Non-Banking Financial Companies

Non-banking financial companies (NBFCs) play an excellent role in the economy by carrying out many economic activities. The NBFC ecosystem comprises a heterogeneous group of companies offering various types of services. These services include microfinance, insurance, personal and infrastructural loans, finance infrastructure, etc

What are NBFCs? 

NBFCs are companies registered under the Companies Act of 1956 or 2013. RBI is the apex regulator of NBFCs under the RBI Act of 1934.

What are the functions of NBFCs?

Although NBFCs are not banks, they still carry out equally important banking activities such as:

• Lending loans and advances
• Leasing and trade financing 
• Asset Management 
• Trading in money market instruments
• Management of stock portfolio 
• Investment products
• Retail Financing
• Hire - purchase
• Insurance and chit business
• Acquisition of securities (sovereign or private), shares, bonds, stocks, debentures, and other similar negotiable securities

 When did NBFCs start in India? How did they grow?

• NBFCs began their functions in 1960s as an alternate option for depositors and investors. Further, the financial needs of the public were not adequately met by the banks. Thus, it became imperative to introduce a new institution, i.e., NBFCs. 
• In the beginning, they were functioning on a small and limited scale. Thus, NBFCs worked without bringing much change in the financial scenario. At the time, NBFCs focused solely on fixed deposit acceptance and leasing services. 
• Later as operations, reach, and market share of NBFCs expanded. The need for a separate regulatory system arose for NBFCs. 
• As a result, a new chapter, i.e., Chapter III B was added to the RBI Act of 1934. After the amendment, RBI had more powers to regulate deposits by accepting NBFCs. 
• Later on, various reforms were introduced. Moreover, one more reform was to allow NBFCs involved in hire purchase and leasing to accept deposits. Yet, they could only accept deposits to the extent of their net-owned funds. NBFCs also need to keep their liquid assets in the form of unencumbered approved government securities (including treasury bills).
• Since 1980s, NBFCs started to attract a large investor base. Further, their coverage also expanded gradually, resulting in a boom in NBFCs in the country. 
• In 1997, amendments were made to the RBI Act, 1934. Ultimately, these amendments aim to put in place a comprehensive regulatory and supervisory structure to safeguard the interests of various stakeholders. Since then, NBFCs have grown enormously in market share, technological solutions, innovations, operations, depositors, and investor base. 
• In 2016, the Indian government allowed 100% foreign direct investment under the automatic route in regulated NBFCs.

Types of NBFCs 

NBFCs are categorized based on various criteria:

1. Based on Liability

• Non-deposit acceptance (Type-I), also, NBFCs who do not accept deposits are further divided into systematically important NBFCs and other NBFCs.
• Deposit accepting NBFCs (Type-II)

2. Based on Activity: There are many types of NBFCs based on their business activity. These types are:

• Investment and Credit Company (Includes Loan Company, Asset Company, Investment Company)
• Micro Finance Company
• NBFC Factor
• Systematically Important Core Investment Company
• NBFC - Infrastructure Finance Company
• Mortgage Guarantee Company
• Non-operative Financial Holding Company (NBFC-NOFHC)
• NBFC Account Aggregator
• Infrastructure Debt Fund
• Peer to peer lending platforms
• Housing Finance Companies

Who controls NBFCs in India?

The Central Bank of India, i.e., RBI, is the apex regulator of NBFCs. The functioning, management, and operations of NBFCs are regulated and monitored by the RBI under the framework set up under the RBI Act of 18934 (Chapter III-B).

How do NBFCs work in India?

Similar to banks, non-banking financial companies provide loans. However, the difference is that while banks provide loans by accepting deposits directly from the public, the NBFCs provide loans by borrowing from banks or selling their commercial papers. Most NBFCs in India are non-deposit accepting; they borrow money from banks or sell commercial papers (short-term financial securities. Hence, the NBFCs rely on public funds for approximately 70% of their liabilities. 

How many NBFCs are there in India?

In 2021, there were around 10,000 (9,507 to be precise) non-banking financial companies registered with the RBI. The majority of these NBFCs are non-deposit-taking categories, i.e., type-I. According to RBI, huge type-I NBFCs with more than 5 five billion rupees assets are systemically important NBFCs. There are around 300 systematically important NBFCs holding more than 80% of the total NBFC asset volume.

Here is the list of the top 10 NBFCs in India: 

1. Bajaj Finance Ltd
2. Shriram Transport Finance Company Ltd
3. Aditya Birla Capital Ltd
4. L&T Finance Holdings Ltd
5. Mahindra & Mahindra Financial Services Ltd
6. Edelweiss Financial Services Ltd
7. Cholamandalam Investment & Finance Company Ltd
8. Muthoot Finance Ltd
9. Manappuram Finance Ltd
10. Sundaram Finance Ltd

Do NBFCs have subsidiaries?

Yes, NBFCs can open up their overseas branches, subsidiaries, joint ventures, and representative offices. They can even undertake investments abroad. However, such desired NBFCs RBI must obtain a No Objection Certificate (NOC) from the Department of Non-Banking Supervision (DNS) from the regional RBI office.

The eligibility criteria for opening up a subsidiary are as follows: 

• Investments must be in the financial sector.
• Direct investment in prohibited activities under FEMA is not permissible.
• Investment is allowed in entities whose core activities are monitored by a financial sector regulator in the host country.
• Foreign investment in an entity having a single intermediate is permissible. However, foreign investment in an entity with multi-layered, cross-jurisdictional structures is not permitted.
• Also, the desired NBFC must be making profits for the previous three years. Moreover, the Net NPAs of the NBFC should be less than 5% of its net advances.

Non-Banking Financial Companies are playing a crucial role in boosting inclusive growth in the economy and social space. NBFCs promote inclusive development by catering to the varied financial needs of their customers. NBFCs are also taking a leadership role in offering innovative services to Micro, Small, and Medium Enterprises appropriate to their business requirements. So, these shadow finance companies are also fuelling demand in the consumer industry. To conclude, this enhanced demand leads to more production, which results in overall GDP growth.