NBFC

NON BANKING FINANCIAL COMPANIES

 In a country like India with a huge
population, it is impossible for banks to cater to all sections of
the society as many areas are inaccessible and remote. Also,
to provide banking facilities to the illiterate and the poor,
finance institutions that work on similar lines as banks are
required. In India, this requirement has traditionally been
fulfilled by NBFC, or non banking financial company. As the
name suggests, NBFC is not a bank though it performs many
functions similar to that of banks.

NBFC is required to be registered

under the Companies Act 1956 to be able to perform
functions similar to a bank. Normally, a NBFC is engaged in
the business of loans and advances, acquisition of shares,
debentures, stocks, bonds and securities issued by the
government. It also indulges in hire-purchase, leasing,
insurance and chit business.
"Non-banking financial company" means-
(i) a financial institution which is a company;
(ii) a non banking institution and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other
manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the bank
may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.

NBFCs as described by RBI in points are-

EQUIPMENT-LEASING COMPANY;
HIRE-PURCHASE COMPANY;
LOAN COMPANY;
INVESTMENT COMPANY
They are also categorized in a different format among 8 categories-
LOAN COMPANY
HIRE PURCHASE COMPANY
INVESTMENT COMPANY
MUTUAL BENEFIT COMPANY
MISCELLANEOUS NON-BANKING FINANCIAL COMPANY-CHIT FUNDS
RESIDUARY FINANCE COMPANY
HOUSING FINANCE COMPANY
EQUIPMENT LEASING COMPANY

Another and recent way of categorizing NBFCs is as under-

ASSET FINANCING COMPANY(AFC)
INVESTMENT COMPANY(IC)
LOAN COMPANY(LC)
(This is with effect from december,2006)
 Definition
“A Non-Banking Financial Company (NBFC) is a company
• registered under the Companies Act, 1956 and
•is engaged in the business of
loans and advances,
acquisition of shares/ stock/ bonds/ Debentures
securities issued by Government or local authority or other
securities of like marketable nature,
leasing, hire-purchase, insurance business, chit
business.”
It does not include any institution whose principal business is
that of agriculture activity, industrial activity,
sale/purchase/construction of immovable property.
 NBFCs : CLASSIFICATION

• FUND BASED ACTIVITIES

– Deposits, Equipment Leasing, Hire Purchase, Bills
Discounting, Loans/ Investments, Housing Finance,
Factoring, Credit Cards etc.
• FEE BASED ACTIVITIES
– Issue Management, Portfolio Management, Corporate
Counselling, Loan/Lease Syndi-cation, M & A, Capital
Restructuring, Credit Rating, etc.

NBFCs Financial Services 6

 Types of NBFC
– Loan Companies: Lend money to companies and individuals. Eg: Housing
finance companies

– Investment Companies: These companies mobilize savings and invest them in

industrial securities. They provide the benefits of diversification of risk and a
steady return to investors. Eg: UTI, LIC

– Leasing Companies: They provide loans to small firms and individuals who
want to buy new machines and equipment.

– Chit Funds: Under this scheme the promoter collects subscriptions at

specified time periods from enrolled members and the amount so collected if
handed over to a member on rotation.

– Housing Finance Companies: HUDCO is a national level institution which

gives loans to individuals and societies for building houses and flats
 Types of NBFC
• Asset finance Companies (AFC)
AFC are financial institutions whose principal business is of financing
physical assets such as automobiles, tractors, construction equipments
material handling equipments and other machines.
ex: Bajaj Auto Finance corp. , Fullerton India etc
• Investment Companies (IC)
ICs generally are involved in the business of shares, stocks, bonds,
debentures issued by government or local authority that are marketable in
nature
ex: Stock Broking Companies, Gilt firms
• Loan Companies (LC)
LCs are loan giving companies which operate in the business of providing
loans. These can be housing loans, gold loans etc
ex: Manapuram Gold Finance, HDFC
BANKS-financial institutions-reached the major section of every country of the
world
still there were some rural, under-privileged and under-served sections in each
of the nations
Requirement of the services of some
financial institution which could cater to their
needs.
Lead to the creation of the NON-BANKING
FINANCIAL COMPANIES or simply NBFCs.

UNTOUCHED AREAS

IMPORTANT ROLE TO BE PLAYED

NEED OF BETTER FINANCIAL SERVICES

UNDER-SERVICED SEGMENTS
NBFCs –concentrate their activities on areas NOT ENTERTAINED by the BANKING
sector -like-
1. HIRE-PURCHASE
2. LEASING
3. EQUIPMENT-LEASING
4. LOANS
5. CHIT FUNDING,etc.
Cost efficiency -NBFCs are better than Banks-
NBFCs-important role in the provision of QUALITY CUSTOMER SERVICES -much
better than banks can ever do.
difference between bank & NBFC
• NBFC cannot accept demand deposits.
• It is not a part of the payment and settlement
system. NBFC cannot issue checks drawn on itself.
• Deposit insurance facility of DICGC is not available for
NBFC depositors unlike in case of banks.
• NBFC cannot indulge primarily in agricultural or
industrial activity
• NBFC cannot engage in construction of immovable
property
• While banks are incorporated under banking
companies act, NBFC is incorporated under company
act of 1956
So to sum up we can define this section “BANKS OVER NBFCs” in the following
points-
 functions
• Act as supplier of loan and credit facilities.
• Supporting investment in property.
• Trade money market instruments.
• Fund private education.
• Underwrite stocks and shares.
• Advise companies merger and acquisition.
• Portfolio Management
 Importance

• Development of sectors like Transport & Infrastructure

• Substantial employment generation
• Help & increase wealth creation
• Broad base economic development
• Irreplaceable supplement to bank credit in rural segments
• Major thrust on semi-urban, rural areas & first time
buyers/users
• To finance economically weaker sections
• Huge contribution to the State exchequer
 IMPORTANT ROLE IN MACRO
ECONOMICS PERSPECTIVE
REACH THE UNDER-DEVELOPED
SECTOR
AREAS UNTOUCHED BY BANKS-
LEASING, LOANS, ETC.
HIGH QUALITY CUSTOMER SERVICE
TO RETAIL CUSTOMERS.
FINANCING COMMERCIAL VEHICLES
AND EVEN SMALL BUSINESSES.
 NBFCs in India: OVERVIEW
 13000+ players registered under RBI :

 Spread all across the country

 Approx. 570 NBFCs authorized to accept public deposits
 Assets worth Rs. 15000 Crore financed annually & growing steadily

 Concentrated on
 Commercial vehicles
 Passenger cars
 Multi-utility & multi-purpose vehicles
 Two-wheelers & Three-wheelers
 Construction equipments
 Consumer durables
Reliance Capital, an arm of the Anil Dhirubhai Ambani Group, will set up a
separate housing financial subsidiary and non-banking financial company
(NBFC) for the consumer finance sector.
Ambani said his company is also planning to selectively expand its

• asset management
• life insurance, and
• broking operations

in emerging markets across Asia, Africa and the

Middle East.