Details about NBFCs for Upcoming Bank Exams

"NON-BANKING FINANCIAL COMPANIES (NBFCs)"

For SBI PO-RRBs-IBPS PO/ Clerk

Introduction:

Non-bank Financial Companies (NBFCs) are financial institutions that take steps banking services without encounter the legal appellation of a bank, i.e. one that does not hold a banking license.  These institutions typically are limited from taking deposits from the public depending on the jurisdiction. Operations of these institutions are often still covered under a country's banking regulations.

NBFC is a company registered under a companies Act, 1956 and is engaged in the business of Loans, Acquisition of shares/stock/bonds/securities, Advances issued by Government or local authority or the securities of like Leasing, Insurance Business, Marketable nature, Chit Business and Hire-purchase.

Historical Background:

The RBI Act, 1934 was amended on 1^st December, 1964 by the Reserve Bank Amended Act, 1963 to include provisions relating to non-banking institutions receiving deposits and financial institutions. With a view to review the existing framework and address these shortcomings, various committees were formed and reports were submitted by them.

Types of NBFCs:

1. Loan Company – Loan Company means any financial institution whose principle business is that of providing finance, weather by making loans or otherwise for any activity other than its own (excluding any equipments leasing or hire-purchase finance)
2. Residuary Non-Banking Company – RNBCs are class of NBFCs which cannot be classified as equipment leasing, loan, hire-purchase, investment and chit fund companies, but which tap public savings by operating various deposits schemes.
3. Equipment Leasing Company
4. Investment Company – This Company is any financial intermediary whose principle business is that of buying and selling of securities. 
5. Hire-purchase Company – Hire-purchase combines element of both loans and lease. You reach an agreement with the dealer to pay an initial deposit, typically anything between 10% and 50% and then pay off the balance in monthly installments over an agreed period of time. And the end of period product is yours.

Regulations:

• NBFC cannot offer gifts/ incentives or any other additional benefit to the depositors;
• They have to create reserve fund and transfer not less than 20% of their net deposits to it every year.
• NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11% per annum.
• The NBFCs are sanctioned to receive or renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
• They have to obtain a minimum credit rating from anyone of the 3 credit rating agencies.

Role of NBFCs:

• To finance economically weaker sections.
• Development of sectors like infrastructure and transport.
• Broad base economic development.
• Substantial employment generation.
• Help and increase wealth creation.