NON-BANKING FINANCIAL COMPANY (NBFCs)

March 31, 2019

Lower-rated companies are still finding it difficult to raise funds due to aversion in bank lending to non-banking finance companies (NBFCs), rise of credit costs for these companies in the last six months and Heavy borrowings by public sector companies.

About:

  • A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature.

  • RBI, under the RBI Act 1934 has the power to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business.

Banks vs NBFCs:

NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:

  1. NBFC cannot accept demand deposits;

  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

  3. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Systemically important NBFCs:

  • NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs.

  • The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.