Home Education NON-BANKING FINANCIAL COMPANY - Unexplained Economical Sector

NON-BANKING FINANCIAL COMPANY – Unexplained Economical Sector

A non-banking financial company is a company that deals with banking services like loans, investments, insurances, etc.

Have you ever thought why do we need NBFC when we have Banks? 

Above all a non-banking financial companies (NBFCs) play an important role in the economy of a country. That is to say in developing countries like India sanction of loans from banks is a hectic procedure for businesses and other infrastructure companies. That is where NBFCs come to the place.

For instance the non-banking financial company provides loans to individuals, businesses, and other infrastructure companies with fewer formalities and at the same or fewer interest rates for a minimum of 8 months to 60 months (5 years). 

What are you going to explore:

  1. What is a Non-banking financial company?
  2. Who regulates NBFC in India?
  3. Difference between NBFCs and Banks
  4. Who lends to NBFC?
  5. Who do NBFCs lend to and How?
  6. NBFCs in India
  7. Conclusion
  8. FAQs

What is Non-Banking Financial Company (NBFC)?

Firstly a non-banking financial company is a company registered under Companies Act 1956 which provide banking services like loans(home loans, vehicle loans, personal loans), insurances, investments like securities issued, fixed deposits, mutual funds include equity, debt, balanced include equity, debt, balanced, etc. which act as financial institutions without having a banking license.

Non-banking financial company

A non-banking financial company is regulated within the framework of the Reserve Bank of India Act, 1934, and works under the guidance of the central bank in India i.e. Reserve Bank of India. Meanwhile one can start non- banking financial company with a minimum of net owned funds (NOF) worth INR 5 crores. 

However the non-banking financial company does not accept demand deposits as it does not has facilities of maintaining short term deposits services like a savings account, current accounts, recurring deposits, etc.

As a result the non-banking financial company only holds long term money in the form of fixed deposits, SIPs, Lump sum Mutual funds include equity, debt, balanced schemes.

Who regulates NBFCs in India?

reserve-bank-of-India-logo

Non-banking financial company (NBFC) is regulated within the framework of the Reserve Bank of India Act, 1934, and works under the guidance of the central bank of India i.e. Reserve Bank of India. But not all the financial companies are considered as Non-banking financial company.

Likewise, companies that deal with asset finance, investments, loans, infrastructure finance, acquisition of shares, small finance services, Mortgage guarantee companies like ICICI bank extra home loan.

A non-banking financial company with asset size (financial) of more than 50 percent of the total assets. Income from financial assets of more than 50 percent of the gross income to registered as NBFC by RBI.

Firstly the Reserve Bank of India has the authority under the Reserve Bank of India Act 1934 to register, provide directions, inspect, suspect, supervise, surveillance over Non-banking financial companies that has the equal criteria of the business.

Secondly the Central Bank of India can punish Non-banking financial companies (NBFC) for breaking the provisions under the Reserve Bank of India Act 1934.

Thirdly Reserve Bank of India has the authority to cancel the certificate of registration provided to a non-banking financial company. Reserve Bank of India also has the right to prohibit the deposits for acceptance and isolate their assets.

So, the Central Bank of India can file a windup petition against the non- banking financial company if NBFC caught not maintaining guidelines or violating provisions set by the Reserve Bank of India. source

Also read: Merger of banks

Difference between NBFCs and Banks

NBFC vs Bank comparison infographic

Registration and Licence

NBFC

On one hand Non-banking financial companies are registered under companies act 1956 and Do not have the license for its banking services.  

Banks

On the other hand banks are registered under the Banking regulatory act 1949 and have the license for its banking services.  

Initial Capital Requirement

NBFC

So, NBFCs required a minimum amount of Rs. 2 crores to 5 crores to start in India as a microfinance institution.  

Bank

But banks required a minimum amount of Rs. 500 Crores to start in India.  

NBFC vs Bank Image

Cash & Cash Equivalents

NBFC

On one hand, Non-banking financial companies deal in finance. It cannot accept the demand deposit. It cannot issue a self-drawn cheque.  

Bank

But on the other hand banks can accept all types of deposits I.e., Time deposit, demand deposits. Banks can issue self-drawn cheques.  

