What is a Non-Banking Financial Company (NBFC)?

About Non-Banking Financial Company (NBFC):

• It is a company registered under the Companies Act, 1956, engaged in the business of loans and advances, the acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
• It does not include any institution whose principal business is that of agriculture activity, industrial activity, the purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. 
• A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions, or in any other manner, is also a NBFC (Residuary non-banking company).
• Generally, these institutions are not allowed to take traditional demand deposits from the public. They can only accept time deposits and they do not provide savings or current account facilities.
  • They cannot accept deposits for a period less than 12 months and more than 60 months.
  • They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum.
• They also provide a wide range of monetary advice like chit-reserves and advances.
• They lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences as given below:
  • They do not have a banking license;
  • They cannot accept demand deposits;
  • They do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
  • Unlike banks, NBFCs are not subjected to stringent and substantial regulations. 
• Regulation:
  • The functions of the NBFCs are managed by both the Ministry of Corporate Affairs and the RBI.
  • The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure that they adhere to the established norms and regulations.
• NBFCs are categorized
  • in terms of the types of liabilities into Deposit and Non-Deposit accepting NBFCs,
  • non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and by the kind of activity, they conduct.
• What are systemically important NBFCs?
  • NBFCs whose asset size is ₹ 500 crore or more as per the last audited balance sheet are considered 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.
• Examplesof NBFCs include investment banks, mortgage lenders, money market funds, insurance companies, equipment leasing companies, infrastructure finance companies, hedge funds, private equity funds, and P2P lenders.