Non-banking financial companies play an important role in India’s economic ecosystem, providing credit, leasing, hire-purchase, investment services, and more. However, NBFCs are not banks. Hence, they are regulated differently by the Reserve Bank of India. Understanding NBFC classification helps borrowers, investors, and businesses know which institution they are dealing with and the regulatory framework it operates under.
What is an NBFC?
NBFC full form itself states that it is a non-banking institution registered under the Companies Act, which carries on the business of Loans and advances, acquisition of shares, hire-purchase, insurance business, or providing other financial services, but does not necessarily hold a full banking licence.
NBFCs are regulated by the RBI under the RBI Act, 1934, and other relevant guidelines. They differ from banks mainly in terms of:
- They cannot accept demand deposits.
- Their regulatory framework is tailored to their business model.
- They often serve niche markets, underserved segments, or engage in specialised financing.
Types of NBFCs by activity
Their business model or primary function categorises different types of NBFCs. Here are some of the key types and what they do:
Loan company
A Loan company is an NBFC whose business is principally providing Loans or advances to others rather than for its own purposes. It may borrow funds and then lend them to consumers, traders, small businesses. This is a broad category that covers many NBFCs focused on credit.
Microfinance institution
These NBFCs cater to financially underserved people in urban, semi-urban, and rural areas. They provide Small-Ticket Loans, often to individuals who may not have a full banking credit history. The goal is financial inclusion.
Asset finance company
These are NBFCs that provide finance for physical assets, such as industrial machinery, equipment, vehicles, and farm equipment. They are typically regulated by prudential norms such as capital adequacy, asset classification, etc.
Investment company
An NBFC whose business is primarily the acquisition of securities and other financial assets. This company typically raises funds from the public, possibly via share capital or borrowing, and invests in different securities.
Infrastructure finance company
These NBFCs specialise in financing infrastructure projects across energy, water, transport, and sanitation.
Housing finance company
Housing finance companies focus on providing Housing Loans and other services to businesses and individuals.
What is the difference between a bank and an NBFC?
- NBFCs can introduce financial products and services based on customer demand.
- NBFCs can also specialise in specific areas such as vehicle financing, Infrastructure Loans.
- The decision-making process of NBFCs is much faster in comparison to banks.
- NBFCs also make it easier for individuals and businesses who have limited access to banking services. NBFCs are focused on contributing towards economic growth.
Conclusion
Non-Banking Financial Institution cover a broad spectrum of financial services in India. The RBI’s classification into layers and the categorisation by activity allow for tailored regulation and help borrowers and stakeholders understand what kind of entity they are engaging with.
Sign in to leave a comment.