Non-Banking Financial Companies: Download NBFCs Notes PDF

By durga|Updated : June 21st, 2022

NBFCs (Non-Banking Financial Companies) is a company that has been registered under the Companies Act, 1956. NBFCs are the organizations that offer bank-related services without having banking licenses. Even though NBFC provides financial services, it differs from the banks in many ways.

NBFCs are supervised by the Reserve Bank of India. The motive behind the emergence of NBFCs was to meet the financial needs that weren’t met by the baking system of India. All the UPSC aspirants must understand everything about the non-banking finance companies as it is an imperative topic from the UPSC exam perspective.

Table of Content

What are NBFCs?

NBFCs are known as the non-banking financial companies that offer financial services and products but they are not officially recognized as a bank with a banking license.

  • The activities of NBFCs 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 NBFC activities, NBFC registration is required. 
  • Some of the popular examples of NBFCs include- ICICI Ventures, SBI Factors Kotak Mahindra Finance, and Sundaram Finance.

Latest Updates on Non-banking Finance Companies

Recently the RBI has proposed a strict regulatory framework for the NBFCs by creating a four-tier structure with a progressive increase in the 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 NBFCs from 180 days to 90 days overdue.

Proposed Classification of NBFCs (Four-Tier Structure)

The supervisory and regulatory framework of NGFCs must be based on 4- a layered structure.

Base layer

  • NBFCs in the lower layer would be known as the NBFCs Base-layer
  • Here least regulatory intervention is warranted

Middle Layer

  • The NBFCs 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

Upper Layer

  • NBFCs 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 for systemic spill-over of risks, and the ability to influence the financial stability

Top Layer

  • This layer is supposed to be empty.
  • This top layer of the pyramid would be empty unless supervisors take a view on specific NBFCs 

Criteria for NBFCs License

To get an NBFC license the company 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 NBFCs 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 NBFCs

There are three broad heads under which the NBFCs 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 finance companies

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 Company 
  • Infrastructure Finance Company (IFC)
  • Mortgage Guarantee Company (MGC)

On the basis of the size of their assets

  • Non-systematically Important NBFCs
  • Systematically Important NBFCs

Different Between NBFCs and Banks

A few activities of NBFCs are akin to that of banks, for example, NBFCs lend and make investments. However, there are a few differences that set them apart.

  • NBFCs 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.
  • NBFCs 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 NBFCs.

Significance of NBFCs

Below we have pointed out some importance of NBFCs

  • In a country like India, where access to bank finance remains a challenge for a large population, NBFCs play a crucial role.
  • NBFCs 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
  • non-banking finance companies are an essential part of the economy’s financial sector because of their inherent characteristics.

Challenges with NBFCs

The criticism faced by NBFCs is 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

NBFCs UPSC 

The NBFCs UPSC Notes have highlighted the crucial information related to NBFCs which aid in the UPSC Preparation. Questions from NBFCs can be asked in both UPSC Prelims and UPSC Mains exams, and that’s why candidates must be well-prepared with the NBFCs 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.

NBFCs UPSC Notes PDF

To make the preparation easier and more feasible candidates must download the NBFCs UPSC notes directly from the link given below. The PDF file contains all the important facts and information related to the NBFCs.

