Complete Guide to Non-Banking Financial Companies

Non-bank financial companies (NBFC) have quickly become an important segment as an alternative lender for finance. NBFCs are recognized as a major financial intermediary, particularly for the retail sectors, with financial inclusion becoming increasingly important.

NBFC is a diverse group of financial institutions providing facilities such as equipment lease finance, hire purchase finance, personal loans, vehicle finance, working capital loans, home loans, equity and investment loans, and more.

What is Non-Banking Financial Company?

NBFC is a company registered under the Companies Act 1956, specializing in financing activities. NBFCs are an integral part of the financial system due to the improvement of competition and diversification in the financial sector, spreading risk especially in times of financial difficulties and are also considered to complement the banking system at competitive prices. NBFCs have exploded in the last few years since venture capital firms, retail and industrial companies entered the lending business.

NBFC provides loans and advances, purchases of stocks / bonds / securities issued by the government or any local authority or others, makes negotiable values of a similar nature. It helps in leasing, hire purchase, insurance business, account business, but does not include every institution whose main activity is agricultural activity, commercial activity, buying or selling goods (other than securities) or providing services and selling / buying / building property.

Types of Non-Banking Financial Companies

Now let’s look at the different types of Non-Bank Finance Company (NBFC) within these broad categories:

• Asset Finance Company (AFC): An AFC is a company, which is a financial enterprise institution whose main business is the financing of in-kind assets in support of productive / economic activity, such as automobiles, tractors, lathes, generator sets, earth moving machines and material handling, self-powered motion, and general industrial machinery. It is defined as the aggregate of funding of physical / real assets that support economic activity and the income derived from it is not less than 60% of its total wealth or income.
• Investment Company: It is a financial institution whose main business is the acquisition of securities.
• Loan Company (LC): LC means any company that is a financial institution. It is the provision of finance, either through loans or advances or otherwise, for activities other than their own, but which do not include an asset finance company.
• Infrastructure Finance Company (IFC): IFC is a non-bank finance company that-
• invests at least 75 percent of its total assets in infrastructure loans
• has a minimum net ownership fund of $300 billion
• has a minimum credit rating of ‘A ‘or equivalent!
• CRAR of 15%
• Systematically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC that carries out the acquisition of stocks and securities.
• Infrastructure Debt Fund: Non-Banking Financial Company (IDF-NBFC): IDF-NBFC is an NBFC registered company to facilitate the flow of long-term debt into infrastructure projects. Minimum term of 5 years only Infrastructure Finance Firms (IFC) can sponsor IDF-NBFC.
• Non-Bank Financial Firms – Microfinance Institution (NBFC-MFI): NBFC-MFI is a non-deposit NBFC and at least 85% of its assets are qualifying assets that meet the following criteria:
  • Loan disbursed by an NBFC MFI to a borrower with a rural household income of $1,000 or less or an urban household income and semi-urban household income of $1 or less, 60,000
  • the loan amount does not exceed $50,000 in the first cycle and $100,000 in subsequent cycles; the total debt of the borrower does not exceed 1,000
  • the credit period for a credit amount of more than 15,000 without penalty may not be less than 24 months
  • loan to be granted without collateral
  • the total amount of income-generating loans is not less than 50 per cent of the total amount of loans granted by MFIs
  • the loan is repaid in weekly, bi-weekly or monthly instalments at the borrower’s choice.
• Non-Bank Financial Firms – Factors (NBFC-Factors): NBFC-Factor is a no-deposit NBFC that is engaged in the core business of factoring. The assets in the factoring business must make up at least 50 percent of your total assets and your income from the factoring business must not be less than 50 percent of your gross income.
• Mortgage Guarantee Companies (MGC): MGC are financial institutions where at least 90% of the turnover is a mortgage guarantee business or at least 90% of the gross income comes from the mortgage guarantee business and the net fund is 100 crores.
• Non-Operative Financial Holding Company (NOFHC): is a financial institution through which promoter/groups can set up a new bank. It is a wholly owned, non-operational finance company (NOFHC) run by the bank, as are all other financial services regulated by the financial sector’s supervisory authorities to the extent permitted by applicable regulatory requirements.

Difference between NBFC & Banks

Here are few major differences between the two.

• NBFC cannot accept demand deposits. Demand Deposits refer to deposits that can be withdrawn without notice. NBFCs cannot offer this service and banks offer it in the form of current or saving account.
• NBFC’s do not form part of the payment and settlement system and cannot write self-drawn checks.
• Deposit Protection Facility: Deposits with banks are covered by insurance to protect the depositor from bank failure. The NBFCs are not required to insure the deposits made.
• Reserve Ratio: Banks are required to hold part of their deposits as reserves as ordered by the government financial institution. An NBFC does not have such a requirement.
• Foreign capital: At banks, the share of foreign investments is limited to 74%. Foreign investment is allowed in an NBFC

The Bottom Line

There is major growth in the trend of developing non-banking financial institutions all around the world as it is a grey area for the investor as well as the lender to work towards enhancing the project. NBFC’s aim at providing loans without any hassle to the public who really wish to help the targeted growth center for the Government.

Hope this article helped you understand the true Meaning and Types of Non-Banking Financial Companies and if it is worth your investment!