Role of NBFCs

What are NBFCs?

NBFCs are financial institutions that offer various financial services similar to traditional banks, but they operate without a banking license. Unlike banks, NBFCs cannot accept demand deposits, but they can provide loans and advances, asset financing, wealth management, and other financial products. A Non-Banking Financial Company (NBFC) is a company that is registered under the Companies Act, 1956 or the Companies Act, 2013 engaged in the business of advancing a loan, acquisition of stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of leasing, hire-purchase, insurance business, chit business. It 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....

Full Form of NBFC

NBFC stands for Non-Banking Financial Companies. NBFCs are financial institutions that offer various financial services similar to traditional banks, but they operate without a banking license. Unlike banks, NBFCs cannot accept demand deposits, but they can provide loans and advances, asset financing, wealth management, and other financial products....

Role of NBFCs

1. Providing Credit Needs: NBFCs play an important role in the Indian financial system, especially because their role is vital in providing credit to sectors that are not served by traditional banks. This helps the financial inclusion of the ignored sector....

History of NBFCs

The concept of NBFCs came to India in the 1960s, it was seen as an alternative for individuals whose financial needs were not sufficiently met by the existing banking system due to less credibility or due to strict paperwork. In the early days of inception, Non-Banking Financial Companies were initially small organisations and did not make much impact on the financial industry at large. In December 1964, The Reserve Bank of India amended the RBI Act, of 1934, and new rules and regulations were established for NBFCs. This act helped NBFCs to get established in India. Later, the government of India established two committees to review the existing structure and working of NBFCs in India....

Objectives of NBFCs

1. Financial Inclusion: NBFCs’ main objective is to promote financial inclusion by extending credit and financial services to ignored sectors of the economy, as the primary banking sector relies on collaterals and stringent documentation which many unorganised sectors lack in....

Functions of NBFCs

1. Lending and Credit: NBFCs provide flexible lending solutions and credit facilities, which include personal, vehicle, housing financing, etc., to individuals and businesses....

Types of NBFCs

1. Asset Finance Company: AFC is a financial institution that facilitates the service of financing the various assets for individuals and businesses which include machinery, heavy equipment, production and farming equipment, and large power generators which involves large capital expenditure. The income arising should not less be than 60% of their total assets. UTI AMC, ICICI AMC, and BIRLA SUN LIFE AMC are a few examples of asset finance companies....

Examples of NBFCs

1. Bajaj Finserv: Bajaj Finserv is a leading non-banking finance company (NBFC) in India, which offers a wide range of financial services across various sectors such as lending, insurance, and wealth management. With a diverse portfolio of products and services. Bajaj Finserv has become one of the most trusted NBFCs in the country....

Advantages of NBFCs

1. Minimal Documentation: NBFCs have smoothened the loan and advance mechanism, as they are making efforts to create a loaning facility paperless, as of now they have minimised the documentation requirements and are also offering paperless and zero documentation loan offers....

Disadvantages of NBFCs

1. Over-Indebtedness: NBFCs can cause low-income people to become excessively indebted. Borrowers might take out several loans from several NBFCs as there are pre-approved loan offers given to them, which could put them in a debt trap situation and make it impossible for them to repay the debt and they will fall in debt cycle to repay....

Difference between Banks and NBFCs

Basis Banks NBFCs Meaning A bank is a government authorised company, which provides banking services to the general public. An NBFC is a company engaged in financial services without a banking license. Regulatory Act Regulated by the RBI under the Banking Regulations Act, 1949. Regulated by the RBI, incorporated under the Companies Act, 1956. Functions Banks offer a wide range of banking services. NBFC is engaged in lending and investment activities. Deposit Acceptance Banks are allowed to accept deposits from the general public. NBFCs are not allowed to accept demand deposits from the general public....