Non-banking financial companies

What is an NBFC? Sec 45I (c) of the RBI Act defines financial institution. A non-banking company carrying business of financial institution will be an NBFC.

Activities included in the definition: Financing, whether by giving loans, advances or otherwise Acquisition of shares, stocks or securities Hire purchase Insurance excluded by notification Management of chits, kuries, etc Money circulation schemes

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.

They are fast emerging as an important segment of Indian financial system. It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of

return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc.

The types of NBFCs registered with the RBI are:Equipment leasing company:- is any financial institution whose principal business is that of leasing equipments or financing of such an activity.

Hire-purchase company:- is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions.

Loan company:- means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity).

Investment company:- is any financial intermediary whose principal business is that of buying and selling of securities.

The term NBFC in India is a motley group of entities engaged in activities ranging from investments in stocks, loans, leasing, hire purchase, deposit-taking, etc. Globally, there would be several classes of entities allowed to do these businesses for example, credit unions, savings institutions, personal credit institutions, leasing companies, etc., would all be doing different businesses. In India, registration as a non-banking finance company almost takes the entity at par with a banking company, except that NBFCs cannot seek deposits withdrawable on demand or by checking. India is one of few countries that allows NBFCs to seek deposits from the public. Since NBFCs are quite close to banks, and getting into banking business is a huge privilege, people vie to have an NBFC company. For certain activities, NBFC registration is mandatory for example, investing in shares. In most other countries, it is inconceivable that a financial company registration is required for investing in stocks. Since even shareholding companies are regarded as NBFCs, business groups need companies to hold their group shares hence, every leading business group has dozens of NBFCs. NBFCs are also seen as entry route to banking business. Some examples of NBFCs are Indiabulls, Muthoot Finance, Tata Capital etc.