Accounts & payment methods

NBFC

However no facilities for maintaining accounts in NBFCs or no facilities for short term deposits. Payment methods like NEFT, RTGS is not a part of NBFCs  

Bank

But in the case of bank facilities for short term deposits in banks. Payment methods like NEFT, RTGS is a part of the Bank.  

Maintenance of Reserves

NBFC

Meanwhile if deposits are accepted than 15% of the as a result statutory liquidity ratio of that deposit should be maintained.  

Bank

Similarly the cash reserve ratio, statutory liquidity ratio should be maintained on a compulsory basis.  

Loan Sanction Process

NBFC

Above all the loan sanction process is easy and convenient in Non-banking financial companies.  

Bank

However the loan sanction process is lengthy and hectic in banks.  

Security of Depositor’s money

NBFC

On one hand their provisions in companies act to secure the depositors of NBFCs but not that strict as compared to banks.  

Bank

On the other hand, there are provisions in the RBI act to secure the Depositor of banks which should be maintained strictly.  

Who lends to NBFC?

Firstly Interest received from Business Loans, Working Capital Loans, Term Loan, Agricultural Loans, Loans for infrastructure, Vehicle Loans, auction of mortgages, are the primary sources of earning which act as working capital in Non-banking financial companies (NBFCs). Other than Loans and auctions Non-banking financial companies (NBFCs) also use to sell commercial papers to raise funds.

BANK-LEND-MONEY-TO-NBFC

Secondly, a Non-banking financial company (NBFC) borrows money from banks. They on-lend this money to small and medium enterprises, retail customers. Therefore banks lend money to NBFC to cover working capital with the term loan on a base rate of 9.21%

Who do NBFCs lend to and How?

This image is about giving cash

In short NBFC is infrastructure finance companies like IL&FS which provides Loans to MSME enterprises, infrastructure companies, and other various businesses.

The non-banking financial company offers various Loans for construction of houses, commercial properties, agricultural Loans, vehicle Loans, refinance or vehicles, personal Loans to enterprises as well as individuals for a tenure period of 12 months to 7 years to target long term repo rate on the interest of 10% to 23% depends upon the scheme offered to the customer.

Non-banking financial company (NBFC) works in both horizontal as well as vertical structures. However a Non-banking financial company borrows money from banks and lends them to businesses and individuals.

How NBFC lends money to its customers?

When an individual or business entity required Loans or want to invest in financial instruments like fixed deposits, mutual funds include equity, debt, balanced, etc. they use to approach branches located in their cities.

Meanwhile as the technology is increasing; so, various steps are taken towards development and innovation in the Fintech. Similarly in exceptional cases, Non-banking financial companies (NBFCs) are now offering Loans and other services in the cities where branches are not located.

Procedure

Time needed: 2 days.

Firstly, Sale executives are appointed in non-banking financial companies (NBFCs) to offer loan schemes.
To clarify these schemes include CIBIL score, past records or statements of active Loans, documentations required, a requirement of the guarantor, property papers, mortgage, net loan amount.

  1. Secondly, after the selection of schemes basics, documents are to be collected from loan applicant like:


    Photo of applicant

    KYC documents (Unique ID, Pan card, voter Id)

    Address proof

    Land documents (if required as per scheme)

    Income proof and bank details of the last 3-6 months

    Signature on loan agreements

    Co-applicant, Guarantor with their KYC documents (if required as per scheme)

    Photos of sale executive and applicant with the asset.

    Certificate of registration or license (in case of business entity)

    Cheques of applicant’s or Co-applicant’s bank account.

  2. After that completion of required necessary documents sales executive prepare a soft as well as hard copy file of all the documents and other details related to basic information, asset details, loan details, Scheme and loan details, Field inspection report, check duplication, etc.

  3. Meanwhile, these files will be submitted to credit managers/accountants/other assigned officials for proper checkups and approvals.

    At last, after approving at each stage finally, the loan amount will be credited to the customer’s bank account.

  4. Tenure of Loan

    subsequently, tenure for repayment of Loans varies between 12 months to 60 or more months depends upon the scheme and need of customer; which will recover on a monthly or half-yearly basis as per scheme given to the customer.

