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.