The Indian banking system saw a huge change when NBFCs were introduced into the banking environment. There are multiple NBFCs in the Indian market today that have become an integral part of the banking structure in the country. The meaning of NBFCs and related details of the same are mentioned hereunder.
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What are NBFCs?
NBFCs are registered under the Companies Act, 2013 of India and are regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1949. NBFCs(Non-Banking Financial Companies) are financial institutions that offer a wide range of banking and financial services and are similar to traditional banks.
The key difference between traditional banks and NBFCs is that the latter cannot accept demand deposits and they do not form part of the payment and settlement system of the country. These companies are usually engaged in providing credit facilities, to individuals and businesses that may find it difficult to access credit from traditional banks.
NBFCs also offer other services like wealth management, insurance, hire purchase, etc. NBFCs are not subject to the same kind of stringent rules and regulations levied by the RBI on traditional banks. This makes them more flexible in lending funds to individuals and MSMEs as compared to traditional banks. At the same time, the lack of adequate regulations as compared to traditional banks also makes them more prone to the risk of fraud or default that can trickle to the entire fabric of the banking system of the country,
What are the types of NBFCs in India?
There are several categories of NBFCs in India and they are classified into three main categories namely, NBFCs registered and regulated by RBI, NBFCs not registered but regulated by RBI through directions, and BFCs exempted from RBI registration and regulations. The common types of NBFCs and their meaning are mentioned below.
- Asset Finance Companies (AFCs) – These are NBFCs that are engaged in financing the purchase of physical assets, such as machinery, equipment, vehicles, and other durable goods.
- Investment Companies (ICs) – These NBFCs are engaged in investing in core securities like shares, debentures, etc.
- Loan Companies (LCs) – These companies are primarily engaged in providing financial needs to individuals and businesses in the form of loans, advances, or other credit facilities
- Infrastructure Finance Companies (IFCs) – These NBFCs are engaged in providing long-term finance for infrastructure projects (at least 75% of their total assets). Such NBFCs should have a minimum credit rating of ‘A’ or equivalent and a CRAR of 15%.
- Microfinance Companies (MFCs) – These NBFCs provide small loans and other financial services to low-income individuals and micro-enterprises ensuring them easy and timely access to finances.
- Core Investment Companies (CICs) – These NBFCs focus on investing in shares and securities of other companies and should have a minimum of 90% of their total assets in the form of such investments. These companies are not allowed to carry on any other financial activities and trade in their investments except through block sales for the purpose of dilution or disinvestment.
- Factors – These NBFCs are primarily engaged in the business of factoring or discounting receivables.
- Mortgage Guarantee Companies (MGCs) – These NBFCs are primarily engaged in providing mortgage guarantee services to banks and other housing finance companies.
What is the difference between Banks and NBFCs?
The core differences between traditional banks and NBFCs are highlighted below.
|Deposits||Banks are permitted to accept deposits from account holders.||NBFCs are not permitted to accept deposits from the public or businesses.|
|Regulations||Banks are regulated as per the provisions of the RBI and the Banking Regulation Act 1949.||NBFCs are incorporated and regulated as per the provisions of the Companies Act, 2013|
|Payments and settlement system||Banks are charged with the function of accepting payments and being part of the settlement process along with other services like issue of cheques, demand drafts, etc.||NBFCs are not allowed to accept payments or be part of the settlement process in the form of issues of cheques, demand drafts, etc.|
|Maintenance of mandatory ratios||Banks has to maintain the mandatory CRR ratios and other similar ratios as per the guidelines of the RBI.||NBFCs are not required to maintain any similar ratios as in the case of traditional banks as there are limited regulations of RBI guidelines.|
|Insurance facility||The deposits in Banks are secured up to Rs. 5,00,000 under DICGC||No such facility is available for NBFCs.|
What are the top NBFCs in India?
There are multiple NBFCs in India that have been incorporated over the years. The top NBFCs in India as of 2023 are,
- Bajaj Finance
- HDFC Limited
- Mahindra and Mahindra Financial Services
- Shriram Transport Finance
- Cholamandalam Investment and Finance Company Limited
- L&T Finance Holdings Limited
- Indiabulls Housing Finance Limited
- Birla Sun Life Insurance Company Limited
- Tata AIA Life Insurance Company Limited
- PNB Housing Finance Limited
NBFCs have become an integral part of the banking system of the country. They play an important role in providing financial services to underserved segments of the population. This helps in integrating the remotest parts of the country under the banking and financial system and enabling the overall progress of the nation.
The prime concern of NBFCs is the limited regulation by RBI which can lead to the risk of default or fraud.
NBFCs cannot accept deposits that are payable on demand.
No. NBFCs are not required to maintain ratios like CRR which are mandatory for traditional banks.
Yes, NBFCs are required to maintain the required credit rating which has to be reviewed and submitted to RBI as per the given guidelines