Understanding what are Non-Banking Financial Companies (NBFCs) in India: One of the key approaches to make money from the stock market is to select a fast-growing industry and look for the best investment opportunity in that industry. If the industry is growing at a good pace, the chances are that the top constituent companies in that industry will too grow at a similar pace.
One industry that is very powerful, growing at a good pace since last decade and is often confused by banking industry in NBFC in India. In this article, we are going to discuss what are Non-Banking Financial Companies (NBFCs) in India, their examples, the definition of NBFCs as per RBI and a few top NBFCs in India. Let’s get started.
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What are Non-Banking Financial Companies (NBFCs)?
In simple terms, Non-Banking Financial Companies are financial institutions that do not possess a banking license from the RBI but still provide bank-like financial services like loans, credit facility, retirement planning, etc.
The need for an NBFC arises when the banking structure already present does not fulfill all the financial needs in the economy. These may be due to rules and regulations that bind the banking sector or lack of reach in the service provided and accessibility to certain consumers across the nation. Here are some of the examples of NBFC’s:
- Investment Banks
- Mortgage Lenders
- Money Market Funds
- Insurance companies
- Hedge and Private Equity Funds
- P2P lenders
- Currency Exchanges
- Pawnshops
- Chit Funds
After reading the definition, we must not mistake the role of an NBFC to a mere backup for banks in India. NBFC’s provide and lead in various services when compared to banks. NBFCs have alone made up for a 12.5% rise in Gross Domestic Product of our country.
NBFCs according to the RBI
According to the Reserve Bank of India (RBI), Non-Banking Financial Companies (NBFC) in India can be defined as:
“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.” (Source: RBI)
The RBI uses the 50-50 test in order to judge if financial activity forms the principal business of a company or not in order to be considered as an NBFC. According to this test
- Financial Assets must constitute more than 50% of the total assets (And)
- Income from these financial assets must constitute more than 50% of the gross income.
Companies that fulfill the criteria mentioned above are to be registered as NBFCs.
Difference between an NBFC and a Bank?
Even though a few activities may be performed by both they do possess the following differences:
- NBFC cannot accept demand deposits: Demand deposits refer to deposits that can be withdrawn without any prior notice. NBFC’s are restricted from providing this service and banks provide then in the form of Current A/C and Savings A/C.
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
- Deposit insurance facility: The deposits placed in banks are backed by insurance in order to protect the depositor against the failure of a bank. NBFC’s are not required to Insure the deposits placed.
- Reserve Ratio: Banks are required to maintain a portion of their deposits as reserves as directed by the RBI. An NBFC is under no such requirement.
- Foreign Capital: When it comes to banks the level of foreign investment is capped at 74%. Whereas 100% of foreign investment is allowed in an NBFC
Do all NBFC’s fall under the purview of RBI?
Not all NBFC’s fall under the purview of the RBI. Different NBFC’s are governed by different laws depending on the function they perform.
| NBFC | GOVERNING BODY |
|---|---|
| Merchant Banker Venture Capital Fund Stock Exchange Stock Broker Sub Broker | SEBI |
| Insurance | Insurance Regulatory and Development Authority |
| Chit Funds | State Governments |
| Nidhi Companies | Ministry of Corporate Affairs |
Top Non-Banking Financial Companies – NBFC’s in India
Here is a list of a few top NBFC’s in India on the basis of Annual Turnover and Net Profit:
— Bajaj Finance Ltd
— Shriram Transport Finance Company Limited
— Muthoot Finance Limited
— Mahindra & Mahindra Financial Services Limited
— Sundaram Finance Limited
That’s all for this post on Non-Banking Financial Companies in India. I hope it was useful for you. If you have any doubts related to NBFC in India, feel free to comment below. I’ll be happy to help. Happy Investing.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
