NBFC INDUSTRY

The Non-Banking Financial Companies (NBFCs) comprise a whole host of institutions that
offer nearly all banking services except for issuing self-drawn checks and demand drafts.
Acting as financial intermediaries they can raise funds from the public, be it directly or
indirectly, and process loans to parties with pay-back capacity. This group could include
businesses such as wholesale/retail traders, small and medium enterprises, or self-employed
individuals. NBFCs are viewed as an extension of the banks, more often than not providing
financial assistance with a customer-first motto. Although banking in nature, it is important to
distinguish between an NBFC and a bank:
NBFCs offer banking services but don’t have a banking license
In the absence of a banking license, they are not liable to hold reserve ratios, unlike the
banks. 
They cannot accept demand deposits from the public
NBFCs are not covered under the Payment and Settlement Systems Act, 2007 (PSS Act) of
India.
Their primary mode of occupation cannot be an agricultural project, industrial activity, sale,
and purchase, or even construction of immovable property.
NBFCs are governed under the regulations set by the Reserve Bank of India. Such
regulations further demarcate the dos and don’ts for such financial institutions and provide a
blueprint for their business practices. For instance, NBFCs are not allowed to outsource
business functions that make up the spine of their internal operations. This includes internal
audits, portfolio and investment management, approving loans, and compliance measures that
ensure standard KYC practices.
 
Structure of the NBFC Segment in India

This sector comprises financial entities that offer diverse variations of financial instruments.
Their business model ranges from managing consumer wealth to disbursing capital and much
more.
Let us closely examine the types of NBFC institutions that we have in India:
1 Collective Investment Companies
The primary objective of such companies is to pool public capital and strategically invest in
the most promising projects to turn a profit. They include the following types of enterprises:
Asset Management
They attract pooled capital from clients to invest in financial instruments such as the stock
market (shares, bonds, etc.), and upcoming real estate projects bringing in the loop the
working class as their customer. Asset management companies at large, source high net
worth individuals and convince them to commit impressive sums of money into investment
schemes. In addition to managing hedge funds, and pension plans, asset management
envelopes the larger societal middle-class bracket by creating long-term saving prospects of
mutual funds, index funds, and exchange-traded funds.
Venture Capital Financing
Private Equity is an investment fund that purchases a majority stake (controlling shares) in a
business that is not publicly traded and works towards restructuring the company for an
appreciated ROI. Venture capital firms are a modern-day extension of traditional private
equity institutions where investment banks and ultra-rich investors lend money to fledgling
companies to accelerate growth. Venture capital companies aim to mark-up the valuation of
the company and exit the business having earned at 3 to 4 times multiple on their initial
investment.
Alternative Investment Funds
Such funds are accessible to well-off individuals and unregulated by legal institutions. As the
name suggests, they offer alternatives to commonly available investment opportunities in the
form of derivatives contracts, managed futures, commodities trading, and art and antiques to
name a few.
2 Credit Rating Agencies
These are institutions that calculate and rate a borrower's ability to pay the borrowed
principal as well as the interest under a specific period. Models to assess credit-worthiness
become complex as we go from individuals to institutions or even governments. Standard &
Poor’s (S&P) and Moody’s are some recognized credit rating agencies that evaluate
organizations and world governments.
3 Exchanges
An exchange is an organized and regulated marketplace where financial securities such as
commodities, futures, derivatives, and foreign exchange are traded. They are run by
intermediaries such as brokers and dealers who buy and sell the securities on behalf of
retail/institutional investors. They are classified into the following types based on security:
Stock Exchanges
They are the foremost threshold to purchase stocks, bonds, and shares in addition to other
financial instruments. The dividends earned overtime on such securities are also payable
through the stock exchange. The stocks could be issued by companies officially listed on that
exchange, bonds, derivatives, and unit trusts. Exchange trading is influenced by order
matching, i.e., the buyer bids for a particular security and when the seller accepts the bid-
offer, the trade-off takes place. Examples include the Bombay Stock Exchange (BSE), and
the National Stock Exchange of India (NSE).
Commodities Exchange
It is a marketplace where commodities are traded. The list of commonly traded commodities
includes edible (agricultural) products such as barley, wheat, maize, milk, coffee, in addition
to metals and oil. The mode of trading varies from spot trading for on-the-spot delivery to
forwards, futures, and options and derivatives.
Currency Exchange
Business entities that deal with foreign currency exchange rates are accorded the legality to
exchange one currency for another. Their mode of operation varies on who operates a
business. In moderate economies, such businesses could have standalone official centres. A
currency exchange could have a chain of service booths for over the counter operations. At
airports, large banks branch out to service to capitalize on traveller needs.
4 Broker
Brokers represent the buy-side and the sell-side in a security transaction. Financial
instruments are best purchased following the counsel of an advisor and the assistance of a
broker. For instance, professionals who place buy and sell orders for public shares listed on
the stock market, act as brokers.
5. Investment and Credit Company (ICC)
As per the new RBI guidelines for NBFC, the ICC merges three former categories of NBFCs
into one. Let us first understand these 3 categories:
The first category is an asset finance company. These companies are engaged in providing
financial support for the physical assets of a business. The assets could range from
machinery, automobile, generators, tractors, etc. that give the business a monetary impetus.
The second category is Loan Companies that advance financial assistance for activities other
than their own, excluding equipment leasing.
The third category is Investment Companies that are permitted by the RBI to purchase and
sell securities.
The aforementioned categories have been merged into Investment and Credit Company. The
duties of the ICC stay collectively the same as they were for asset finance companies, loan
companies, and investment companies.
6. Infrastructure Finance Company (IFC)
Such NBFCs have to deploy three-fourth of their assets towards infrastructural loans.
Infrastructure could vary as follows:
Transport – Roads, ports, inland waterways, airports, railway tracks, tunnels, bridges, and
urban public transport.  
Energy – Electricity generation, transmission, and distribution, oil pipelines, oil/gas/LPG
storage facility, and gas pipelines.
Water & Sanitation – Solid waste management, water supply pipeline, water treatment
pipeline, sewage collection, irrigation channels, and stormwater drainage system.
Communication – Fixed networks for telecommunication, and towers
Social and Commercial Infrastructure – Education Institutions, Hospitals, 3-star or higher
category hotels situated outside cities with a population over 1 million. It also includes
common infrastructure for industrial parks, capital investment for fertilizers, post-harvest
storage infrastructure for agriculture, soil-testing laboratories, and terminal markets.
 
