In recent years, Non-Banking Financial Companies (NBFCs) have been growing in India at a swift rate, providing services that are similar to banks but with less stringent regulations. The Indian Government has taken several measures to regulate NBFCs and to assist them to provide better and responsible services to their customers.
What are NBFCs: Non-Banking Financial Companies
Non-Banking Financial Companies (NBFCs) are financial institutions which provide banking and other financial services without having an official bank licence or authority. Although they provide services which are similar to banks, NBFC offer a wider range of services than a traditional bank.
NBFCs focus on providing small loans and invest in certain sectors, such as mutual funds, venture capital, insurance products, housing finance and money exchange. For customers who need non-traditional finance options, NBFCs can provide access to cash and financial assistance at times when banks may not be able to avail their services. Additionally, NBFCs are more accessible than traditional banks to customers because of their limited requirements for new applicants.
There are various types of NBFCs present in India. These include Asset Finance Companies (AFC), Loan Companies (LCs), Investment Companies (ICs), Systematically Important Non-Deposit Taking Non-Banking Financial Company (NBFC-ND-SI). These entities offer different kinds of services depending on the type they are registered as by the Reserve Bank of India (RBI).
History of NBFCs
In 1964, RBI Act, 1934 amended to include and regulate NBFCs. This marked the start of official recognition and regulations of NBFCs.
In 1997, Chapter III B was introduced to strengthen the regulatory oversight of NBFCs. It was introduced to address concerns regarding the stability and integrity of the financial system and to enhance the supervision and control of NBFCs by the Reserve Bank of India (RBI).
In 2000, NBFCs started expanding their activities beyond traditional lending and ventured into various financial services. They diversified into areas such as asset financing, infrastructure financing, insurance, housing finance, microfinance, and more.
In 2010, The RBI introduced the concept of Core Investment Companies (CICs), which are a category of NBFCs that primarily make investments in group companies.
In 2016, Non-Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016 introduced the functioning of NBFC-AA, which are entities that collect and provide financial information of customers from multiple financial institutions.
In 2017, NBFC - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 was introduced to provide a regulatory framework for peer to peer (P2P) lending platforms , which are a type of NBFC that facilitate lending and borrowing between individuals through an online platform.
In 2021, RBI classified the NBFCs into four layers:
- Base Layer: This layer includes Non-deposit taking NBFCs. This layer includes peer to peer lending platforms Account Aggregators NBFCs, Non-Operative Financial Holding Companies. The Non-Deposit taking NBFCs included in this layer have an asset size of less than 1000 crores.
- Middle Layer: This layer includes all deposit taking NBFCs irrespective of their assets size. It also includes Non-deposit taking NBFCs having asset size of equal to or more than 1000 crores. This layer also includes NBFCs that are engaged in the business of Standalone Primary Dealers, Infrastructure Debt Fund - NBFCs, Core Investment Companies, Housing Finance Companies, and Infrastructure Finance Companies.
- Upper Layer: This layer included the top 10 NBFCs in respect of their assets size as well as systematically important NBFCs and they will always remain in this layer, irrespective of other factors.
- Top Layer: This layer is currently empty but will be filled with upper layer NBFCs which require higher supervision.
How NBFCs Differ from Banks
Non-Banking Financial Companies (NBFCs) are organisations which carry out banking-related activities, except they can not accept demand deposits and issue cheques. This is different to banks which can do both. These companies include entities such as microfinance organisations, Infrastructure finance companies and Core Investment Companies.
NBFCs offer many services that are similar to banks such as lending money and accepting deposits but they must be registered with the Reserve Bank of India (RBI). They also have to adhere to certain regulations and guidelines set by the RBI, such as maintaining minimum capital adequacy ratio and Assets classification and provisioning.
In general, NBFCs offer more flexibility that traditional banks as they are not subject to certain bankings norms and regulations and can often provide more customised products and services tailored as per the needs of their customers. NBFCs focus on niche markets and may specialise in services like leasing, hire purchase or loan against shares or real estate.
