Non-Banking financial companies play an important role in access to financial
services enhancing competition and diversification of the financial sector.
There are various types of institutions to be involved in financial services in
India. This includes commercial banks financial institutions and
Non-banking finance companies due to the financial sector reforms
Non-banking financial companies have been emerged as an integral part of
the Indian financial system.
Nonbanking finance companies frequently act as
suppliers of loans and credit facilities and accepting the deposits, operating
various mutual funds, and similar other functions. They are competitive and
complementary to banks and financial institutions. In this paper, the author
will analyze various types of NBFCs, its benefits, the difference between the
owned and net owned funds of NBFCs, and how are NBFCs different from Banks.
NBFC is a Financial Institution that is into Lending or Investment or collecting
monies under any scheme or arrangement but does not include any institutions
which carry on its principal business as agriculture activity, industrial
activity, trading and purchase or sale of immovable properties. A company that
carries on the business of accepting deposits as its principal business is also
India has a diversified financial sector undergoing rapid expansion, both in
terms of the strong growth of existing financial services firms and new entities
entering the market. The sector comprises commercial banks, insurance companies,
non-banking financial companies, co-operatives, pension funds, mutual funds, and
other smaller financial entities. The banking regulator has allowed new entities
such as payments banks to be created recently thereby adding to the types of
entities operating in the sector.
An Overview Of Non- Banking Financial Service Institutions
However, the financial sector in India is predominantly a banking sector with
commercial banks accounting for more than 64 percent of the total assets held by
the financial system. The Government of India has introduced several reforms to
liberalize, regulate and enhance this industry.
The Government and Reserve Bank of India (RBI) have taken various measures to
facilitate easy access to finance. These measures include (to name a few)
launching different categories of Non-Banking Finance Companies (NBFCs), Asset
Reconstruction Companies (ARCs), and Micro Finance Institutions (MFIs).
combined push by both government and private sector, India is undoubtedly one of
the world�s most vibrant capital markets. Over the years, Non-Banking Financial
Companies (NBFC�S), Housing Finance Companies (HFC�s), Asset Reconstruction
Companies (ARC�s), Micro Finance Institutions (MFI�s), and Nidhi Companies have
played a dominant role in mobilization and disbursal of funds./
With the advent of mobile technology and vast strides made by the country in the
field of information technology, Payment Banks has emerged as a new model of
banks conceptualized by the Reserve Bank of India (RBI).
What is non-banking Financial Institutions (NBFIs)?
A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 2013 engaged in the business of loans and advances,
acquisition of shares/stocks/bonds/ debentures/securities issued by Government
or local authority or other marketable securities of a like nature, leasing,
hire-purchase, insurance business, chit business but does not include any
institution whose principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of the immovable property.
A non-banking institution which is a company and has principal business of
receiving deposits under any scheme or arrangement in one lump sum or in
installments by way of contributions or in any other manner is also a
non-banking financial company (Residuary non-banking company).
Financial activity as a principal business is when a company�s financial assets
constitute more than 50 percent of the total assets and income from financial
assets constitute more than 50 percent of the gross income. A company that
fulfills both these criteria will be registered as NBFC by RBI. Interestingly,
this test is popularly known as the 50-50 test and is applied to determine
whether or not a company is into financial business. NBFCs lend and make
investments and hence their activities are akin to that of banks; however, there
are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and
cannot issue cheques drawn on themselves;
- Deposit the insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in the
case of banks.
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial
Company can commence or carry on the business of a non-banking financial
institution without a) obtaining a certificate of registration from the Bank and
without having a Net Owned Funds of Rupees Two crore.
However, in terms of the powers given to the Bank, to obviate dual regulation,
certain categories of NBFCs which are regulated by other regulators are exempted
from the requirement of registration with RBI viz. Venture Capital Fund/Merchant
Banking companies/Stockbroking companies registered with SEBI, Insurance Company
holding a valid Certificate of Registration issued by IRDA, Nidhi companies as
notified under or formed under section 406 of the Companies Act, 2013, Chit
companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,
Housing Finance Companies regulated by National Housing Bank, Stock Exchange or
a Mutual Benefit company.
Various Types of NBFCs
NBFCs are categorized as above:
- In terms of the type of liabilities into Deposit and Non-Deposit
- Non deposit taking NBFCs by their size into systemically important and other
non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
- By the kind of activity they conduct.
Within this broad categorization the different types of NBFCs are as follows:
- Asset Finance Company (AFC):
An AFC is a company which is a
financial institution carrying on as its principal business the financing of
physical assets supporting productive/economic activity, such as automobiles,
tractors, lathe machines, generator sets, earth moving and material handling
equipment, moving on own power and general purpose industrial machines.
Principal business for this purpose is defined as the aggregate of financing
real/physical assets supporting economic activity and income arising therefrom
is not less than 60% of its total assets and total income respectively
- Investment Company (IC):
IC means any company which is a financial institution carrying on as its
principal business the acquisition of securities
Loan Company (LC): LC means any company which is a financial
institution carrying on as its principal business the providing of finance
whether by making loans or advances or otherwise for any activity other than
it's own but does not include an Asset Finance Company.
