Non Banking Financial Company- Boosting economic growth

Posted in Finance Articles, Total Reads: 14451 , Published on 27 June 2011
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Banks are the most important institutions which are responsible in managing and securing the wealth of the common man. The banking industry, whether public banks or private banks, are the most trusted business entities, where people with all their trust deposit their hard earned money for safety. However, there is another institution which has gradually made its presence felt in this field- Non Banking Financial Company.

 

NBFC

Non banking financial companies are primarily responsible for receiving deposits under any scheme or arrangement or any other manner, or lending, similar to banks, but they don’t have a banking license . NBFC’s focus on business related to 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. NBFC’s are financial intermediaries engaged in the business of accepting deposits delivering credit and play an important role in channelizing the scarce financial resources to capital formation. They supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. However, they do not include services related to agriculture activity, industrial activity, sale, purchase or construction of immovable property. In India, despite being different from banks, NBFC are bound by the Indian banking industry rules and regulations.

 

NBFC’s have a striking similarity with the banks in terms of the services offered. However, there is a major difference between the roles, responsibilities and functions between banks and non banking financial companies. Some of the differences can be pointed out as below:

 

A NBFC cannot accept demand deposits i.e. funds deposited at a depository institution that are payable on demand immediately or within a very short period, which are similar to current accounts or savings accounts.

NBFC’s cannot issue cheques to its customers as they are not a part of the transactions system.

Deposit insurance facilities are also not available for NBFC depositors unlike in case of banks.

 

For an institution to become a NBFC, it is mandatory for it to be registered with the Central Bank i.e. RBI in India, to carry out its operations. However, certain NBFC’s i.e. venture capital fund/merchant banking companies/stock broking companies registered with Sebi, insurance company holding a valid certificate of registration issued by IRDA etc are exempted from being registered under the RBI. The list of institutions which need to be registered under the RBI to become NBFC’s are:

loan company

investment company

equipment leasing company

hire-purchase company

 

The different types of NBFCs registered with RBI have been reclassified as

Asset Finance Company (AFC)

Investment Company (IC)

Loan Company (LC)

 

NBFC’s have seen a considerable business model shift because of the fluctuating environment and market dynamics. NBFC’s are constantly facing challenges like high cost of funds, slow industrial growth, stiff competition with the banking sector, non performing assets etc.

However, NBFC’s do play a critical role in participating in the development of an economy by development in sectors like transport, employment generation, wealth creation, bank credit in rural segments and to support financially weaker sections of the society. Emergency services like financial assistance and guidance is also provided to the customers in the matters pertaining to insurance.

The banking sector would always be the most important sector in the field of business because of its credibility in supporting manufacturing, infrastructural development and even being the backbone for the common man’s money. But despite this, the roles of NBFC’s are critical and their presence in a country would only boost the economy in the right direction.

 


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