The banks and financial institutes across the globe are primarily responsible to serve a variety of financial operations including deposits and loans. In today’s scenario, financing companies other than banks have also been emerging in the business to serve people’s growing needs and demands in the digital age. Non-Banking Financial Companies (NBFC) are one of the types of finance companies giving a tough competition to banks in certain areas.

A popular example of NBFC in India is Bajaj Finance that was first set up in the year 1987 and has observed immense success ever since. Below is a graph representing its growth in revenue over the years.

The Growth Story - Bajaj Finance -NBFC

Source: Inc42 BrandLabs

Typically, a Non-Banking Financial Company (NBFC) can be defined as a company listed under Companies Act of 1956 and is responsible for giving loans and advances, acquiring stocks/debts etc. issued by governing authorities, leasing, chit funding etc. However, they are nowhere associated with businesses involved in agricultural, industrial or sale/purchase of goods and property.

Types of NBFCs

1.      Loan Company (LC)

LCs are responsible for providing advances and loans for business or other purposes.

2.      Asset Finance Company (AFC)

AFC is responsible for extending finances for physical assets such as automobiles, earth movers etc.

3.      Investment Company (IC)

ICs are responsible for acquiring securities like equity, debts, shares etc.

4.      Infrastructure Finance Company (IFC)

IFC need to fulfil a long list of criteria, some of them including:

  • A minimum of 75% of total assets involved in infrastructure loans.
  • 75% of CRAR
  • Net fund of at least ₹ 300 crores.
  • Credit rating of ‘A’.

5.      Mortgage Guarantee Company (MGC)

MGCs are those relying on 90% of the income earned from mortgage guarantee and has a net fund ₹100 crores.

6.      NBFC- Non-Operative Financial Holding Company (NBFC-NOFHC)

NBFC-NOFHC is a newly formed bank by promoters holding the bank and financial services and is regulated by RBI.

There are more such NBFCs functioning successfully in the Indian Banking and Financial Services market today. Each one has an individual role to play and caters to unique needs of their customers.

Who regulates Non-Banking Finance Companies?

Unlike banks, not all NBFCs are regulated by the Reserve Bank of India (RBI). Most of the NBFC are governed by other authorities depending upon the factors like their net fund, type of business etc. Here’s a list of a few NBFCs and their regulatory bodies in the Indian context…

  • Venture Capital Fund, Merchant Banking regulated by SEBI
  • Chit funds by State government
  • Housing Finance by National Housing Bank (NHB)
  • Nidhi Company governed by the Ministry of Corporate Affairs

How NBFCs are different from Banks?

There are quite a few differences between how banks and NBFCs function. The most basic ones are that:

  • The NBFCs are not authorised by the RBI to perform payment and settlement systems (NEFT, RTGS, debit/credit cards) in India.
  • They cannot issue cheques or accept demand deposits.
  • Unlike in banks where deposits up to 1 lac are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), deposits in NBFCs have no such guarantees and security.

Conclusion

The NBFC market is expanding in India and has a huge scope to develop further considering the fintech revolution and technological advances of AI and machine learning (ML). If you have been in search of banking solutions that will enable your NBFC to reach new milestones in the financial business, reach out to our experts today.

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