Infrastructure Finance Company (IFC):IFC is a non-banking
- Which deploys at least 75 percent of its total assets in infrastructure
- Has a minimum Net Owned Funds of Rs 300 crores,
- Has a minimum credit rating of �A� or equivalent
- And a CRAR of 15%. Capital
adequacy ratio of banks capital to its risk.
- Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI
is an NBFC carrying on the business of acquisition of shares and securities
Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): It
means a non-deposit taking NBFC (other than a company formed and registered
under section 25 of the Companies Act, 1956 or Section 8 of the Companies Act,
2013) that fulfills the following conditions:
- Minimum Net Owned Funds of Rs 5 crores. (For NBFC-MFIs registered in the
North Eastern Region of the country, the minimum NOF requirement shall stand at
Rs 2 crores).
- Not less than 85% of its net assets are in the nature of �qualifying
Benefits of NBFCs
According to research and studies, it is proved that NBFCs are outperforming
banks. The continued better performance from NBFCs has given rise to an uptick
of 15% customer satisfaction as compared to the banking customers. The same is
agreed by the RBI according to the recent Financial Stability Report. Banks and
Non- Banking Financial Companies (NBFCs) are financial intermediaries and the
services offered by them are pretty much the same as banks.
benefits of incorporating an NBFC and carrying on its activities are listed
- Competitive Interest Rates:
Rate of interest is one of the main aspects of
all types of loans. Non-Banking Financial Sectors have started to concentrate on
this area in the recent decades and have brought down the interest rates to
either equal to bank lending rates or at times even lower to bank rates. With
all the other benefits when the rate of interest is also lowered, borrowers
found this more easy and affordable. This has also resulted in lower EMI
(Equated Monthly Instalment) for borrowers. Based on the income, credit scoring,
and repayment, the rate of interest is charged on the borrowers However it is at
- Quick Processing:
At banks, it is very important that the applicant should
fulfill the eligibility criteria but NBFC is lenient in this aspect. This makes
loan approval easier, a smoother process, and quicker. Most of the time, people
apply for loans when they are in immediate need of money. NBFCs have taken this
as an opportunity to meet the demand by quickly processing the loans at a
competitive rate of interest. At times, borrowers are even ready to compromise
on the interest rates if the loan amount is huge and if they could get it
- Fewer Rules and Regulations:
As NBFC is incorporated under the Companies Act,
(though regulated by the Reserve Bank of India), the rules and regulations for
lending are not as stringent as banks. This helps borrowers to get loans easily.
In view of less complicated loan processing requirements, borrowers are highly
satisfied. Of course, the risk of default is high with NBFC and thus interest
rates and other charges will be according priced by the NBFC. Even the loan
amount approved will be quite lesser than the collateral value. This is due to
the high risk of default. NBFCs do not have statutory reserve ratios and can
open branches at will.
- Loan available for Individuals with Poor Credit Rating:
Individuals with poor
credit ratings generally will not get loans from banks. The reason for this is
banks consider borrowers are high-risk individuals if the credit scoring is low.
Unless the credit score is above 600 -650, it is very difficult to get a loan
sanctioned from banks. On the other hand, loans will be offered to individuals
with low credit scores by NBFCs but most of the time the interest rates for such
borrowers will be higher than market rates. Due to these aforementioned
advantages, most of the NBFCs are growing.
- With regard to offering loans, banks and NBFCs will offer business, personal
and retail loans. And this is totally on the basis of the repayment capacity of
the borrower. Most of the corporate sector prefers banks; however retail sector
chooses NBFCs over banks. Simple loans such are vehicle financing loans, gold
loans, home loans, and durable loans are offered by NBFCs and the customer
satisfaction ratio is high here. NBFC sector is also set to expand even further
in the coming days.
How is the bank different from NBFIs?
NBFIs lend and make investments and hence their activities are similar to that
of banks; however there are a few differences:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue
cheques drawn on themselves;
- the deposit insurance facility of Deposit Insurance and Credit Guarantee
the corporation is not available to depositors of NBFCs, unlike in the case of
Here are some of the key points which shows the different functioning of NBFCs
than that of Banks:
- Governing Act:
Banking companies are governed by Banking Companies Act, 1949, whereas,
Non-banking Financial companies are governed by RBI Act
Banking companies must obtain a license from RBI for commencement.
However, there is no license is required in the case of NBFCs.
- Ceiling on deposits:
There is no ceiling on deposit mobilization in the case
of a banking company, on the other hand in the case of for NBCs there is a
restriction on acceptance of deposits which is based on the net worth of the
- Balance Sheet:
The proforma for the Balance sheet of the banking company
should be as per the format provided by RBI. But for Non-banking The company,
the balance sheet should be as per the Companies Act.
