NBFC : Types & Functions
What is NBFC?
- A Non-bank financial company (NBFC) is a financial organization that works like a bank that is it provides all the services similar to that of a bank like providing securities, debentures, loans, bonds and stocks but does not hold any banking license.
- This institution is registered under the Companies Act, 1956 and hence the name.
- But it is not involved in any kind of deals regarding agriculture, industry, sales or purchase or even construction of immovable property.
- As per the RBI Act of 1934, the NBFCs are regulated by the RBI.
- Some examples of NBFCs include Life Insurance Corporation, General Insurance Corporation and more.
What are the differences between NBFCs and Bank?
- Demand deposits cannot be accepted by NBFC.
- As NBFCs do not have a banking license they cannot allow any kind of banking services like withdrawal of money.
- Not being a part of the payment and settlement system NBFCs cannot issue cheques drawn on it.
- While banks do provide Credit insurance policies, NBFCs do not.
- It is not necessary for NBFC to maintain Reserve Ratios.
- NBFCs are allowed to maintain foreign investment of about 100%.
Originally, NBFCs registered with RBI were classified as:
- Equipment leasing company: This is a financial institution that provides leasing of equipment as its principal business or financing of such activities.
- Hire-purchase company: It is a financial company that carries on business hire purchase transactions or the financing of such transactions.
- Loan company: It is a financial institution that provides of finance for loans or advances or otherwise for any activity other than its own.
- Investment company: It is a company or an institution that carries out the acquisition of securities.
- Residuary Non- Banking Companies: These institutions receives deposits in installment or in any other way as a lump sum amount by certificates, sale or any other kinds of monetary instruments.
- Mutual Benefit Financial Companies: These are also known as Nidhi Companies which provides lending and borrowing services to its members.
- Miscellaneous Non- Banking Company: Also known as the Chit fund Company, these are responsible for managing a team where every member of the team will pay certain installments for a definite period of time and in turn gain a huge amount of money as a profit at the time of auction or sales.
From December 2006, the NBFCs have been re-classified into the following types.
- Asset Finance Company (AFC)
- Investment Company (IC)
- Loan Company (LC)
Asset Finance Company (AFC) - It is an institution that carries out financing of physical assets such as automobiles, equipment, and other industrial machines.
NBFC's can further be classified into two forms such as:
- NBFCs accepting public deposit (NBFCs-D)
- NBFCs not accepting/holding public deposit (NBFCs-ND)
Role of NBFCs
- NBFCs provide assistance to the weaker sections of the society.
- NBFC supports in development of infrastructure and transport.
- NBFC helps in economic development.
- NBFCs helps in wealth creation.
Some Important Facts Regarding NBFCs
- It is compulsory for NBFCs to register with RBI to carry out business as per clause (a) of Section 45 I of the RBI Act, 1934.
- All NBFCs cannot accept public deposits. Only those NBFCs which are registered with RBI and have valid certificates can accept deposits.
- An NBFC cannot use the name of RBI to conduct their business.
- If RBI rejects the grant for Certificate of Registration(COR) then the NBFc cannot accept or reject fresh deposits.
- An NBFC is supposed to have a total funding of 2 crore as updates on 21st April in the year 1999.
- NBFC offers rate of interest at 11% and cannot increase that any further.
- NBFC's can accept or renew deposits for a minimum period of 12 months and maximum period of 60 months.
- NBFC's do not accept deposits repayable on demand.
- The deposits with NBFCs are not insured.
- RBI does not guarantee the repayment of debts by NBFCs.
- It is must for every NBFC to maintain a reserve fund of which at least 20% of its net profit must be transferred before dividend declaration.
- RBI can ask for information to have a check on the conduct of their business.
- The NBFCs are required to invest in India in approved securities at least 5% or higher percentage as updated by RBI from time to time.
- There is no Ombudsman for hearing complaints against NBFCs.