What is NBFC?
NBFC is known as a non-banking financial institution that offers financial services and products, but it is not officially recognized as a bank with a banking license.
>>Download NBFC UPSC Notes PDF
- The activities of Non-Banking Financial Institutions(NBFI) include lending and other financial services like providing loans & advances, credit facilities, trading in the money market, savings and investment products, managing stock portfolios, money transfers, etc.
- Additionally, their activities also include leasing, hiring, venture capital finance, infrastructure finance, and so on.
- Before beginning the Non-Banking Financial Institutions activities, NBFC registration is required.
- Some of the popular examples of Non-Banking Financial Institutions include- ICICI Ventures, SBI Factors, Kotak Mahindra Finance, and Sundaram Finance.
Latest Updates on Non-Banking Financial Institutions(NBFC )
Recently, the RBI has proposed a strict regulatory framework for the NBFCs by creating a four-tier structure with a progressive increase in regulation intensity.
- In 2020, RBI announced a host of measures to offer liquidity aid to NBFCs
- RBI has also proposed the classification of non-performing assets of base layer Non-Banking Financial Institutions from 180 days to 90 days overdue.
Proposed Classification of Non-Banking Financial Companies (Four-Tier Structure)
The supervisory and regulatory framework of NGFCs must be based on 4- a layered structure.
- NBFCs in the lower layer would be known as the NBFC-Base layer
- Here least regulatory intervention is warranted
- The Non-Banking Financial Institutions in the middle layer would be known as NBFC-ML or NBFC- Middle Layer
- Here, the regulatory regime is strict compared to the base layer
- Non-Banking Financial Institutions in the upper layer would be known as NBFC-UL or NBFC-Upper Layer
- This layer would be crowed by the NBFCs that have great potential of systemic spill-over of risks, and the ability to influence the financial stability
- This layer is supposed to be empty.
- This top layer of the pyramid would be empty unless supervisors take a view on specific Non-Banking Financial Institutions.
License Criteria for NBFC in India
To get a license the Non-Banking Financial Institutions in India must meet the following criteria
- The company should be registered as per the Companies Act
- The corporation must be either a Private Limited Company or Limited Company
- The company must have at least Rs. 2 crores of Net Owned Fund
Following Non-Banking Financial Institutions are spared from the requirement of registration with the Reserve Bank of India:
- Merchant Banking Companies/ Venture Capital Fund/ Stockbroking companies registered with SEBI
- Chit companies as defined in clause (b) of section 2 of the Chit Funds Act, 1982
- Nidhi companies that are notified under section 620A of the Companies Act, 1956
- Insurance companies holding a Registration certificate issued by IRDA
- Stock exchange company
- Housing finance companies that are regulated by NHB (National Housing Banks)
Types of Non-Banking Financial Institutions (NBFC)
There are three broad heads under which the NBFC in India can be categorized:
- On the basis of deposits
- On the Nature of their activity
- On the basis of the size of their assets
On the basis of deposits
- Deposit-taking non-banking finance companies
- Non-Deposit taking Non-Banking Financial Institutions
On the Nature of their activity
- Asset Finance Company (AFC)
- Non-Banking Financial Company-Factors (NBFC-Factors)
- Investment Company (IC)
- Systematically Important Core Investment Company (CIC-ND-SI)
- Non-Banking Financial Company: Micro Finance Institutions (NBFC-MFI)(IDF-NBFC)
- NBFC-Non-Operative Financial Holding Company (NOFHC)
- Loan Company (LC)
- Infrastructure Debt Fund: Non-Banking Financial Institutions
- Infrastructure Finance Company (IFC)
- Mortgage Guarantee Company (MGC)
On the basis of the size of their assets
- Non-systematically Important NBFCs
- Systematically Important Non-Banking Financial Institutions
Difference Between Banking and Non-Banking Financial Institutions in India
A few activities of NBFC are akin to that of banks; for example, Non-Banking Financial Institutions lend and make investments. However, there are a few differences that set them apart.
- Non-Banking Financial Institutions are types of financial institutions in India that offer banking services without a banking license but on the other hand, Bank is a government-authorized financial intermediary which aims to provide banking services.
- NBFC can’t accept demand deposits
- They don’t form part of the payment and settlement system. Also, they can’t issue cheques drawn on themselves.
- Credit Guarantee Corporation and the deposit insurance facility of Deposit Insurance are not available to the depositors of Non-Banking Financial Institutions.
Significance of NBFC
Below, we have pointed out the importance of non-banking financial companies in India.
- In a country like India, where access to bank finance remains a challenge for a large population, NBFC plays a crucial role.
- Non-Banking Financial Institutions are the types of financial institutions that offer services to the market segments that the commercial banks don’t due to high risk and low returns
- NBFCs are an essential part of the economy’s financial sector because of their inherent characteristics.
Challenges with NBFC
The criticism faced by Non-Banking Financial Institutions in India are as follows:
- NBFCs are not heavily regulated, just like banks. Due to this, a huge risk was highlighted during the 2008 Global Financial Crisis, where the lending practices of the companies were unchecked. In the end, it resulted in a disastrous outcome.
- The IL&FS default and turbulence in the Indian Credit Market in 2018 pointed out some fundamental and critical questions about the role of NBFCs and their business model
The NBFCs UPSC Notes have highlighted the crucial information related to NBFCs which aid in the UPSC Preparation. Questions from Non-Banking Financial Institutions can be asked in both UPSC Prelims and UPSC Mains exams, and that’s why candidates must be well-prepared with the NBFC UPSC Notes. They must analyze the UPSC Previous Year Question Paper and go through the right UPSC Books to strengthen their preparation. The way UPSC has framed the questions in the past years is tough which is why the preparation must be followed by an effective strategy and robust study plan.
Other Important UPSC Notes