Banking Awareness: What Are NBFC And Their Functions

Non-banking financial institutions commonly known as NBFCs are the financial institutions regulated by RBI. Readout this article to know the types and functions of NBFCs.

| Updated On May 1st, 2020 at 11:33 am

The Reserve Bank Of India has defined NBFC as the  Companies which are  registered under the Companies Act, 1956 and are 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 they 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 related to it and sale/purchase/construction of immovable property are known as Non-Banking Financial Company. Reserve Bank Of India has further extended the definition of NBFC as the Companies having   principal business of receiving deposits under any scheme or through any arrangement in one lump sum or in installments by way of contributions or in any other manner.

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Functions Of NBFC

Hire Purchase Services

Hire purchase service is a way through which the seller delivers the goods to the buyer without transferring the ownership of the goods. The payment of th goods is made in installments. Once the buyer pays all the installments of the goods, the ownership of the good is automatically transferred to the buyer.

Retail Financing 

Companies that Provides short term funds for Loan against shares, gold, property, primarily for consumption purposes.

Trade finance 

Companies dealing in Dealer/distributor finance so that they can for  working capital requirements, vendor finance, and other business loans.

Infrastructural Funding 

This is the largest section where major NBFCs deal in. A lot of portion of this segment alone makes up a major portion of funds lent, amongst the different segments. This majorily includes Real Estate, railways or Metros, flyovers, ports, airports, etc.

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Asset Management Company:

Assest managment companies are those companies consists of fund managers (who invest in equity shares to gain handsome gains) who invest the funds pooled by small investors and actively manage it.

Leasing Services 

The companies that deals in leasing or for a better understanding of this word we can understand it in such a way that the way we rent property or flat for living similary these companies provide property to small businesses or sometime even larger ones who cannot afford it for whatsoever reason. The only difference between renting and leasing is that in leasing contracts are made for fixed period of time.

Venture Capital Services

The companies that invest in the small businesses which are at their initial stage but their success rate is high and are promising enough of sufficient return in coming time.

Micro Small Medium Enterprise (MSME) Financing

MSME is one of the roots of our economy and millions of livelihood depends on this sector that is why government announced such luring schemes for MSME sector to promote its growth.

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Difference between NBFC and Bank?

Function Banks NBFCs
Demand Deposits It Can accept all types of deposits It Can’t accept demand deposits
Deposit insurance It Covered under the RBI’s deposit insurance. There is No deposit insurance
Payment and Settlement system of the RBI They are supported by the Payment and Settlement System (RTGS, NEFT etc.,) NBFCs Can not avail the payment and settlement system.
Foreign investment  It is Allowed up to 74% It is Allowed upto 100%
CRR It is Applicable It is Not applicable
CRAR It is Applicable There is 15% CRAR for Deposit taking NBFCs and Non-Deposit taking – Systemically Important NBFCs.
SLR It is Applicable 15% SLR for Deposit taking NBFCs
SARFAESI It is Applicable It is Applicable
Provisioning It is Applicable It is Applicable
Incorporation Banking Regulation Act Companies Act (mostly)

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Regulators of Non-Banking Financial Companies

Given below is the complete overview of different types of NBFCs and how they are controlled.

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Frequently Asked Questions:

Q. What is NBFCs?

Ans. Any Non-Banking Financial Institution which deals in services of banks but are not banks. For difference see the table given above.

Q. What is full form of NBFC?

Ans. Non-Banking Financial Company is the full form of NBFC.

Q. Who regulates NBFC?

Ans. Reserve Bank Of India is the regulator of NBFCs.

Q. Can NBFC give loan?

Ans. Yes! they deals in credit services.

Q. What is difference between NBFC and bank?

Ans. Major difference between NBFC and Bank is that NBFC cannot issue cheques. For more differences refer to the table given above.