Updated : May 26, 2023What is NBFC ? Its Meaning, Types, Role And Scope
Non-Banking Financial Companies, or NBFCs, play a vital role in the financial system of India. The NBFC full form stands for “Non-Banking Financial Company.”, which comes into existence after their incorporation with the ROC and becomes functional when the RBI gives them the requisite licence to operate. These are establishments that provide banking services without holding a banking licence, filling in the gaps that traditional banks may not reach. We assist in the formation of NBFC and in obtaining the necessary licences.
What is an NBFC ?
The NBFC meaning is simple, yet their function is comprehensive. They play a significant role as non-banking financial institutions, providing credit facilities, loans, asset financing, and more. These functions of NBFC are indispensable in enhancing financial inclusion, particularly in unbanked and under-banked areas.
Operating under the regulatory purview of the Reserve Bank of India (RBI), NBFCs in India are known for their versatility and adaptability. They cannot quite function as a bank per se, because they cannot accept demand deposits or issue checks. Nevertheless, they stand out as non-banking financial companies providing diverse financial services to meet a wide array of consumer needs.
A common question is, “What is NBFC?” An NBFC example includes organisations such as Muthoot Finance or Bajaj Finance, which offer financial products and services like loans, credit facilities, and wealth management. There are different types of NBFC, including Asset Finance Company (AFC), Investment Company (IC), and Infrastructure Finance Company (IFC), among others.
NBFC vs Traditional Banks
So, what’s the NBFC and bank difference? The primary difference between NBFC and bank lies in their functionalities and the regulations they fall under. Unlike banks, NBFCs cannot accept demand deposits or issue checks. The NBFC full form in banking indicates their role in supplementing banking services while operating under different rules.
The NBFC vs bank debate often highlights the role of each in the country’s economic landscape. Despite the difference between banking and non banking financial institutions, both are pivotal for financial stability and growth. The overlap of banking and non banking financial institutions ensures a more comprehensive reach of financial services.
Scope of NBFC’s Roles and Services
The NBFC definition, however, extends beyond just these services. Non-banking financial institutions in India, such as NBFCs, offer a wider scope of financial services, adapting to the changing landscape of the financial sector. They have tapped into sectors of the market where traditional banks have been less successful.
Understanding what is NBFC in India requires a nuanced view of its role and responsibilities. It’s essential to realise that NBFCs, regulated by RBI, are an integral part of the country’s financial system, catering to the underserved sections of the society.
Non-banking financial institutions in India, including NBFCs, offer a vast array of services contributing to the economy’s health. Their scope extends to a wider reach, enabling more individuals and businesses to avail themselves of financial services, thereby driving economic growth.
It’s clear that NBFCs, with their varied types and broad range of functions, are set to play an even more significant role in the future of India’s financial landscape. The symbiotic relationship between NBFCs and banks ensures a holistic approach to financial services in the country, ushering in a new era of financial inclusion and stability.
Types of NBFC
NBFCs are classified into different types based on factors such as liability structure, size, and the nature of activities they perform. However, It’s important to note that each of these types is subject to different regulations and norms. These include :
- Asset Finance Company (AFC) : An AFC is an NBFC whose principal business is to finance physical assets that correlate to productive or economic activity, such as automobiles, tractors, generator sets, earth-moving and material handling equipment, industrial machinery, etc.
- Investment Company (IC) : ICs are entities that deal primarily with the acquisition of securities. Their business activity mainly involves the holding and managing of investment in other companies.
- Loan Company (LC) : LCs are NBFCs that provide finance — whether by making loans or advances or otherwise — for any activity other than its own (excluding equipment leasing and hire-purchase activities).
- Infrastructure Finance Company (IFC) : IFCs are a category of NBFCs that provide infrastructure loans, which are non-repayable over a period of time. These companies play a crucial role in developing the nation’s infrastructure.
- Systemically Important Core Investment Company (CIC-ND-SI) : These are NBFCs involved in the business of acquisition of shares and securities, which satisfies a certain set of conditions put forth by the RBI. They are called systemically important as their failure or disruption can cause significant disruption to the overall financial system.
- Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC) : IDF-NBFCs are a category of NBFCs that are formed to facilitate the flow of long term debt into infrastructure projects. They raise resources through issue of Rupee or Dollar denominated bonds of minimum five-year maturity.
- Micro Finance Institution (NBFC-MFI) : These are financial institutions that provide small-scale financial services in the form of credit, savings, and insurance to the low-income segments of the society. They play a significant role in promoting financial inclusion.
- Non-Banking Financial Company – Factors (NBFC-Factors) : NBFC-Factors primarily engage in the factoring business. Factoring is a financial transaction where a company sells its receivables (invoices) to a third party (called a factor) at a discount. Factors help businesses by providing them immediate liquidity based on their invoices or receivables.
Scale Based Regulation for NBFCs
It is a new regulatory framework introduced by the Reserve Bank of India (RBI) in October 2021. The framework aims to improve the regulation and supervision of NBFCs by aligning it with their size, complexity, and risk profile. Under the scale-based regulation, NBFCs are classified into three layers :
- Base layer : NBFCs with assets of up to INR 1,000 crore.
- Middle layer : NBFCs with assets of INR 1,000 crore to INR 5,000 crore.
- Upper layer : NBFCs with assets of more than INR 5,000 crore
NBFCs in each layer are subject to different regulatory requirements. For example, NBFCs in the upper layer are required to maintain higher capital levels and liquidity ratios than NBFCs in the base layer. The scale-based regulation is a significant development in the regulation of NBFCs in India. It is expected to help to improve the stability of the NBFC sector and reduce the risk of systemic shocks.
Key features of the scale-based regulation
- It is based on the size, complexity, and risk profile of NBFCs.
- It aims to improve the regulation and supervision of NBFCs.
- It is expected to help to improve the stability of the NBFC sector.
The scale-based regulation is a positive development for the NBFC sector in India. It is expected to help to improve the stability of the sector and reduce the risk of systemic shocks.
