In India's continuously evolving financial landscape, Non-banking Financial Companies (NBFCs) play a pivotal role by offering a wide range of financial services to various population segments. Over recent years, NBFCs have experienced notable growth and have become increasingly significant. These entities participate in the financial sector through activities that encompass deposit acceptance, provision of secured and unsecured loans, leasing, hire-purchase services, and more. The multifaceted contributions of NBFCs have positioned them as key players, catering to the diverse financial needs of different sections of the population.
Bajaj Finance Limited is one of the leading NBFCs in the country, offering a host of products including personal loans, fixed deposits, insurance, and more.
What are NBFCs?
NBFCs full form is Non-banking Financial Companies. It refers to an institution that delivers financial services akin to traditional banks but operates without a banking licence. NBFCs hold significance within the financial ecosystem, particularly in countries such as India, where they play a vital role in addressing the credit gap and fostering financial inclusion. In India, the Reserve Bank of India (RBI) regulates and oversees NBFCs, ensuring compliance with the provisions outlined in the RBI Act of 1934. This regulatory framework underscores the pivotal role NBFCs play in augmenting financial services and contributing to the overall economic landscape.
What services are offered by NBFCs?
Non-Banking Financial Companies (NBFCs) provide a range of financial services, offering alternatives to traditional banking institutions. Key services include:
- Loan Services: NBFCs offer personal, business, and vehicle loans, catering to diverse financial needs. They often provide faster processing and flexible terms compared to banks.
- Investment Solutions: They offer investment products such as mutual funds, bonds, and fixed deposits, enabling customers to grow their savings.
- Asset Financing: NBFCs provide financing for purchasing assets like machinery, equipment, and vehicles, supporting businesses in their growth and operational needs.
- Insurance Services: Many NBFCs offer insurance products, including life, health, and general insurance, helping customers manage risks and protect assets.
- Wealth Management: They offer financial planning, portfolio management, and advisory services for individuals and businesses seeking to manage and grow their wealth.
- Microfinance: NBFCs engage in providing small loans to underserved and low-income individuals, promoting financial inclusion and economic development.
All about an NBFC in India
A Non-Banking Financial Company (NBFC) in India is a financial institution that provides banking services without holding a banking license. They offer loans, investments, and other financial services. NBFCs play a vital role in financial inclusion, catering to diverse needs, but they operate under different regulations compared to traditional banks.
Role and objectives of NBFC
Non-Banking Financial Corporations (NBFCs) play a crucial role in the financial sector by providing a wide range of services, including loans, asset management, and investment opportunities. They primarily cater to segments often overlooked by traditional banks, such as small businesses and individuals with limited credit histories. The key objectives of NBFCs include enhancing financial inclusion, promoting entrepreneurship by offering accessible credit, and facilitating economic growth through targeted financial solutions. Additionally, NBFCs contribute to the diversification of the financial market, offering consumers more choices in funding and investment options, thereby fostering competition and innovation within the financial services landscape.
Eligibility to get an NBFC license in India
To obtain an NBFC license in India, entities must meet certain criteria set by the Reserve Bank of India (RBI). Key requirements include a minimum net owned fund, a specific business plan, fit and proper management, and adherence to regulatory guidelines. Detailed documentation, financial soundness, and compliance with RBI norms are essential.
Documents required to get an NBFC license
To obtain an NBFC license in India, required documents typically include:
- Detailed business plan
- Memorandum and Articles of Association
- Board resolution for NBFC application
- Certificate of Incorporation
- Audited financial statements
- KYC documents of directors
- Regulatory compliance documents
- Legal opinion on stamp duty
- Non-refundable application fee
Guidelines of RBI for NBFCs in India
- Minimum Net Owned Fund (NOF): Prescribed minimum capital requirement.
- Prudential norms: Guidelines for asset classification and provisioning.
- Risk management: Implementation of effective risk management systems.
- Corporate governance: Adherence to governance principles.
- Statutory compliance: Fulfilment of legal and regulatory obligations.
- Reporting requirements: Timely submission of reports to RBI.
Functions of NBFCs
Non-banking Financial Companies (NBFCs) serve vital functions in the financial sector.
Credit provision: NBFCs extend credit facilities, providing loans and financial assistance to individuals and businesses. Read all about the features of our personal loan.
Investment activities: They engage in various investment avenues, including securities, stocks, and bonds, contributing to market liquidity.
Accepting deposits: Certain NBFCs accept deposits, offering an alternative to traditional banking institutions.
Financial advisory: Many NBFCs offer financial advisory services, guiding clients on investments, financial planning, and risk management.
Promoting financial inclusion: NBFCs play a pivotal role in bridging the credit gap, especially in underserved areas, promoting financial inclusion in diverse communities.
Types of NBFCs
In India, various types of NBFCs contribute distinctively to the nation's financial landscape:
Asset Finance Companies (AFCs): Specialising in financing tangible assets like machinery and vehicles, AFCs aid individuals and businesses in acquiring essential assets, and facilitating economic expansion.
