What are Non-Banking Financial Institutions?

Non-Banking Financial Institutions are organizations that offer bank-related services without having banking licenses . NBFCs have been registered under the Companies Act, of 1956.NBFCs are regulated by the Reserve Bank of India (RBI) and play a significant role in providing credit and financial services to underserved segments of the population. Payment Banks World Bank

Who regulates Non-Banking Financial Institutions?

The RBI regulates the NBFC and the Department of Non-Banking Supervision (DNBS) is responsible for the supervision of the NBFC under the regulatory – provisions contained in Chapters III B and C and Chapter V of the Reserve Bank of India Act, 1934.

Which are the Non-Banking Financial Institutions?

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 competition to banks.

What do non-banking financial companies do?

NBFCs are non-banking finance companies registered under the Companies Act, of 1956. Non-Banking Financial Institutions 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.

What are the examples of NBFC in India?

A few examples of NBFCs are Power Finance Corporation Limited, Shriram Transport Finance Company, Bajaj Finserv , Mahindra & Mahindra Financial Service, Muthoot Finance Ltd, etc. These NBFCs offer a range of financial services such as loans, leasing, hire-purchase, investments, and money transfer services.

How many NBFCs are in India?

As of October 2022, there were a total of 9,500 Non-Banking Financial Institutions or NBFCs registered with the Reserve Bank of India. However, the number may increase in the future.

What is the difference between NBFC and bank?

There are various differences between Banks and NBFCs. NBFCs don’t form part of the payment and settlement system and can’t issue cheques drawn on themselves. Like banks, Non-Banking Financial Institutions can’t issue demand drafts. Unlike in the case of banks. The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs. Difference between Scheduled and Non-scheduled Banks Asian Infrastructure Investment Bank

What are the advantages of Non-Banking Financial Institutions?

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. Non-Banking Financial Institutions also charge fewer fees than banks, which makes them more profitable compared to banks.

What are the services provided by NBFC in India?

NBFCs in India offer a wide range of financial services to individuals and businesses. Some of the NBFC services in India are credit facilities and loans, money markets, currency exchange, underwriting , and merger activities.

Is NBFC in India profitable?

Yes, according to the recently published Financial Stability Report of the Reserve Bank of India, Non-Banking Financial Institutions in India are profitable . However, the profitability of NBFCs depends on a number of factors such as the type of services offered, the size of the NBFC, the market conditions, and the level of competition.

How to download NBFC UPSC notes?

A non-banking financial institution (NBFC) is a type of financial institution that provides banking and other financial services without meeting the legal definition of a bank . Candidates preparing for the Civil Services Exam can download the NBFC UPSC Notes from here .

How NBFC raise money?

Non-Banking Financial Institutions raise money by borrowing money from other financial institutions and accepting non-chequable deposits. The insurance, and mutual funds companies are examples of NBFCs in India.

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NBFC – Types, NBFC vs Bank, Non-Banking Financial Institution in India

By BYJU'S Exam Prep

Updated on: November 14th, 2023

NBFCs or Non-Banking Financial Institutions are the institutions that have been registered under the Companies Act, of 1956. NBFCs offer bank-related services without having banking licenses. Even though NBFCs provide financial services, they differ from banks in many ways. The Reserve Bank of India supervises Non-Banking Financial Institutions. The motive behind the emergence of NBFC was to meet the financial needs that weren’t met by the baking system of India.

In recent years, the role of NBFCs has gained even greater significance as they have emerged as a key source of credit for the rapidly growing digital economy. In this article, we will delve into the world of NBFCs, their importance, the types of NBFCs in India, and their impact on the financial landscape.

Table of content

1. What is NBFC?
2. Latest Updates on Non-Banking Financial Institutions(NBFC )
3. License Criteria for NBFC in India
4. Types of Non-Banking Financial Institutions
5. NBFC vs Bank
6. Significance of NBFC
7. Challenges with NBFC
8. NBFC UPSC

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. 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.

NBFC UPSC Notes

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 Reserve Bank of India 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 a 4-layered structure.

Base layer

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

Middle Layer

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

Upper 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 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 of 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 a Limited Company.
The company must have at least Rs. 2 crores of Net Owned Funds.

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

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

NBFC vs Bank

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 between banks and NBFCs.

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

The NBFC sector in India has undergone significant growth in recent years. 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.
NBFCs have played a critical role in promoting financial inclusion, especially in rural areas, by providing credit to those who may not have access to formal credit channels.
Moreover, NBFCs also contribute significantly to economic growth by creating employment opportunities and supporting the growth of various sectors of the Indian economy.

Challenges with NBFC

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. To address these challenges, NBFCs need to adopt best practices in risk management, governance, and compliance, and work closely with regulators and stakeholders.

NBFC UPSC

An understanding of NBFCs is important for aspirants preparing for the UPSC exam, as questions related to financial inclusion, economic development, and financial sector reforms often feature in the exam. Moreover, given the importance of NBFCs in the UPSC Economics Syllabus, a thorough understanding of their operations, regulations, and challenges can help aspirants develop a nuanced perspective on issues related to financial stability, risk management, and regulatory reforms. It is highly recommended to go through the best books, and economics notes for UPSC to prepare for this topic comprehensively.

NBFC UPSC Questions

Question: Which of the following is an example of a Non-Banking Financial Institution (NBFI)? a) State Bank of India b) ICICI Bank c) Housing Development Finance Corporation (HDFC) d) Indian Overseas Bank

Answer: c) Housing Development Finance Corporation (HDFC)

Question: Which of the following is not a type of Non-Banking Financial Institution (NBFI)? a) Insurance companies b) Mutual funds c) Money market funds d) Commercial banks

Answer: d) Commercial banks

Question: Which of the following is not a function of Non-Banking Financial Institutions (NBFI)? a) Providing credit facilities b) Mobilizing savings c) Providing deposit facilities d) Providing investment advice

Answer: c) Providing deposit facilities

Question: Which of the following is not a type of Non-Banking Financial Institution (NBFI)? A) Mutual Funds B) Insurance Companies C) Investment Banks D) Public Sector Banks

Answer: D) Public Sector Banks

UPSC Notes
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