Non-Banking Financial Company (NBFC)

NBFC's are financial organisations that do not have

full banking license but they provide financial
services similar to that of banks. These companies
are registered under Companies Act, 1956 and
Companies Act,2013. NBFC's provide financial
services such as market brocking and acquisition
of shares, bonds and debentures.
 Nature and Type OF NBFC’s

Non-banking financial companies can be

divided into two categories based on their
character which is depository and non-
depository. If a company does not take any
deposits, then they are suffixed with ND.
Example of the deposit-taking institution is
thrift stores, loans provider.
Five types of NBFC’s are in India based on their
primary services:
 1. Investment Company

The primary business of Investment Company

is to hold and manage securities for
investment purposes; they typically offer
investors a variety of funds and investment
services. This includes recordkeeping,
accounting, tax management and portfolio
management. Investment companies include
further subcategory;
2.Core investment companies
Core investment company is company holding
shares, debentures and is categorizes as NBFC’s by
the RBI. They can’t deal in trading of the
instruments they hold. A core investment company
needs to register itself with RBI if it is dealing in
raising funds through commercial papers,
debentures, inter-corporate deposits and by
borrowing from financial institution however if
core investment company doesn’t need to get a
certificate of registration from RBI if companies
asset is less than 100 crore.

3.Asset finance companies -
Asset finance companies are the financial
institution which deals with the business of
financing physical assets that correlates with
any economic activity such as automobiles,
power generators, and material handling
equipment. According to RBI regulation, any
NBFC can act as an asset finance company if
the income arising out of it is less than 60%
of its total revenue.
 4. Loan Companies

Any company which is a financial institution

and its principal business is providing finance
by making loans, or an advance is a loan
company under NBFC’s.
 5.Infrastructure Financing

Infrastructure financing NBFCs provide loans

for developing infrastructure projects such as
roads, ports, airports, and power plants.
These loans are generally long-term and
involve a high degree of risk.
 Infrastructure Debt Fund

IDFs act essentially as vehicles for financing

debt of infrastructure companies and through
this, they create space for commercial banks
to lend to another infrastructure project. They
can be set up as a company or trust; only the
company based IDF’s would come under the
purview of NBFC and hence governed by RBI.
 Microfinance

Microfinance NBFCs offer small loans to low-

income individuals and small businesses
typically not served by traditional banks.
These loans are often used for income-
generating activities such as starting a small
business or purchasing inventory.
 Housing Finance
Housing finance NBFCs provide loans for
purchasing, constructing, or renovating
residential properties. These loans are
typically secured against the property being
financed.
 Commercial Finance
NBFCs provide working capital loans to
businesses for various purposes, such as
inventory financing, trade finance, and
invoice discounting.
 Personal Finance
Personal finance NBFCs offer personal loans,
credit cards, and other financial products to
individuals. These loans are typically
unsecured and can be used for various
purposes, such as home renovations,
weddings, or medical expenses.
 Role of NBFCs in the Indian Financial System

NBFCs play a crucial role in the Indian financial

system by catering to the diverse credit needs
of various sectors of the economy. Their
ability to provide customized financial
products and services tailored to the specific
needs of different segments of society makes
them a vital component of the financial
system.
 The role of NBFCs can be summarized as
follows

Providing Credit: NBFCs credit various

population segments, including individuals,
small and medium enterprises (SMEs), and
large corporations. NBFCs are generally more
flexible than banks in terms of lending
criteria, and they can provide credit to those
who may not meet the stringent requirements
of traditional banks.
 Mobilizing Savings
NBFCs mobilize savings from different sources,
such as retail investors, high-net-worth
individuals (HNIs), and institutional investors,
and they use these savings to finance various
activities.
Providing Investment Services
NBFCs provide investment services such as portfolio
management, investment advisory, and
distribution of financial products.
Providing Payment Services: NBFCs also provide
payment services such as issuing debit and credit
cards, electronic fund transfers, and mobile
banking.
Supporting Infrastructure Development: NBFCs also
play a key role in supporting infrastructure
development by providing long-term finance to
infrastructure projects and distribution of
financial products.
 Scope of NBFC

Non-Banking Financial Companies (NBFCs)

have gained significant importance in the
financial sector over the past few decades.
They play a crucial role in the economy by
providing financial services to those who may
not have access to traditional banking
services. In this article, we will explore the
scope of NBFCs, their role in the economy,
and the challenges they face.
 Scope and Categories of NBFCs

The scope of NBFCs is broad and diverse.

They offer a range of financial products and
services, such as loans, leasing, hire-
purchase, investment, and insurance. They
are different from banks as they do not have
a banking license, nor do they accept
deposits from the public. NBFCs can be
classified into several categories, such as
Asset Finance Companies, Loan Companies,
Investment Companies, Infrastructure Finance
Companies, and Microfinance Companies.
 Role of Non-Banking Financial Companies (NBFCs) in
Financial Inclusion

the role of NBFCs in the economy is significant, as they cater

to the unbanked and under banked population of the
country. NBFCs provide financial services to individuals,
small and medium-sized enterprises, and other businesses
not served by traditional banks. They are crucial in financial
inclusion, a key component of sustainable economic growth.
The role of NBFCs in the economy is significant, as they cater
to the unbanked and under banked population of the
country. NBFCs provide financial services to individuals,
small and medium-sized enterprises, and other businesses
not served by traditional banks. They are crucial in financial
inclusion, a key component of sustainable economic growth.
Contribution of NBFCs to Economic Development through
Long-Term Capital for Infrastructure and MSME Sector

NBFCs also contribute to the development of the economy by

providing long-term capital to the infrastructure sector.
They fund projects such as roads, airports, ports, and
power plants, which are critical for economic development.
NBFCs also play a vital role in the growth of the micro,
small, and medium-sized enterprises (MSME) sector by
providing them with access to capital.
However, the scope of NBFCs comes with its challenges. One
of the main challenges faced by NBFCs is access to funding.
Unlike banks, NBFCs cannot access cheap funding from the
central bank. They have to rely on market borrowings,
which can be expensive and volatile. This can pose a
significant risk to their liquidity and solvency.
Challenges Faced by NBFCs in the Regulatory
Environment

Another challenge faced by NBFCs is the regulatory

environment. The Reserve Bank of India (RBI) regulates NBFCs,
and they have to comply with several regulations and
guidelines issued by the RBI. This can be time-consuming
and costly for NBFCs, especially for small and mid-sized
players who may not have the resources to comply with
regulatory requirements.
Moreover, NBFCs also face operational challenges. Due to their
limited size and scale, NBFCs may not have the same level of
operational efficiency as banks. This can result in higher
operating costs, impacting their profitability and ability to
compete with banks.
Challenges and Significance of NBFCs in the Economy

In conclusion, the scope of NBFCs is broad and

diverse. They play a significant role in the economy
by providing financial services to the unbanked
and under banked population, funding critical
infrastructure projects, and supporting the growth
of the MSME sector. However, NBFCs face several
challenges, such as access to funding, regulatory
compliance, and operational efficiency. Addressing
these challenges will be crucial for the sustainable
growth of the NBFC sector and its contribution to
the economy.