Introduction
A Non-Banking Financial Company shortly referred to as NBFC, is an establishment that is registered in the Companies Act, 1956. The primary business of the company is lending, making investments in several types of shares, stocks, bonds, debentures or securities, renting, hire purchase, protection of business, chit business, etc The major function of the company is to receive deposits below several scheme or arrangement in one whole sum or may be in installments.A Non-Banking Financial Company does not contain any organization and whose main business involves various activities from fields like agriculture, industrial, trading or sale or purchase or construction of any fixed property. One of the key features to be kept in mind is that the monetary activity of loans or advances should be for the activity other than itself. In the nonexistence of this facility, all the companies would have been NBFCs.
The exact banking facilities that can be offered by Non-banking finance company depends on the authority, and may comprise facilities such as loans facilities, savings products, credit facilities, investments and money transfer facilities. Any company can participate in banking business, excepting that they are not permitted to use the term bank in their name. A corporation can only name itself a bank if it is registered as bank with the respective nation's central bank.
Key Difference between Banks and NBFC
The main function of NBFCs is to lend and make investments in the share market and henceforth their activities are similar to that of banks but there are a little difference between them as given below:i. NBFCs cannot receive any demand deposits
ii. NBFCs cannot be a form of any part of the payment and settlement system, hence cannot give cheques that are drawn on itself
iii. Deposit insurance service of Deposit Insurance and Credit Guarantee Corporation is not offered to any depositors of the NBFCs, unlike in the case of banks.
Types of NBFCs
NBFCs are classified as follows:i. Asset Finance Company(AFC) : An AFC is a corporation which is a monetary institution carrying on as its main business the funding of various physical assets supporting productive or economic activity such as vehicles, tractors, lathe machineries, generators, earth stirring and material management equipment, working on its own supremacy and all-purpose industrial machineries. Primary business for this requirement is defined as collective of financing real or physical assets supporting economic activity and revenue ascending therefrom is not lesser than 60% of its entire assets and entire income respectively.
ii. Investment Company (IC): IC is any form of non-banking finance company which is a monetary institution working on as its main business the attainment of securities.
iii.Loan Company (LC): LC is any non-banking finance company which is a monetary institution working on as its main business the funding whether by creating loans or advances or else for any action other than its own but it does not comprise an Asset Finance Company.
iv. Infrastructure Finance Company (IFC): IFC is a non-banking finance company which organizes at least 75% of its entire assets in the infrastructure loans. It has a lower Net Owned Fund of about Rs. 300 crore and has a smallest credit rating of A or its equivalent and has a CRAR of about 15%.
v. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is a non-banking finance company working on the business of attainment of various shares and securities which fulfills certain conditions. .
vi. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking non-banking finance company consuming not lesser than 85%of its assets in the nature of various qualifying assets that fulfill the following norms:
a. loan spent by an NBFC-MFI to a debtor with a country domestic annual income not above Rupees 60,000 or urban and semi-urban domestic annual income not above Rupees 1,20,000. b. loan amount should not exceed Rupees 35,000 in the first cycle and Rupees 50,000 in following cycles.
c. the entire indebtedness of the debtor should not be above Rupees 50,000.
d. the tenure of loan should not be less than 24 months for a loan amount in excess of Rupees 15,000 with forestallment without consequence.
e. loan should be extended without security;
f. the collective amount of loans that is given for income generation should not be less than 75% of all the total loans issued by the MFIs.
g. a loan is repayable on daily, fortnightly or monthly installments at the choice of the debtor.
vii. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking non-banking finance company betrothed in the main business of factoring. The monetary assets in the factoring business should constitute at least 75% of its entire assets and its income that is derivative from the factoring business should not be lesser than 75% of its overall income.