7. Infrastructure Debt Fund: Non-Banking Financial Company (IDF-NBFC)
They provide long-term debt for infrastructure projects by raising funds through Multiple
Currency bonds of (at least) 5-years maturity. The law states that only Infrastructure Finance
Companies have the legal capacitance to sponsor IDF-NBFCs.
8. NBFC-Factors
Such non-banking financial companies are heavily involved in the business of factoring. In
finance, factoring is a classification of debtor finance wherein a business can sell its invoices
to a third-party vendor (referred to as a factor) at a discount rate.
9. Residuary Non-Banking Companies (RNBCs)
The core nature of such companies is receiving fund deposits. They operate as long as their
principal business is accepting deposits from schemes, and agreements and not be a loan
company, make investments, or finance asset creation. On term deposits, they offer a rate of
interest of 5% per annum and 3.5% on daily deposits, compounded annually. RNBFCs are
not allowed to accept deposits for more than 84 months and less than 12 months. The law
inhibits their power to promote deposits by gifts or incentives. Furthermore, the deposits
made with them are not payable on demand.
10. Account Aggregators
This class of Non-Banking Financial Institutions was legalized by the Reserve Bank of India
in 2016. Account Aggregation refers to the process of compiling and consolidating data from
multiple sources (accounts) such as investment accounts, bank accounts, credit card accounts,
or consumer/business accounts. As per RBI guidelines, account aggregators should offer such
services to financial institutions having sought customer consent. As of writing, seven
account aggregators have procured in-principal approval from the Central Bank in India with
one of them in the penultimate phases of going live.
The overall NBFC sector is projected to grow at 10-12% for the financial year 2020. The
industry has serious government attention with steps to up consumer confidence while
maintaining secure and transparent channels for customers to avail NBFC services.