The full form of NBFC is Non-Banking Financial Company. NBFCs are financial institutions that offer banking services without having a banking license. These companies are registered under the Companies Act and regulated by the Reserve Bank of India (RBI). NBFCs play a vital role in India’s financial system by providing credit and financial services to those who are not served by traditional banks. NBFCs engage in activities like giving loans, buying stocks, acquiring equity, insurance business, and government bonds. However, unlike banks, they do not accept regular demand deposits from the public. To start an NBFC, there are certain requirements, including having a minimum net owned fund of Rs. 2 crores. Examples of NBFCs include housing finance companies, chit fund companies, and stockbroking firms.
History Of NBFC
The evolution of Non-Banking Financial Companies (NBFCs) in India began in the 1960s, during a time of economic growth and a need for financial services beyond traditional banks.
In the early stages, NBFCs mainly provided hire-purchase and leasing services to meet the increasing demands of consumers and businesses looking for alternatives to traditional banking. The lack of strict regulations allowed NBFCs to operate with flexibility, helping them grow quickly and establish their place in the financial sector.
As the NBFC sector grew, regulatory concerns arose, leading the Reserve Bank of India (RBI) to introduce guidelines to oversee their operations. The first major regulatory framework for NBFCs came in 1997 with acchanges to the Reserve Bank of India Act, giving the RBI the power to regulate and supervise NBFCs. Later amendments and guidelines aimed to improve transparency, stability, and risk management in the sector.
The journey of NBFCs has not been without challenges. The global financial crisis of 2008 and the liquidity crunch in 2018 exposed weaknesses in the sector, prompting a reassessment of risk management practices and liquidity positions. These challenges led to a recalibration of strategies, with NBFCs adopting measures to enhance asset quality, strengthen liquidity, and improve transparency in reporting.
Examples of NBFCs
Some examples of NBFCs include:
Commercial Banks
Credit Unions
Building Societies
Mortgage Companies
Finance Companies
Leasing Companies
Investment Banks
NBFC in India
Here the NBFC company list present in India:
Bajaj Finance Limited
HDFC Ltd. (Housing Development Finance Corporation)
LIC Housing Finance Ltd.
Mahindra & Mahindra Financial Services Limited
Muthoot Finance Ltd.
Shriram Transport Finance Company Limited
Tata Capital Financial Services Ltd.
L&T Finance Limited
Cholamandalam Investment and Finance Company Limited
Manappuram Finance Ltd.
Indiabulls Housing Finance Ltd.
Aditya Birla Finance Limited
Piramal Capital & Housing Finance Ltd.
Reliance Capital Ltd.
Sundaram Finance Limited
Types of NBFCs
Non-Banking Financial Companies (NBFCs) in India come in various types, each serving different financial needs and helping boost the country’s economy. The Reserve Bank of India (RBI) classifies NBFCs based on their activities, ability to take deposits, and importance to the financial system. Here are some main types of NBFCs in India:
Asset Finance Companies (AFCs)
AFCs focus on financing assets like machinery, vehicles, and equipment. They offer customized financing solutions to individuals, small and medium-sized enterprises (SMEs), and corporations for acquiring these assets.
Investment and Credit Companies (ICCs)
ICCs primarily finance physical assets that support economic activities, such as automobiles, tractors, and generators. At least 60% of their total assets are used for this purpose.
Infrastructure Finance Companies (IFCs)
IFCs are NBFCs that allocate at least 75% of their total assets to infrastructure loans. They provide long-term finance for projects like roads, bridges, power plants, and telecommunication networks.
Microfinance Institutions (NBFC-MFIs)
NBFC-MFIs are non-deposit-taking NBFCs that offer microloans to rural and urban households with low annual incomes. They must have at least 85% of their net assets in the microfinance sector.
These NBFCs play a crucial role in providing financial services that cater to specific needs, thereby contributing to the overall growth of the economy.
Role of NBFCs
Non-Banking Financial Companies (NBFCs) play an important role in India’s financial system by offering a variety of financial services and promoting financial inclusion. Here’s a simple explanation of their key roles and objectives:
Financial Inclusion
NBFCs aim to provide credit and financial services to underserved groups and individuals who may not have easy access to traditional banking facilities. They serve small businesses, low-income households, and other underserved markets, filling the gaps left by banks.
