The Non-Banking Financial Companies are performing an exceptional role in the economy by delivering numerous type financial activities. NBFCs are actually a heterogeneous group providing several services extending from micro finance to insurance. They provide insurance, gives MFI loans, chits etc.
Gold loan NBFCs, chit funds, nidhis etc. are examples of NBFCs.
In recent years, the RBI is putting high regulations on NBFCs. Some of the regulations are as hard as that of banks. Extension of SARFAESI clause and putting more capital requirements are some of them. Actually there is a trend of imposing almost all regulatory requirements of banks on the NBFC sector. This is because failure of big NBFCs is dangerous to the economy as well. The NBFCs are nicknamed as shadow banking sector.
NBFCs are regulated by the RBI under the RBI Act of 1935 from 1997 onwards. They have to: register with the RBI, keep minimum capital, maintain SLR etc. Other strict norms are also detailed by the RBI. Important NBFCs are identified by the RBI by categorizing them into systemically important NBFCs, deposit taking NBFCs, NBFC- MFI etc.
What is an NBFC?
“A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 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 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 and sale/purchase/construction of immovable property.” – RBI.
What is difference between banks & NBFCs?
Banks and NBFCs are basically financial intermediaries. Banks are regulated under the Banking Regulation Act though most of the laws of Companies Act are also applicable to banks. NBFCs are registered under the Companies Act. Both are regulated by the RBI. Main differences between banks and NBFCs are:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
IV. Bank is a financial institution whose liabilities (i.e., deposits) are widely accepted as a means of payment in the settlement of debt. Non-bank financial intermediaries, on the other hand, are those institutions whose liabilities are not accepted as means of payment for the settlement of debt.
V. Banks are termed as creators of credit through money multiplier activity whereas NBFCs are not.