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Non Banking Finance Companies�(NBFCs)

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

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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.

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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.

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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.

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  • 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.

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  • 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.

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Types of NBFCs�

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

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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.

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  • 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.

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  • 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.

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  • 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.

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  • 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

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