>> Download NBFCs UPSC Notes PDF

Other Important UPSC Notes
Human Development Index UPSC NotesCabinet Mission Plan 1946 UPSC Notes
World Economic Forum UPSC NotesGovernment of India Act of 1919 Notes for UPSC
Indian Independence Act 1947 UPSC NotesGoods and Services Tax (GST) Council Notes for UPSC
Kushan Empire & Dynasty UPSC NotesG20 Summit UPSC Notes
Fundamental Rights UPSC NotesIUCN Notes for UPSC
Indian Council Act 1861 UPSC NotesParticularly Vulnerable Tribal Group PVTG UPSC Notes
Indian History UPSC NotesIndian Economy Notes for UPSC
Charter Act 1833 UPSC NotesMahalwari System Notes for UPSC Exam
Jal Jeevan Mission Notes for UPSCWildlife Protection Act 1972 Notes PDF
Organic Farming Scheme Notes for UPSCArtificial Intelligence UPSC Notes
Nanotechnology in India Notes for UPSCMountbatten Plan Notes for UPSC
Indus Water Treaty Notes for UPSCContinental Drift Theory UPSC Notes
Asian Development Bank UPSC NotesIndus Water Treaty 1960 UPSC Notes
Charter Act 1813 Notes for IAS ExamCharter Act 1853 UPSC Notes
Biosphere Reserves in India Notes for UPSC ExamUPSC Notes - Morley minto Reforms
Revolt of 1857 Notes for UPSCStructure of Atmosphere UPSC Notes
Regulating Act of 1773 UPSC Polity NotesRyotwari System UPSC Notes
Tiger Conservation in India UPSC NotesEnvironmental Impact Assessment (EIA) Notes for UPSC
e-Governance UPSC NotesInvestment Models Notes PDF for UPSC
Pitt’s India Act 1784 UPSC NotesGovernment of India Act 1858 Notes PDF for UPSC
Cyber Security UPSC NotesCripps Mission 1942 Notes PDF for UPSC
National Hydrogen Mission UPSC NotesGlobal Hunger Index (GHI) 2021 Notes for UPSC
National Green Tribunal Act UPSC NotesMonetary Policy Committee UPSC Notes
PM-Kisan Samman Nidhi Yojana Notes for UPSCInternational Atomic Energy Agency UPSC Notes
Ocean Currents Notes for UPSCIndia State of Forest Report 2021 UPSC Notes
Central Pollution Control Board Notes for UPSCNITI Aayog UPSC Notes
Civil Disobedience Movement UPSC Notes104 Constitutional Amendment Act UPSC Notes
Ramsar Convention UPSC NotesCitizen’s Charter UPSC Notes
Indus Valley Civilization UPSC NotesAnti-Defection Law UPSC Notes

Comments

write a comment

NBFCs UPSC FAQs

  • NBFCs are the Non-Banking Financial Companies. They have been registered under the Companies Act, 1956. These Non-Banking Financial Companies are the organizations that offer bank-related services without having banking licenses.

  • The Department of Non-Banking Supervision (DNBS) is responsible for the regulation and supervision of Non-Banking Financial Companies (NBFCs) under the regulatory - provisions contained in Chapter III B and C and Chapter V of the Reserve Bank of India Act, 1934.

  • The non-banking institutions include insurance firms, microloan organizations, venture capitalists, currency exchanges, and pawn shops. These non-banking finance institutions offer services that may not suit banks but serve as a competition to banks. 

  • NBFCs are non-banking finance companies registered under the Companies Act, 1956. They are involved in the business of accepting deposits and delivering credit and play a crucial role in improving the scarce financial resources for capital formation.

  • A few examples of NBFCs are Power Finance Corporation Limited, Shriram Transport Finance Company, Bajaj Finserv, Mahindra & Mahindra Financial Service, Muthoot Finance Ltd, etc.

  • As of January 1, 2021, there were a total of 9,507 non-banking finance companies or NBFCs registered with the RBI.

  • NBFCs don’t form part of the payment and settlement system and can’t issue cheques drawn on themselves. Like banks, NBFCs can’t issue demand drafts. Unlike in case of banks. The deposit insurance facility of deposit insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.

  • NBFCs can offer loans and credit facilities and can trade in money market instruments. NBFCs can also perform wealth management, for example- managing portfolios of shares and stocks. NBFCs also charge fewer fees than the banks which makes them more profitable compared to the banks.

  • NBFCs can offer services such as credit facilities and loans, money markets, currency exchange, underwriting, and merger activities. 

  • Yes, according to the recently published Financial Stability Report of the Reserve Bank of India, NBFCs are profitable in India. 

Related Posts

What is National Integration?
What is National Integration?Yesterday, 10 am|1 upvotes
What is Agricultural Extension Service?What is Agricultural Extension Service?Yesterday, 10 am|2 upvotes
Comprehensive News Analysis  27-06-2022
Comprehensive News Analysis 27-06-2022Yesterday, 10 am|19 upvotes

Featured Articles

Follow us for latest updates