    However installments from agricultural Loans and farm equipment sector which includes tractors, harvesters, agricultural machines, etc. are collected on 6 monthly bases because of the agricultural income which depends on seasonal crops.

NBFCs in India

NameProducts and Services offers
Mahindra FinanceVehicle Loans, Personal Loans, construction loan, Fixed deposits, Mutual funds, Insurances
Shri Ram  Transport FinanceVehicle Loans, Business Loans, working capital Loans, Insurances, fixed deposits, recurring deposits
Chola mandalamVehicle Loans, Loans against property, home loans, insurances
Muthoot FinanceGold Loans, Money transfer, Foreign exchange, Insurances, Securities and investments
HDB Finance  Personal Loans, Credit Loans, Professional Loans, Gold Loans, Loans against property, securities, life insurance policies.
TATA CapitalTerm Loans, Working Capital Loans, Construction Loans, and Loans against securities, Equipments Financing and leasing.
L&T Financial ServicesVehicle Loans, Housing Loans, Mutual Funds, Real estate finance, Micro Loans, Infra Finance, and Wealth Management.
Bajaj FinservHome Loans, Personal Loans, Mortgage Finance, Insurances, Investments and wealth management
Home creditInsurance, Cards, Revolving Loans, Car Loans, Home appliances and electronic finance
TVS CreditVehicle Loans, Business Loans
Magma FinanceInvestments, Commercial lending, SME Finance, Consumer Finance
Hero FincorpSME and Commercial Loans, Medical Equipments Finance Two-wheeler and used car loans, Loans against property, Business loans,

Conclusion

Non-banking financial companies (NBFCs) play a crucial role in the country’s economy. Non-banking Financial Companies (NBFCs) are as important as banks in countries.

On one hand, Non-banking financial companies (NBFCs) are flexible and act as a boon for businesses and construction companies.

And on the other hand, due to the flexible and convenient banking procedures doubts the reliability of these financial institutions as compared to other hardcore banking institutions.

To clarify in a country like India Non-banking financial companies who act as financial institutions can increase the ease of business and money flotation across the country which also helps our economy to reach 5 trillion in the future.

FAQs

Question: What is NBFC Crisis in India?

Answer: Our detailed blog

Question: Can NBFC accept demand deposits.?

Answer: No, NBFC only accepts time deposits because NBFC is a company, not a bank.

Question: Can NBFC give loan?

Answer: Yes, NBFC gives loans to construction companies, businesses, and individuals.

Question: Can NBFC borrow from RBI?

Answer: NBFC borrows money from banks regulated by RBI not directly from RBI.

Question: Can NBFC accept time deposits?

Answer: Yes, NBFC only accept time deposits from 12 months to 7year

Question: Can NBFC give loan to group companies?

Answer: Yes, NBFC gives loans to massive projects and businesses.

Question: Can NBFC take a loan from shareholders?

Answer: No, NBFC cannot accept demand deposit they can only take a loan from banks.

Question: Can NBFC issue commercial paper?

Answer: Yes, NBFC can issue commercial papers if the net worth is 100 crore or more.

Question: Can NBFC be a private company?

Answer: Yes NBFC is a private company it is registered under Companies act 1956.

Question: How many NBFC licenses were cancelled by RBI?

Answer: 1701 NBFC licenses have cancelled in 2019. source

Question: Which NBFC is best for fixed deposit?

Answer: Fincare small finance

Question: Which NBFC is best for education loan?

Answer: TATA capital

Question: Which NBFC accept public deposits?

Answer: No, NBFC does not accept public deposit

Question: Which NBFC is converted to the commercial bank?

Answer: Au small finance, Kotak Mahindra, etc

Question: When was NBFC started in India?

Answer: In 1960 NBFC start operating

Question: What is the regulatory body for NBFC?

Answer: Reserve bank of India

Question: Who can start NBFC?

Answer: One can start NBFC with a minimum of net owned funds (NOF) worth Rs. 5 crores.

Question: Who do NBFCs lend to?

Answer: Individuals, businesses, Construction companies.

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