NBFCs in India such as Bajaj Finance, L&T Finance Limited, Muthoot Finance, etc have created a niche for themselves. Easy credit, pan India presence, superior quality customer service and digital innovation has led to their prominent rise. This article explores everything about NBFCs. From the full form of NBFC to its history, types and growth prospects.
In this article
- What is the Full Form of NBFC?
- What is an NBFC?
- History of NBFC in India
- Types of NBFC
- Role and Objectives of NBFC
- NBFC vs Bank
- Top listed NBFC Companies in India
What is the Full Form of NBFC?
The full form of NBFC is Non-Banking Financial Company. NBFC is also referred to as NBFI which stands for Non-Banking Financial Institution.
What is an NBFC?
The Reserve Bank of India defines NBFC as ‘a company registered under the Companies Act, 1956 engaged in the business of loans, advances, acquisitions of government securities, insurance etc’.
What are the Services Offered by NBFCs?
NBFCs offer the following services:
- Loans & Credit facility
- Underwriting shares
- Advice on Mergers and Acquisitions.
History of NBFC
1. NBFCs were first started in India in the 1960s as an alternative for individuals whose financial needs were not sufficiently met by the existing banking system.
2. The Non Banking Financial Companies were initially small organisations and did not make much impact on the financial industry.
3. In December 1964, The Reserve Bank of India amended the RBI Act 1934 and a new chapter of dealing with NBFCs was introduced. This act paved the way for the establishment of NBFCs in India. Later, the government of India established two committees to review the structure and working of NBFCs in India.
- James S Raj Committee: James S Raj Committee was established in the 1970s to study the framework of NBFCs. The committee recommended uniform chit fund legislation for the entire nation.
- Chakravarty Committee: The Chakravarty Committee committee was established in 1982 to review the monetary system in India. The committee recommended the complete evaluation of interlinking between the banking sector and NBFCs.
Today NBFCs have grown significantly in terms of operations, range of instruments and market products, technological advancement, etc.
Types of NBFCs in India
There are two types of Non banking Financial Companies in India
1. Deposit Accepting Financial Companies: Deposit Accepting Financial Companies are the NBFCs which accept deposits from the public like investment companies, asset management companies, etc.
2. Non- Deposit Accepting Financial Companies: Non- Deposit Accepting Financial Companies are the NBFCs which do not accept deposits from the public. They are only allowed to lend money to the public and take repayment of loans.
Role and Objectives of NBFC
Roles of NBFCs
1. NBFCs play an important role in promoting inclusive growth in the country as it provides tailor made solutions to diverse customer needs.
2. NBFC plays a significant role in building financial strength as it provides credits to Micro, Small, and Medium Enterprises.
3. NBFCs are a major source of funding for new businesses.
4. NBFCs play a pivotal role in the overall development of the country which includes - generation of employment, transport development, wealth creation opportunities, etc.
Objectives of NBFCs
1. NBFCs thrive to create more job opportunities in the country by lending loans to private industries, which increases the demand for manpower, eventually creating employment opportunities.
2. NBFCs help in mobilizing funds by the distribution of money which leads to income regulation, thereby shaping economic development of the country.
3. NBFCs aim to strengthen the financial markets as it provides funds to the SMEs.
What is the Difference Between NBFC and a Bank?
|BASIS FOR COMPARISON||NBFC||BANK|
|Meaning||An NBFC is a company without a banking license.||A bank is a government authorized company which provides banking services to the public.|
|Incorporated under||Companies Act 1956||Banking Regulation Act, 1949|
|Foreign Investment||Allowed up to 100%||Allowed up to 74% for the private sector banks.|
|Maintenance of Reserve Ratios||Not required||Compulsory|
|Insurance of your deposits||Not available||Available|
Top NBFCs in India
|Company Name||Last Price||Net Profit (in cr.)||Rank as per Net Profits|
|Bengal & Assam||1,440.15||125.36||14|
|Tata Inv Corp||1,024.65||118.64||15|
|PTC India Fin||20.95||110.00||16|
*As on 8th January 2021
An NBFC can be regarded as a non-banking financial company that does not hold a banking license. However, it does work similar to a bank as it provides all of the services which are similar to the services provided by the banks. These companies do not have a banking license, they are required to follow the banking rules and regulations. This proves that NBFCs are critical for the economy as they grant credit to the weaker section of the society starting from Small and Medium Enterprises to the leasing and hire purchase. Since banks have multiple rules governing its lending activities, NBFCs are the faster alternative for raising funds for weaker sections of the society or budding startups etc. Hence, the government is also constantly taking measures to come up with collective rules for the betterment of these NBFCs and the citizens.