Banks and NBFCs

Banks and NBFC

In the modern era, Banks are the major contributor to financial stability & the economic growth of the country. But the bank doesn’t actually perform the entire task that completes the financial needs of the individual or organization. Therefore we required a company that supports the other financial task such as asset finance management, Investment management, Loan, Infrastructure and finance management. All the above requirements were fulfilled by the NBFC (Non-Banking Financial Company). Today we are going to learn about NBFC & MFI and the comparison among Bank, NBFC & MFI.

An NBFC is a financial company registered with the companies’ act of 1956. NBFCs are engaged in the profession of loans & advances / Purchase of Share / Stock / Bond / Securities.

For a company to be registered there are two main criteria. A company incorporated under the Companies Act, 1956 and desirous of commencing the business of non-banking financial institution as defined under
Section 45 I (a) of the RBI Act, 1934 should comply with the following:
1) It should be a company registered under Section 3 of the Companies Act
2) It should have a minimum net owned fund of ₹ 200 lakh.

Types of NBFC

Asset Finance Company (AFC):

An AFC is a financial organization that supports the principal business by financing physical assets promoting productive/economic activity
E.g. Automobiles, Tractors, Lathe machines, Cranes, Generator sets, and Earthmoving and Material handling equipment, moving on own power and General-purpose industrial machines.

Investment Company (IC):

IC means any firm which is a financial institution carrying its principal business by the purchase of securities

Loan Company (LC):

LC intends for key business by providing loans or advances or any activity other than its own but does not include an AFC

Infrastructure Finance Company (IFC):

  • Infrastructure finance companies deploy a minimum of three-fourths of their total assets in infrastructure loans.
  • A minimum crediting rating of ‘A’ and the Capital to Risk-Weighted Assets ratio is 15%.
  • Net owned Fund should be more than 300 Cr

Infrastructure Debt Fund (IDF-NBFC)

  • IDF-NBFC is an organization that facilitates the flow of long-term debt into Infrastructure projects.
  • IDF-NBFC boosts resources with Multiple-Currency bonds of minimum 5-year maturity.
  • Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

Gold Loan NBFCs in India:

Many NBFCs are offering gold loans in India; about 95 % of the gold loan enterprise is managed by three Kerala based companies.
E.g. Muthoot Finance, Manapuram Finance & Muthoot Fincorp.

NBFCs vs. Banks

  • An NBFC can’t accept Demand Deposits
  • An NBFC is not a part of the payment and settlement system
  • They cannot issue cheques
  • NBFC is not insured by DICGC i.e. (Deposit Insurance & Credit Guarantee organization)
  • An NBFC is not to maintain Reserve Ratios with RBI

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