What are NBFCs? Why are they picking up?

 

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NBFCs are Non-Banking Financial Companies that deal with loans and other financial activities but they don't have a banking license instead they are registered under the Companies Act 1956.

A company with the primary business of receiving deposits under any scheme in a lump sum or in installments or in any other manner is also known as Non-Banking Financial Company (Residuary Non-Banking Company).

Activities NBFCs are Involved in

Non-Banking Financial Companies are primarily involved in the activities such as Loans and Advances, Hire and Purchases, Leasing, Insurance Business, Chit Business, Acquisition of Shares, Debentures, Stocks, etc.

Activities NBFCs cannot be Involved in

Non-Banking Financial Companies cannot be the institutions that are primarily involved in Agriculture, Industrial Activity, Sale, Purchase or Construction of any immovable property, Sale or Purchase of any Goods other than Securities.

Criteria to become an NBFC

The Reserve Bank of India has issued very clear guidelines about the functioning of the NBFCs. As per the guidelines, a company whose principal business is financial activity is considered a Non-Banking Financial Company.

Now, what does it mean to have the principal business of financial activity?

It means that the financial assets must consist of more than 50 percent of the total assets and

income from financial assets must consist of more than 50 percent of the gross income.

If the company fulfills both the criteria it will be registered as NBFC by RBI. If these criteria are not fulfilled by any company then it will not be regulated by the RBI.

Difference Between Banks andNBFCs

By far the working of banks and non-banking Financial Companies seems similar but clearly, they are not the same. So, let’s understand the difference between them.

❖     Unlike banks, NBFCs can’t demand deposits.

❖     NBFC cannot issue cheques to itself. Because they are not part of the payment and settlement system

❖     A Deposit Insurance facility is not available for NBFCs.

Types of NBFCs

There are different type of NBFCs according to the RBI, based on types of activities they perform, type of liabilities as accepting deposits and non-deposits, size of non-deposit taking NBFCs, etc. so, following are the different types of NBFCs:

Asset Finance Companies

Asset Finance Companies (AFCs) are those companies with principal business (not less than 60% of its total assets and total income respectively) of financing the physical assets such as earth moving equipment, automobiles, generator sets, etc.

Investment Company

Investment companies are NBFCs that sell or acquire securities from the general public as their principal activity.

Loan Company

The NBFCs with the principal business of providing different types of loans or advances for business are called the loan companies.

 

Infrastructure Finance Company

Infrastructure Finance Companies are the NBFCs providing loans in infrastructure sub-sectors such as electricity generation, urban public transport, gas or oil pipelines, etc.

Why are NBFCs Picking up in India?

The NBFCs have shown tremendous growth in India in recent years. With the size of population our country has, it is not possible to smoothly cater to the financial needs only through banks. Non-Banking Financial Companies are playing a prominent role in catering to the needs of the public. We can call them the shadow banking system in India. They have contributed to the growth of MSMEs and SMBs with their simple and digitized lending systems.

Growth of MSMEs and SMBs

During the pandemic period, NBFCs have played a major role in saving the business of MSME and SMB sectors by extending their helping hand and arranging funds for them. Getting loan approval from banks is a lengthy and time-consuming task. There come the NBFCs for the rescue of MSMEs and SMBs by providing easy loans with the least paperwork.

Simplification and Decentralization of lending

NBFCs have simplified the system of providing personal loans, credits, insurance, and their other services by removing the middlemen and reaching out to the customers directly.

 They also offer wealth management by managing their portfolios via investing in stocks, shares, and securities.

Strengthening Various Economic Sectors

NBFCs have contributed to strengthening various economic sectors such as

❖    Converting savings into investments.

❖    Providing Long-term Credit and specialized Credit.

❖    Helping in the Employment Generation.

❖    Helping in the development of Financial Markets, etc.

Digitization of Financial Services by adapting to technology

By incorporating technology, NBFCs have improved the customer experience by optimizing time to market and by offering credit analysis tools, etc.

Through open banking and API banking, financial services have been made easy to avail.

Approachable By Wider Customer Range

NBFCs have established a wide network with multiple points of contacts, easy loan disbursement, and round-the-clock services, they have managed to reach the Tier 2, 3 & 4 market sectors.

 Non-Banking Financial Companies have played a vital role in the Indian Economy. And at Zavron Finserv, we strive for small businesses and individuals to fulfill their dreams through Personal Loan, Business Loan, Two-wheeler Loans and Used Car Loans.

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Location: Nagpur, Maharashtra, India

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