Meeting Specific Financial Needs
NBFCs offer tailored financial products and services to meet the specific needs of individuals and businesses. They provide consumer loans such as personal loans, vehicle loans, and home loans, as well as microfinance to support small businesses and entrepreneurs.
Asset Financing
NBFCs specialize in asset financing by offering loans and credit facilities for purchasing assets like vehicles, machinery, and equipment. This helps individuals and businesses acquire essential assets and promotes economic growth.
Infrastructure Financing
NBFCs play a key role in developing infrastructure by providing funds for various projects, including roads, bridges, and power plants. This supports the country’s economic growth and development.
Investment and Wealth Management
NBFCs offer investment products and wealth management services, helping individuals and organizations grow their savings and investments. They invest in various avenues such as securities, stocks, and bonds, contributing to market liquidity.
Promoting Economic Growth
By providing credit and financial services to various sectors, NBFCs help in the growth of the economy. They support the organized banking sector by meeting the financial needs of the corporate sector and providing credit to the unorganized sector and small local borrowers.
Eligibility of an NBFC For Registration with RBI
An NBFC can be registered with RBI if it satisfies the following conditions:
The company should be registered under the Companies Act, 1956.
The company should have a minimum paid-up capital of Rs.5 crore.
The company should be engaged in the business of lending, financing, leasing, investing in securities, or providing any other financial services.
The company should not be engaged in the business of chit fund, mutual benefit fund, or Nidhi company.
The company should not be a subsidiary of a banking company.
The company should not be a housing finance company.
The company should be in compliance with the RBI guidelines on NBFCs.
NBFCs Which Need Not be Registered With RBI
NBFCs which are not required to register with RBI are those NBFCs which satisfy either of the following two conditions:
The NBFCs having a net owned fund of Rs.50 lakh or less.
The NBFCs which are engaged only in the business of lending against securities, buying and selling of shares/securities, providing housing finance, and factoring.
NBFCs Which Need to be Registered With RBI
NBFCs which are required to register with RBI are those NBFCs which do not satisfy either of the following two conditions:
The NBFCs having a net owned fund of Rs.50 lakh or less.
The NBFCs which are engaged only in the business of lending against securities, buying and selling of shares/securities, providing housing finance, and factoring.
Procedure to Incorporate an NBFC
The process of incorporating an NBFC is as follows:
Draft the Articles of Association for the company.
File a company incorporation application with the Registrar of Companies.
Hold a board meeting and pass a resolution to incorporate the company.
Appoint a company secretary and a director.
Deposit the company’s share capital with the Registrar of Companies.
File a declaration of commencement of business with the Registrar of Companies.
Guidelines an NBFC Needs to Follow
An NBFC needs to comply with the guidelines set by the Reserve Bank of India (RBI) to ensure that it is functioning in a responsible manner. Some of the key guidelines that an NBFC needs to follow are:
An NBFC must maintain a minimum capital adequacy ratio of 15%.
An NBFC must not extend more than 50% of its net owned funds to a single borrower.
An NBFC must not extend more than 25% of its net owned funds to a single group of borrowers.
An NBFC must not make any loans or investments in shares, debentures, and other securities.
An NBFC must not enter into any agreement with its borrowers to purchase or sell goods or services.
An NBFC must not enter into any agreement with its borrowers to supply goods or services on credit.
Services Offered By NBFCs
Non-Banking Financial Companies (NBFCs) provide various financial services in India, including:
Personal loans
Home loans
Vehicle loans
Gold loans
Microfinance
Leasing and hire-purchase services
Credit card services
Insurance services
Investment and asset management services
Wealth management services like managing stock and share portfolios
Discounting services
Acquisition of shares, stocks, bonds
Hire-purchase
Insurance or chit business
Money transfer services
Private education funding
Retirement planning
Underwriting stocks and shares
Trading in money markets
Term Finance Certificates (TFCs) and other financial obligations
