Course Code: 18BMC205A

Course Title: Banking and Financial Institutions

Course Leader

Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in

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 Lecture No. 2
Regulations Governing Non- Banking Financial Institutions

At the end of this session, students will be able to:

– Understand Non Banking Financial Institutions

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 Contents

 Meaning of NBFI
 Difference between NBFI and banks
 Importance and Role of NBFI
 Functions and Regulations
 Types and Guidelines
 Top five NBFI

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 Financial Institution
A financial institution is an institution which collects funds from
the public, and places them in financial assets, such as deposits,
loans and bonds rather than tangible property.

FINANCIAL INSTITUTION

Banking Non banking

institution institution
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 Non Banking Financial Institution

A non-bank financial institution (NBFI) is a financial institution

that does not have a full banking license or is not supervised by a
national or international banking regulatory agency.
 Non-banking financial institutions, are financial institutions that
provide banking services, but do not hold a banking license. These
institutions are not allowed to take deposits from the public.

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 NBFI’s VERSUS BANK’s
BANKS NBFIS

Definition Banking is acceptance of deposits NBFI cannot accept

withdraw able by cheque or demand; demand deposits NBFI
are companies
carrying financial
business

Scope of business Scope of business of the bank is There is a various types of

limited. business regarding financial
activities.

Major limitation on No non banking activity are Cannot provide checking

Business carried. facilities.

Need for a license License norms are tightly controlled It is comparatively much
and generally it is perceived to be easier to get a registration
quite difficult to get a license for a as an NBFI.
bank
Regulations BR Act and RBI Act lay down the Much lesser control over
stringent control over the bank. NBFI
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 Importance
 Non banking financial institutions have the following
importance in Indian economy.
 Greater reach.
 Flexibility in tapping resources.
 Retail services to small and medium business.
 Important component of financial
market.

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 Role of NBFIs

 Development of sectors like Transport

& Infrastructure
 Substantial employment generation
 Help & increase wealth creation
 Broad base economic development
 To finance economically weaker sections
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 Functions
 Brokers of loanable funds
 Mobilization of savings
 Channelization of funds into investment
 Stabilize the capital market

 Provide liquidity

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 Regula tion
 RBI Act, 1934, it is mandatory that every NBFI should be registered
with RBI to commence or carry on any business of non-banking
financial institution.

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 Types of NBFI

Risk
pooling
institutions

Financial Contractual
services saving
providers institutions

types

Specialized
Market
sectoral
makers
financiers
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 Types of NBFI

 Risk-pooling institutions:
•Insurance companies underwrite economic risks associated with
illness, death, damage and other risks of loss.
•There are two main types of insurance companies: (a)general
insurance (b)life insurance.

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 Types of NBFI cont.

 Contractual savings institutions:

Contractual savings institutions (also called institutional investors)

give individuals the opportunity to invest in collective investment
vehicles (CIV).
• Collective investment vehicles pool resources from individuals
and firms into various financial instruments including equity, debt
and derivatives.
Eg- mutual funds, pension funds.

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 Types of NBFI cont.
 Market makers

Market makers are broker-dealer institutions that quote a buy and

sell price and facilitate transactions for financial assets. Such assets
include equities, government and corporate debt, derivatives, and
foreign currencies.

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 Types of NBFI cont.

 Specialized sectoral financiers:

They provide a limited range of financial services to a targeted

sector. For example, real estate financiers channel capital to
prospective homeowners, leasing companies provide financing for
equipment and payday lending companies that provide short term
loans to individuals that are under banked or have limited
resources.

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 Types of NBFI cont.
• Financial service providers Financial service providers include
brokers management consultants, and financial advisors, and
they operate on a fee-for-service basis.
• Their services include: improving informational efficiency for the
investors and, in the case of brokers, offering a transactions
service by which an investor can liquidate existing assets.

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 Company’s under NBFC

They are also categorized in a different format among 8 categories

• Loan company
•Hire purchase company
•investment company
•mutual benefit company
•housing finance company

• Equipment leasing company

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 Guidelines on fair
Practices
• Application for loans and their processing.
• Loan appraisal and terms\conditions.
• Disbursement of loan.
• Customer acceptance policy.
• Customer identification procedure.
• Monitoring of transactions.
• Risk management.
• Kyc for existing accounts.
• Appointment of principal officer 18
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 Top five NBFCs in India:
• Housing Development Finance Corporation Limited
• Power Finance Corporation Limited
• Rural Electrification Corporation Limited
• National Bank of Agricultural and
Rural Development
• Infrastructure Development Finance
Company Limited

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 Summary

• A non-bank financial institution (NBFI) is a financial institution that

does not have a full banking license or is not supervised by a
national or international banking regulatory agency
• RBI Act, 1934, it is mandatory that every NBFI should be
registered with RBI to commence or carry on any business of
non-banking financial institution
https://www.rbi.org.in/commonman/English/Scripts/BanksInIndia.asp
x

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 References
a. Essential Reading
1. Class Notes
2. L M Bhole and Jitendra Mahakud (2017), financial institutions and Markets, 6th edition,
Mc Graw Hill.
3. Benton Gup (2016) Banking and Financial Institutions, Wiley Publications.

b. Recommended Reading
1. N Kannan, (2017),Banking sectors reforms in India, Abhijit publications
2. IIBF (2017) Legal and Regulatory Aspects of Banking, 3rd edition, Macmillan
3. Indian Institute Of Banking & Finance, (2015), Banking Products And Services,
Taxmann Publications Pvt. Ltd

c. Magazines and Journals

1. Business India, fortnight subscription (India Book House Ltd)
2. Business Today, fortnight subscription (Living media India Limited)
3. Money Today, monthly subscription (Living media India Limited)
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 Disclaimer

• All data and content provided in this presentation

are taken from the reference books, internet –
websites and links, for informational purposes only.

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