In India, There are many types of NBFCs such as:
- Asset Finance Companies (AFC): These companies disburse loans for the purpose of purchasing assets such as vehicles, machinery, equipment and purchase or construction of property. They are also involved in leasing finance or hire-purchase financing.
- Investment Companies (IC): These companies engage in the business of making investment in bonds, securities, stocks and venture capital funds with the aim to generate income from their investment portfolio.
- Infrastructure Finance Companies (IFC): These companies provide long-term finance for the purpose of Infrastructure development, such as power, transportation, telecommunication and other core sectors.
- Loan Companies (LC): These companies operate with the purpose of providing loans and credit facilities to individuals and businesses.
- Systematically Important Core Investment Companies (CIC): Companies which have an asset size of at least 100 crores and 90% of its net assets should be in the form of shares are identified as core investment companies because their primary purpose is to invest in shares of many other companies, which also means that the whole economy will be affected if these companies collapse.
- NBFC-Factor: These companies offer debt factoring services to businesses seeking finance against unpaid invoices without need to go through the traditional banking process of loan application and approval process.
- Housing Finance Companies: These companies primarily engage in providing finance with the purpose of purchasing, construction and renovation of properties. These companies are regulated by National Housing Bank (NHB).
Each of these NBFCs operate with their own purpose to serve the economy and its customers.
Functions and Role of NBFCs in the Indian Economy
NBFCs (Non-Banking Financial Companies) plays an important role in India’s economy, assisting in the development and growth of industries, serving as lenders to those who are often not served by traditional banks, and increasing the availability of credit for small businesses and startups.
NBFCs are different from traditional banks in many ways. While banks are allowed to accept demand deposits, NBFCs cannot do the same. Banks can grant loans and advances, make investments and provide insurance cover, while NBFCs can only grant loans or advance credit and invest in securities issued by the government and local authorities. Unlike banks, they cannot issue cheque books to their customers nor can they provide other payment services such as ATM facilities or net banking.
Also, Bank deposits are typically covered by deposit insurance provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which guarantees the repayment of a certain amount in case of bank failure. NBFCs deposits are not covered by this guarantee. Banks have to maintain CRR and SLR, whereas NBFCs are not required to maintain these reserve ratios.
Top NBFCs in India
India is home to a long list of Non-Banking Financial Companies (NBFCs), each with their own specialty and purpose. Here are some of the top NBFCs in India that you should definitely know about:
Bajaj Finance Limited: Specialising in consumer finance, Bajaj Finance is one of the leading NBFCs in India. It offers loans for various requirements like business expansion, housing, education, and more.
Shriram Transport Finance Company Ltd: This NBFC is one of the largest commercial vehicle financiers in India, offering loans for buying heavy/light vehicles as well as construction equipment.
Fullerton India Credit Company Limited: This NBFC is a leader in providing retail finance solutions, encompassing everything from small business loans to personal loans and more.
Indiabulls Housing Finance Limited: Indiabulls Housing Finance specialises in giving out home loans to people across India. It also provides a variety of other financial products and services like loan against property, project finance and capital market finance.
Edelweiss Financial Services Ltd.: Edelweiss Financial Services was founded in 1996 and has since committed itself to providing innovative financial solutions for individuals, corporations and institutions alike. Some of its core offerings include asset reconstruction services, investment banking solutions as well as capital market services.
Conclusion:
Non-Banking Financial Companies (NBFCs) are an important part of the Indian financial system. These companies provide banking services, such as taking deposits and lending money, but do not have a banking licence and are not subject to banking regulations. The Reserve Bank of India (RBI) regulates NBFCs through a comprehensive set of rules and regulations. The various types of NBFCs in India include Microfinance Institutions, Investment Companies, Venture Capital Funds and Money Lenders. With the emergence of new technologies and innovative business models, the scope of NBFCs is growing and they are becoming an integral part of the Indian financial landscape.
