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NBFCs INTRODUCTIONS

Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still exercised under bank regulation. A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bond Hire-purchase, insurance business, or chit business but does not include any institution whose principal business is that includes agriculture or industrial activity; or the sale, purchase or construction of immovable property.

Services provided
NBFCs offer most sorts of banking services, such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term Finance Certificate) and other obligations. These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business. Non-bank institutions also frequently support investments in property and prepare feasibility, market or industry studies for companies. However they are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments.

Every NBFC should be registered with RBI


In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies / Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.

Commercial Banks v/s NBFCs


Commercial banks and non-banking companies are both financial intermediaries receiving deposits from public and lending them or investing them as the case may be according to circumstances. Hence, NBFCs are called Para banks. But there are some vital differences between them. They are: 1) An NBFCs cannot accept demand deposits like banks do 2) Cheque can be issued against bank deposit whereas no such facility is available in the case of NBFCs. 3) The commercial banks can manufacture credit out of the raw material of deposits by creating claims against themselves. But, NBFCs cannot create credit as commercial banks do. They can lend only out the resources on hand. So, they have limited capacity to create credit. 4) Commercial banks are able to enjoy certain facilities like rediscounting facilities, deposit insurance coverage facilities, refinancing facilities,etc. These facilities are not extended to NBFCs. 5) Generally, the commercial banks offer lesser rate of interest and also charge lesser rate of interest than that of the NBFCs. 6) Commercial banks are subjected to strict supervision and control of the RBI where as the NBFCs are more or less completely free from the RBI's control. 7) A variety of assets in the form of loans of various types, cash credits, overdrafts, bills discounting etc. are held by commercial banks whereas the asset of NBFCs are more or less specialized in nature. For instance, hire purchase companies specialize in consumer loans and housing finance companies specialize in housing finance alone.

Types of NBFCs registered with RBI 1) Hire-purchase finance companies:Hire Purchase Finance Company means company is carrying on as its business the hire purchase transactions or the financing or the financing of such transactions. Hire-purchase or installment credit is needed by transport operators, farmers and professionals needing equipment who find it difficult to offer security to the lending institutions. In this form of credit, the goods themselves serve a security because they remain the property of the lender until the loan has been repaid. It is a less risky business since the goods purchased on hire purchase basis themselves serve as securities till the last installment of the loan is paid. In fact, a major share of the hire purchase goes to the automobile industry. The recovery problem does not arise in most cases, since, the borrower is able to repay out of future earnings, viz., the regular inflow of funds out of the assets purchased.

2) Investment Companies:Investment Company means any company, which is carrying on as its principal business the acquisition of securities. An investment company may also be called as an investment trust. The principle aim of an investment company is to protect the small investors by collecting their small savings and investing them on diversified securities so that risk may be spread. As individual, they cannot do this. But, the investment company has formed for the collective investment of money subscribed by many investor particularly small investors. Besides, it gives its investors the investment company, there is also investment counsel. An investment counsel company engages itself purely in the giving investment advice alone. It helps the investors to select a sound and liquid security. Again, there is a holding company which essentially buys shares and stocks mainly for the purpose of exercising control over another institution. It generally purchases the shares of the same company in order to have a control over it rather than purchasing shares of different companies.

3) Asset Finance Company (AFC):AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines.

Functions of Non-Banking financial Companies


1)

Receiving of Deposits:-The primary function of non-banking financial

institution is to receive deposits from the public in various ways such as issue of debentures, unit certificates, savings certificates, subscription etc. Hence, deposits of non-banking companies comprise of money received from the public by way of deposits or a loan or in any other form. 2) Lending of money:- Another equally important function is lending of money. Non-banking companies provide financial assistance in various formshire purchase finance, leasing finance, consumption finance, and finance for social activities and so on. Easy and timely finance is available and generally those customers who have been denied of bank finance approach these companies and enjoy the credit facilities extended by them. 3) Investment of money:- These companies also invest their surplus money on various outlets. In the case of investment companies, their main function is to invest on principle securities and pass on the benefits to small investors.

Important regulations relating to acceptance of deposits by NBFCs


1) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. 2) NBFCs 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. The interest may be paid or compounded at rests not shorter than monthly rests. 3) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. 4) NBFCs (except certain AFCs) should have minimum investment grade credit rating. 5) The deposits with NBFCs are not insured. 6) The repayment of deposits by NBFCs is not guaranteed by RBI. 7) Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.

List of NBFCs permitted to accept Public Deposits


Klug Investments Pvt. Ltd. Bajaj Finance Ltd. Mahindra & Mahindra Financial Services Ltd Hero Financial Services Ltd. Sahara India Financial Corporation Ltd. Adarsh Genaral Motor Financiers Ltd

Conclusion
NBFCs are gaining momentum in last few decades with wide variety of products and services. NBFCs collect public funds and provide loan able funds. There has been significant increase in such companies since 1990s. They are playing a vital role in the development financial system of our country. The banking sector is financing only 40 per cent to the trading sector and rest is coming from the NBFC and private money lenders. At the same line 50 per cent of the credit requirement of the manufacturing is provided by NBFCs. 65 per cent of the private construction activities was also financed by NBFCs. Now they are also financing second hand vehicles. NBFCs can play a significant role in channelizing the remittance from abroad to INDIAN states.