NBFC Notes: UPSC IAS Exam
Non-banking financial companies, or NBFCs, 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. Nonetheless, all operations of these institutions are still covered under banking regulations.
Functions of NBFC
NBFCs are doing functions similar to banks
- They play a supplementary role in the economy and cater to the urban-rural poor and the Microfinance institutions.
- They help in the goal of achieving financial inclusion.
- They are engaged into lending to the infrastructure sector and factoring business.
Few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
- NBFC cannot issue Demand Drafts like banks
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
- While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956
Types of NBFC: Example
- Asset Finance Company (AFC): Financial institution carrying on as its principal business the financing of physical assets supporting economic activity, such as automobiles, tractors etc.
- Investment Company (IC): Financial institution carrying on as its principal business the acquisition of securities.
- Loan Company (LC): Financial institution carrying on as its principal business of providing loans.
- Infrastructure Finance Company (IFC): IFC is a non-banking finance company which deploys at least 75 per cent of its total assets in infrastructure loans
- Infrastructure Debt Fund: IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar-denominated bonds of minimum 5 years’ maturity.
- Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): Provides Microfinance
- All the NBFCs are regulated by RBI. Certain categories of NBFCs are regulated by other regulators.
- For example, Venture Capital Fund/Merchant Banking companies/Stockbroking companies are registered with SEBI.
- The Insurance Companies are regulated by IRDA and Housing Finance Companies (HFCs) are regulated by National Housing Bank.
- Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India.
RBI Guidelines for NBFC
- More capital for lending: Banks can now assign risk weights to their rated NBFC exposures depending on ratings given to them by accredited credit rating agencies.
- Lower borrowing cost for quality NBFCs:Reduction in risk weightage could lead banks to lower the borrowing cost for well-rated NBFCs. It will a big relief for NBFCs marred by higher borrowing cost post Rs 90,000-crore default by IL&FS in August last year.
- Systemic incentive to do better: Since borrowing cost will depend on the credit rating assigned to them, banks will push all NBFCs to get rated. This will encourage flow of information in the system, making it lucrative for NBFCs to lower their NPA level, and improve capital adequacy ratios.
- Separating men from boys:The new norms will help segregate the good NBFCs from the poor ones as any unrated exposure of banks towards NBFCs, which owes banks Rs 200 crore or more will now attract 150 per cent risk weightage versus 100 per cent.