Non Banking Finance Companies�(NBFCs)

Submitted by�Dr. Minakshi Duggal Mehta�Assistant Professor (Commerce)�Hans Raj Mahila Maha Vidyalaya, Jalandhar�

​

INTRODUCTION

• In the world of money, many different types of companies help economies grow. One important group is called Non Banking Financial Companies or NBFCs.
• They work together with regular banks to help more people access financial services. NBFCs do things differently and follow special rules.
• They make sure more people can use financial services and they provide specific help.
• Non Banking Financial Companies (NBFCs) are entities that provide bank-like financial services but they do not hold a banking license and are unregulated.

MEANING

• Non-Banking Financial Companies (NBFCs) are financial institutions that provide a wide range of financial services similar to traditional banks, but they do not hold a banking license. They are involved in activities such as lending, investing, trading in securities, asset management, and various other financial activities.
• However, unlike banks, NBFCs are not allowed to accept demand deposits from the public. Instead, they raise funds through various other means like debentures, bonds, and borrowings. NBFCs play a crucial role in providing financial services to various sectors of the economy and promoting financial inclusion.

NBFC Regulations �

• NBFC regulations are a set of rules, guidelines, and norms established by regulatory authorities, such as the Reserve Bank of India (RBI) in India, to govern the functioning and operations of non-banking financial companies (NBFCs).
• Regulatory Authority: NBFC regulations are overseen by regulatory bodies like the Reserve Bank of India (RBI) in India.
• Licensing and Registration: NBFCs need to obtain proper licenses and registration from the regulatory authority to operate legally.
• Capital Adequacy: NBFCs are required to maintain a certain level of capital to ensure financial stability and solvency.
• Asset Classification: Regulations dictate how NBFCs categorize their assets and loans, ensuring transparency and risk assessment.

​

​

• Risk Management: NBFCs must have adequate risk management strategies in place to mitigate financial risks.
• Corporate Governance: Regulations focus on good governance practices, including board composition, transparency, and accountability.
• Prudential Norms: NBFCs have to follow specific norms related to lending practices, income recognition, and provisioning.

​

• Disclosure Requirements: NBFCs are required to disclose financial information regularly to provide transparency to investors and stakeholders.
• Interest Rates: Regulations often guide NBFCs on the maximum interest rates they can charge on loans.

​

Types of NBFCs�

Non-Banking Financial Companies (NBFC) vs. Banks �

Functions of NBFCs�

• NBFCs play a significant role in diversifying the financial landscape by offering a wide range of services that complement traditional banking services. Here are the functions of Non-Banking Financial Companies (NBFCs):
•  Financial Intermediation: NBFCs act as intermediaries between borrowers and lenders, providing various financial services without being full-fledged banks.

​

​

• Credit Provision: They offer loans and credit facilities to individuals, businesses, and sectors that might have limited access to traditional banking services.
• Investment Activities: NBFCs invest in various financial assets such as stocks, bonds, mutual funds, and other securities.
• Leasing and Hire-Purchase: They offer services like leasing and hire-purchase, allowing individuals and businesses to acquire assets without the immediate need for large upfront payments.

​

​

• Factoring and Bill Discounting: NBFCs provide factoring services where they purchase accounts receivable from businesses and provide immediate funds, helping with cash flow management.
• Insurance Services: Some NBFCs offer insurance-related services, especially in rural areas, to provide coverage to those who are underserved by traditional insurance companies.

​

• Foreign Exchange Services: Certain NBFCs offer forex services for individuals and businesses needing currency exchange and remittance facilities.
• Microfinance: NBFCs provide microfinance services to financially underserved sections of society, particularly in rural areas, by offering small loans and financial products.

​

• Advisory Services: Some NBFCs offer financial advisory services, helping clients with investment decisions, financial planning, and portfolio management.
• Mortgage Services: They provide mortgage loans, allowing individuals to buy or improve real estate properties.
• Vehicle Finance: NBFCs offer loans for purchasing vehicles, both for personal use and commercial purposes.
• Retail Financing: They provide financing for consumer goods, electronics, and other retail products through partnerships with retailers

​

​