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NBFC (Non Banking Financial Company): Types & Functions

NBFC (Non Banking Financial Company): Types & Functions
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:
  1. Equipment leasing company: This is a financial institution that provides leasing of equipment as its principal business or financing of such activities.
  2. Hire-purchase company: It is a financial company that carries on business hire purchase transactions or the financing of such transactions.
  3. Loan company: It is a financial institution that provides of finance for loans or advances or otherwise for any activity other than its own.
  4. Investment company: It is a company or an institution that carries out the acquisition of securities.
  5. 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.
  6. Mutual Benefit Financial Companies: These are also known as Nidhi Companies which provides lending and borrowing services to its members.
  7. 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: 
  1. NBFCs accepting public deposit (NBFCs-D) 
  2. 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.
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