A non-banking financial company (NBFC) is a company that is registered under the Companies Act – 1956, or under the Companies Act – 2013,and which is engaged in business of loans and advances, acquisition of stocks/shares/bond/security/debentures issued by the government or any local authority or any other similar marketable security, leasing, insurance business, hire-purchase and chit business. However, NBFCs do not include any institution whose primary business is that of industry activity, agriculture activity, or purchase or sale of any goods (except securities), or services and construction, or sale or purchase of an immovable property. A residuary non-banking company (RNBC) is a non-banking company with a principal business of accepting deposits under a scheme of an arrangement in installments or in one lumpsum by way of contribution or in any other manner. RNBC is also an NBFC.
Traditionally, NBFCs were mainly involved in providing services to those classes of customers that are generally excluded from the banking sector. However, in recent times, the lines between banking institutions and NBFCs have blurred. NBFCs are competing with banks in providing financial services such as infrastructure and housing finance among others. NBFCs offer services not only to big entities that are apart of multinational corporations but also to small entities with assets around INR 25 lakhs.
NBFC entities can be differentiated not only on the basis of size but also on the basis of sophistication of operations and the kind of activities they undertake. Different types of entities under NBFCs are regulated by different regulatory bodies. The RBI regulates mortgage guarantee companies (MGCs), assets finance companies (AFC), infrastructure debt funds (IDF-NBFCs), core investment companies (CICs), NBFC-microfinance institutions (NBFC-MFIs), loan companies (LCs), factoring companies(FCs), infrastructure finance companies (IFCs),investment companies (ICs) and residuary non-banking companies (RNBCs); the National Housing Bank (NHB) regulates housing finance companies; the SEBI regulates merchant banking companies, venture capital fund companies, stock broking and collective investment schemes; the Ministry of Corporate Affairs (MCA) regulates Nidhi companies and mutual benefit companies; the state government regulates chit fund companies; and the Insurance Regulatory and Development Authority (IRDA) regulates insurance companies.
By catering to those who are excluded from the formal banking system and providing financial services to infrastructure projects, NBFCs promote inclusive economic growth and play an active role in the development of the country. NBFCs contribute to inclusive growth by offering the following services:
NBFCs offer loans against security of gold jewellery or gold in any other form. Although banks also lend money in exchange for gold as security, NBFC gold loans have witnessed incredible growth in the recent past because of their friendly approaches, simplified procedures for sanctions, quick disbursement of loans, etc. Branches of NBFCs that offer gold loans have significantly increased mostly in semi-urban and urban areas of the country.
By offering money in exchange for the security of gold, NBFCs monetise gold stock which was otherwise lying idle and facilitate in creating resources that are productive. In just 4 years, i.e., from 2009 to 2013,NBFC gold loans increased from a mere INR 34 billion to a whopping INR 475 billion.
Traditionally, NBFCs were involved in financing two-wheelers, trucks, and construction equipment, etc., but now NBFCs also offer finances for used or second-hand vehicles, three-wheelers, reconditioned vehicles along with secure and unsecured capital financing, loan against property etc. In India, such loans are very popular with road transport operators especially in the self-employed segment, and no other financial institutions offer second-hand vehicle loans.
Micro Finance Institutions (MFI)
NBFC-MFIs provide financial services such as loans, savings, micro-insurance, and money transfer services to the poor. NBFC-MFIs are a welcome alternative to the exploitative money lenders and the rigid and strictly regulated commercial banks. In the last decade, NBFC-MFIs have proved to be a fast-growing enabler in offering financial services such as capital inputs to the poor, which generate self-employment and promote inclusive growth.
Unlike commercial banks, NBFCs also extend small-ticket loans to low-income home buyers all over the country. Large NBFCs are setting up units to offer loans of INR 2 to 6lakhs to borrowers with an income of INR 6,000 to 12,000 per month. Such companies have easier ‘Know Your Customers’ (KYC) norms,such as relaxed documentation requirements to facilitate access to easy loans to low-income borrowers. The housing finance NBFCs are now at par with public sector banks in terms of providing housing loans. The total amount of loans provided by public sector banks is the same as that provided by NBFCs, although NBFCs are much smaller in comparison to the public sector banks.
The role that NBFCs play in the inclusive growth of the country is imperative to sustainable development. As explained earlier, NBFCs provide the much needed financial services where the banking system fails because of strict regulations and tedious paperwork in the commercial banking sector. NBFCs can be called the real game changers in India’s financial industry for their contribution to certain areas such as financial inclusion, especially micro-finance, affordable housing, second-hand vehicle finance, gold loans and infrastructure finance. NBFCs have shown year-on-year growth in their share in the total credit creation in the country and continue to perform at rates comparable to those of the banking system.