- Negotiable instruments:
There is the use of negotiable instruments such as cheques, bills of exchange for various transactions in a bank. But Negotiable
instruments cannot be used for the withdrawal of money from Non-Banks.
- Credit Rating:
Credit rating is not required for accepting deposits in the
case of a banking company. Whereas NBFCs have a mandatory requirement of Credit
rating in order to accept deposits from the public
- Types of Accounts:
Different types of accounts can be opened by a bank for
the benefit of customers in a banking company. A non-banking financial company
can only accept deposits of different duration as prescribed by RBI.
- Interest on deposit:
The interest charged by a bank` on deposits is decided
by the banks themselves. It is based on Prime Lending Rate (it is the interest
rate charged by the banks while lending on Government securities that have no
risks). But for a non-banking company, the interest rate on deposits is decided
- Insurance coverage on deposit:
All bank deposits are insured up to a certain
limit compulsorily with Deposit Insurance Credit Guarantee Corporation. But
there is no insurance cover for non-banking company deposits.
- Lending policy:
The lending policy of commercial banks is influenced by the monetary policy
of RBI. But for the other institutions, the lending policy is decided by the
security offered by the borrower
- Joint Operation:
All banking companies are necessarily joint-stock
companies. But, NBFCs can be in the form of Nidhis, Benefit societies, etc.
However, partnership firms are prohibited now.
- Forex Transaction:
The commercial banks can undertake transactions in
foreign exchange as Authorized Dealers, whereas, NBFCs cannot undertake
transactions in foreign exchange unless they are licensed by RBI.
- Merger of banks:
A banking company can be merged with other commercial banks
as per RBI orders. But the Merger of non-banking will be as per the Companies
- Periodical Inspection:
There can be an inspection of banks by RBI
periodically. No such approval is required from RBI. But, non-banks should
comply with the provisions of the Companies Act.
- Appointment of Chairman and Directors:
Appointment of Chairman and managing
directors in a banking company requires prior approval of RBI. But no such
approval is required from RBI for an NBC. But, they should comply with the
provisions of the Companies Act.
- Public Sector:
There exists a public sector commercial bank in India. But there does not
exist public sector non-banking companies
- Type of Advertisements:
Commercial banks can choose any type of
advertisement for inviting public deposits. For non-banks, advertisements for
inviting public deposits should be as per RBI regulations.
- Customer grievance:
For a banking company, consumers� Grievance Cells of
respective banks will look after the grievance of customers. Whereas in the case
of NBFCs a Company Law Board is set up which acts as the regulatory authority
for non-banking companies in case of non-refund of deposits.
- Rate of Interest:
Consumer credit is cheaper with banks as the interest
charged is on a declining rate of interest. But hire purchase finance of NBFCs
has a flat rate of interest and hence it�s costlier.
- Evidence between banker and customer:
Savings account and current account
are operated in a bank and entries of the savings account are recorded in the
passbook and the passbook is regarded as the conclusive evidence between a
banker and customer. But there are no such accounts in non-banking
In India, both the Banks and the NBFIs are the key elements of a sound and
stable financial system. Usually the Banking Institutions dominate the financial
system in most countries including India because every sector whether business,
household or the public, all collectively rely on the banking system for a wide
range of activities and to meet their financial needs.
Nevertheless, by offering all the additional and alternative financial needs
along with the usually required needs of the people, NBFIs have also gained
significant popularity in both the developed & developing countries. The NBFCs
on the one hand facilitates long term investment and financial services and
provides aid to the people who requires such a facility but are unable to
because of a lot of formalities and limitations in the banking sector, it is
often a challenge to the banking sector. Whereas, on the other hand, there is a
growth of NBFIs with a wide range of products available for individuals &
institutions with the available resources to invest.
NBFIs not only provides demand side of fund an alternative sector of financing
besides bank financial institution but also facilitate a sound competitive
environment in the financial market. Therefore, the role of NBFIs have also
become very important especially today.
- Swarit Advisors, Non -Banking Financial Companies (NBFC)- An
overview https://swaritadvisors.com/learning/non-banking-financial-companies-nbfc-an-overview/ (accessed
on 09/03/2021 at 05.13 pm).
- The Companies Act, 2013.
- RBI Government, https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92
(accessed on 09/03/2021 at 05.15 pm
- RBI Act, 1934, s 45-IA.
- Companies Act, 2013, s 406.
- Chit Funds Act, 1982, cl (b) s 2.
- N Gopal Swamy, Dr. M. Nandhini, Performance of Non- Banking Financial
Institutions in India. https://www.researchgate.net/publication/335544028_PERFORMANCE_OF_NON-BANKING_FINANCIAL_INSTITUTIONS_IN_INDIA (accessed
on 09/03/2021 at 05.03pm)
- Account Learning, Banking company v. Non-banking company (including NBFCs) https://accountlearning.com/banking-company-vs-non-banking-company-including-nbfcs/ (accessed
on 09/03/2021 at 05.22 pm)