These days, there is a growing buzz around NBFCs. Knowing what is an NBFC and its purpose will help you understand the basic idea of these financial institutions. Continue reading to dig deeper into the concept of the NBFC. You will also learn more about its history and scope, and the different types of NBFCs.
What is Full Form of NBFC ?
People often refer to certain financial institutions as NBFCs. The NBFC full form refers to a non-banking Financial Company — a financial service provider that is not a bank. An NBFC does not offer standard banking services such as savings accounts or check facilities. It does not hold a bank license.
NBFCs provide a broad spectrum of financial products to help individuals seeking financial services like credits and hire purchases. They are known for their customer-friendly credit services, pan-India operations, and easy online accessibility. These companies require registration under the Companies Act of 2013.
NBFC and its History?
A Non-Banking Financial Company (NBFC) provides several financial services comprising leasing, hire-purchases, lending, insurance, deposits, shares, and chit funds. Another term for NBFC is NBFI or Non-Banking Financial Institution. These companies do not require a full banking license to provide financial products and services.
The history of NBFC in India dates back to the sixties. There was a need to help people access financial services, as banks could not serve them adequately. In 1964, the government introduced the concept of NBFCs in the RBI Act. This paved the way for establishing NBFCs in India.
NBFCs evolved rapidly during the last few decades by adopting digital technologies and expanding their range of products and services. NBFC operations are similar to banks as they provide loans and financial leasing by accepting money directly or as schemes. But how are they different from banks? Let’s explore the main attributes of NBFCs, to begin with.
Main Attributes of NBFCs
NBFCs focus on the micro level. They enable small and medium-sized businesses to manage their cash and liquidity requirements. These are some of the main features of Non-Banking Financial Companies:
- The primary functions of NBFCs involve equity acquisition, stocks, loans, insurance, micro-deposits, and government-insured bonds.
- NBFCs cannot accept repayable-on-demand deposits.
- There is no insurance on deposits with NBFCs.
- Non-Banking Financial Companies cannot exceed prescribed interest rates on deposits by RBI.
- NBFC customers receive no additional benefits as incentives or gifts.
- RBI does not guarantee the repayment of deposits with NBFCs.
- An NBFC can accept or renew deposits for a period ranging between a minimum of 12 months and a maximum of 60 months.
NBFC meaning in banking service does not cover your ability to open current or savings accounts. You cannot deposit and withdraw deposits from a Non-Banking Financial Company.
Types of NBFC in India
Broadly, there are two types of NBFC in India: deposit-accepting and non-deposit-accepting companies. The following are the main NBFCs according to their nature of financial services:
- Nidhis: These are mutual benefit finance companies that allow the pooling of funds to achieve specific investment objectives.
- Loan Companies: LCs focus primarily on providing advances or loans.
- Asset Finance Companies: AFCs help businesses finance physical assets such as agriculture or industrial equipment.
- Investment Companies: ICs deliver services for the acquisition of securities.
- Infrastructure Finance Companies: IFCs position a minimum of 75 percent of their assets to provide infrastructure loans.
- Hire Purchase Companies: These institutions support hire purchase transactions.
- Housing Finance Companies: These NBFCs carry out the principal business of providing loans to construct houses.
- Chit Funds Companies: These non-banking financial companies operate chit schemes, i.e. they accept periodic deposits over a fixed period from a definite number of subscribers.
NBFCs and Banks: Key Differences
The term non-banking financial company means that these companies are not banks. However, most activities of NBFCs are like banks except for some main differences. These are a few highlights of NBFC Vs Bank services on various parameters:
| Parameters | NBFCs | Banks |
| Broad meaning | Financial services companies require no banking licenses. | Government-authorized institutions require a banking license. |
| Legal compliance | Companies Act, 2013 | Banking Regulation Act, 1949 |
| Eligibility of foreign investment | Eligible for 100 percent foreign investment. | Eligible for up to 74 percent foreign investment. |
| Reserve funds | Not mandatory | Mandatory |
| Availability of insurance on deposits | Not available | Available |
| Credit creation | NBFCs cannot create credit. | Banks can create credit. |
| Transactional services | No transactional services are available. | Provide diverse transactional services. |
| Payment and settlement cycle | Do not take part in the payment and settlement cycle. | Banks are part of payment and settlement cycles. |
| Purpose of deposits | NBFCs accept deposits as security. | Banks accept a deposit as their primary function. These are payable to depositors on demand. |
| Cash Reserve Ratios and Statutory Liquidity Ratios | Maintenance of CLR and SLR is not mandatory. | Banks must maintain CLR and SLR. |
NBFCs and banks are separate entities with unique business models and regulatory provisions. Unlike banks, NBFCs do not require a banking license, though it performs similar operations.
NBFCs do not provide transactional services like online payments, cash deposits, and withdrawals, unlike banks. The services by banks include cheque payments, fund remittance, credit and debit card facilities, and savings or current account services. Unlike banks, NBFCs ensure faster loan approval and disbursement.
The Takeaway
Non-banking financial companies provide several financial services to small and medium companies and individuals. These companies do not require banking licenses to deliver financial products and services but need registration under the Companies Act of 2013.
The primary operations of NBFCs focus on loans, equity acquisition, insurance services, government bonds, and housing finance services.
Deposit-accepting and non-deposit-accepting non-banking financial companies are the main types of NBFCs. Non-banking financial companies cater to the diverse requirement of different segments of society, as banking services cannot provide comprehensive financial help. NBFCs provide the benefits of end-to-end financial services, smooth application processes, and faster loan processing.