Loan Companies: Prominent in consumer finance, they offer personal, home, and education loans, addressing specific financial needs and providing credit to those with limited access to formal banking channels.
Infrastructure Finance Companies (IFCs): Focused on funding infrastructure projects in sectors like power and transportation, IFCs play a pivotal role in supporting national development and economic progress.
Microfinance Institutions (MFIs): Targeting economically disadvantaged segments, MFIs empower individuals and self-help groups with small loans, fostering entrepreneurship and sustainable livelihoods.
Investment Companies: Engaged in managing financial assets, investment companies cater to retail and institutional investors, contributing to capital formation and responsible investing practices.
Systemically Important Core Investment Companies (CICs-SI): A subset of investment companies, CICs-SI, with their significant role, are closely regulated by RBI due to their potential impact on financial stability. They hold substantial assets in the equity shares, debt, or other financial assets of their group companies.
Additional read: Types of NBFCs in India
Process of incorporation of a Non-Banking Financial Corporation (NBFC)
Incorporating a Non-Banking Financial Corporation (NBFC) involves several key steps. First, you must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN) for the proposed directors. Next, draft the Memorandum of Association (MoA) and Articles of Association (AoA), outlining the company’s objectives. Following this, file the incorporation application with the Registrar of Companies (RoC) along with the required documents. After approval, apply for an NBFC license from the Reserve Bank of India (RBI), meeting the necessary capital requirements. Once registered, the NBFC can offer various financial services, including nbfc personal loans, enhancing access to credit for individuals and businesses.
Pros and Cons of NBFC
Non-Banking Financial Corporations (NBFCs) play a significant role in the financial ecosystem, offering various services like loans, investment products, and asset management. Here’s a discussion of the pros and cons of NBFCs:
Pros |
Cons |
1. Accessibility |
NBFCs often cater to underserved segments, providing loans to individuals and businesses that may not qualify for traditional bank financing. |
2. Flexible Loan Products |
They offer a variety of financial products, including nbfc personal loans, which can be tailored to meet customer needs. |
3. Quick Loan Processing |
The loan approval and disbursement process is usually faster than that of banks, enabling timely access to funds. |
4. Focus on Niche Markets |
NBFCs often specialize in specific sectors, providing tailored solutions that meet unique market demands. |
In summary, while NBFCs offer unique advantages like accessibility and flexibility, they also come with certain drawbacks that potential borrowers should consider.
What is a net owned fund?
Net Owned Fund (NOF) refers to the capital that a Non-Banking Financial Corporation (NBFC) has after deducting its liabilities from its total assets. It is a crucial metric used to assess the financial health and stability of an NBFC. NOF includes equity capital, reserves, and surplus funds, providing insights into the company's ability to absorb losses and support its operations.
The net owned fund is particularly important in the context of regulatory compliance, as the Reserve Bank of India (RBI) mandates minimum NOF requirements for NBFCs to ensure they maintain sufficient capital to support their lending activities. The NBFC full form in banking is "Non-Banking Financial Company," and these institutions often engage in activities such as providing loans, asset management, and investment services.
A robust NOF signifies that an NBFC can effectively manage risk and continue to operate without relying excessively on borrowed funds. Consequently, a strong net owned fund is essential for sustaining growth, attracting investors, and maintaining confidence among stakeholders in the financial system.
What is the difference between NBFC and a bank.
Comparing NBFC and bank offers reveals a competitive landscape, with both entities presenting similar terms. However, banks adhere to stringent eligibility protocols, limiting accessibility for many. Higher credit score prerequisites, typically above 750, make bank loans challenging for individuals with weaker profiles. In contrast, NBFCs demonstrate flexibility, approving loans for those with lower credit scores. To ensure a smooth application process, it’s essential to check eligibility for personal loan and understand the documents required for personal loan.
India's NBFC sector, with its diverse range, mirrors the richness and complexity of the nation's financial landscape. Each category of NBFC caters to distinct financial requirements, contributing uniquely to economic expansion. From facilitating asset financing and personal loans to driving infrastructure development and empowering marginalised communities, NBFCs have ingrained themselves deeply into India's financial fabric, offering more inclusive access to credit.
Aspect |
NBFC |
Bank |
Definition |
Non-Banking Financial Company |
A financial institution licensed to accept deposits and provide loans |
Regulation |
Regulated by the Reserve Bank of India (RBI) |
Regulated by the RBI and the Banking Regulation Act, 1949 |
Deposit Acceptance |
Cannot accept demand deposits |
Can accept both demand and time deposits |
Loan Disbursement |
Provides loans, typically without the need for high credit scores |
Loans usually require higher credit scores and stringent eligibility criteria |
Interest Rates |
Generally more flexible and competitive |
Often have fixed interest rates determined by the RBI |
Scope of Services |
Primarily focuses on loans, asset management, and investments |
Offers a wide range of services including savings accounts, current accounts, loans, and more |
Financial Inclusion |
Often targets underbanked segments |
May have stricter eligibility criteria, limiting access for some individuals |
Capital Requirement |
Minimum net owned fund (NOF) required |
Subject to capital adequacy norms as per Basel guidelines |
