial Companies (NBFC) are required to submit various returns and reports to the RBI at regular intervals.
• Non Banking Financial Companies (NBFC) are required to conduct a statutory audit of their accounts by a qualified auditor and must be members of the  ICAI.
• Non Banking Financial Companies (NBFC) are also required to conduct an internal audit.

Conclusion

Non-bank Financial Corporation (NBFC) plays an essential role in the ecosystem of the financial industry; NBFC offers a range of financial services that complement traditional banking. It has also promoted financial inclusion through NBFC, such as channelized savings and investments, mostly in small-scale industries and retail sectors, as well as underserved areas and unbanked sectors of India. Understanding the role of financial inclusion in NBFC is crucial for individuals and businesses to make informed financial decisions. In India, the evolution of NBFC (Non Banking Financial Companies) has taken place, acquired a new meaning, and shown robust growth in recent years. The Non-banking Financial Company(NBFC) is a company that is not a bank and yet carries lending activities almost similar to a bank. The Banking sector has always been highly regulated. However, simplified sanction procedures, flexibility and timeliness in meeting the credit needs and low-cost operations resulted in the NBFC getting an edge over banks in providing funding. Non Banking Financial Companies (NBFC) have been pioneering retail asset-backed lending, lending against securities, microfinance, etc. and have been extending.

FAQ’s

1. https://www.rbi.org.in/