Non-Banking Financial Companies (NBFCs) – What are they?

By Trader Pit

July 9, 2021


A non-banking financial firm is a financial firm that is located outside of the conventional banking sector, and a non-banking financial company’s (NBFC) primary business is providing financial services to individuals and corporations rather than to banks. Typical services offered by NBFCs include insurance, investments, investment banking, financial planning, and the provision of consumer finance, among other things.

In this article, I will discuss NBFCs – Non-Banking Finance Companies. Non-Banking Finance Companies have been in the news a lot recently. The reason is that most people have forgotten what NBFCs are all about. NBFCs are funds that invest in various securities, bonds, and other financial instruments.

Popular-NBFC-in-India-1280x720
image courtesy – taxguru.in

Understanding Non-Banking Financial Companies (NBFCs) in India: One of the most important approaches to making money in the stock market is to choose a sector with strong growth and find the best investment opportunities in that sector. If the industry is growing at a good rate, there is a good chance that the large companies in the industry will grow at the same rate.

A very strong sector, which has grown at a good pace over the last decade and is often confused with the banking sector, is the NBFC sector in India. In this article, we discuss what are non-banking financial companies (NBFCs) in India, their examples, the definition of NBFCs as per the RBI and some best NBFCs in India. Let’s get started.

What are non-banking financial corporations (NBFCs)?

Simply put, non-banking finance companies are financial institutions that do not have a banking license from the RBI but offer bank-like financial services such as loans, credit, retirement plans, etc.

The need for NBFCs arises when the existing banking structure does not meet all the financial needs of the economy. This may be due to the rules and regulations that bind the banking industry or the lack of coverage of services offered and accessibility for some consumers across the country. The following are some examples of NBFCs:

  • Investment banks
  • Mortgage lender
  • Money Market Funds
  • Insurance companies
  • Hedge funds and private equity funds
  • P2P Lender
  • Currency exchange
  • Pawn shops
  • Anti-fraud fund

After reading this definition, one should not mistakenly assume that the role of NBFCs is limited to merely supporting banks in India. Compared to banks, NBFCs offer various services and are leaders in this field. Thanks to the NBFC alone, the GDP of our country has increased by 12.5%.

NBFC- Definition & Conditions as per RBI

nbfc rbi defition

According to the Reserve Bank of India (RBI), non-banking financial companies (NBFCs) in India can be defined as follows:

A non-banking finance company (NBFC) is a company registered under the Companies Act, 1956, which is engaged in the business of lending and borrowing, acquisition of shares/securities issued by the government or local authorities or other negotiable securities of similar nature, leasing, renting, insurance, fraud, but does not include an entity whose principal activity is farming, manufacturing, buying or selling (Source: RBI).

The RBI applies a 50/50 test to determine whether or not financial activities are the main activity of a company to qualify it as an NBFC. After this test.

  1. Financial assets must represent more than 50% of total assets (SOW)
  2. The income from these financial investments must exceed 50% of gross income.

Companies fulfilling the above criteria should be registered as NBFCs.

The difference between NBFC and the bank?

Although some activities can be performed by both, there are the following differences:

  1. NBFCs cannot accept demand deposits: Demand deposits are deposits that can be withdrawn without notice. NBFCs offer this service on a limited basis, while banks offer it in the form of current and savings accounts.
  2. NBFCs are not part of the payment and settlement system and cannot write cheques in their name.
  3. Deposit Insurance Fund : Deposits with banks are covered by insurance that protects the depositor in the event of the bank’s failure. NBFCs are not required to insure placed deposits.
  4. Reserve Factor : Banks are required to hold a portion of their deposits as reserves in accordance with the RBI guidelines. The NBFC is not subject to any such requirement.
  5. Foreign capital : In the case of banks, the share of foreign investment is limited to 74%. While the NBFC allows 100% foreign investment.

Are all NBFCs subject to the RBI?

Not all NBFCs fall under the jurisdiction of the RBI. The various CFNBs are governed by different laws depending on the functions they perform.

NBFCMANAGEMENT BODY
Investment bankers
Venture-capital funds
Stock exchanges
Stockbrokers
Sub-brokers
SEBI
InsuranceInsurance Regulatory and Development Authority
Anti-fraud fundState Governments
Nidhi CompanyMinistry of Business Affairs

Top non-banking financial companies – NBFCs in India

Here is a list of some of the best NBFCs in India based on their annual revenue and net profit:

  • Bajaj Finance Ltd.
  • Sriram Transport Finance Company Limited
  • Muthoot Finance Limited
  • Mahindra & Mahindra Financial Services Limited
  • Sundaram Finance Limited

Frequently Asked Questions

Which are non-banking financial companies?

Non-banking financial companies include insurance companies, investment companies, and securities companies. These companies don’t provide any banking service.

What are non-banking financial companies examples?

Non-Banking Financial Companies (NBFCs) are companies that provide financial services to individuals and businesses. Some examples of NBFCs include: Loan companies Insurance companies Investment companies Retail banks Money transfer companies Money market funds Brokerage firms Some examples of NBFCs are: Airlines Banks Brokerage firms Insurance companies Loan companies Money transfer companies Retail banks What are the different types of non-banking financial companies? There are many different types of non-banking financial companies. Some of the most common types are: Loan companies Insurance companies Investment companies Retail banks Money transfer companies Money market funds Brokerage firms Some examples of non-banking financial companies are: Airlines Banks Brokerage firms Insurance companies Loan companies

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About the author

Trader Pit

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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