In a country like India with a huge population, it is impossible for banks to cater to all sections of the society as many areas are inaccessible and remote. Also, to provide banking facilities to the illiterate and the poor, finance institutions that work on similar lines as banks are required. In India, this requirement has traditionally been fulfilled by NBFC, or non banking financial company. As the name suggests, NBFC is not a bank though it performs many functions similar to that of banks.
NBFC is required to be registered under the Companies Act 1956 to be able to perform functions similar to a bank. Normally, a NBFC is engaged in the business of loans and advances, acquisition of shares, debentures, stocks, bonds and securities issued by the government. It also indulges in hire-purchase, leasing, insurance and chit business.
"Non-banking financial company" means(i) a financial institution which is a company; (ii) a non banking institution and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.
NBFCs as described by RBI in points areEQUIPMENT-LEASING COMPANY; HIRE-PURCHASE COMPANY; LOAN COMPANY; INVESTMENT COMPANY
They are also categorized in a different format among 8 categoriesLOAN COMPANY HIRE PURCHASE COMPANY INVESTMENT COMPANY MUTUAL BENEFIT COMPANY
INVESTMENT COMPANY(IC)
LOAN COMPANY(LC) (This is with effect from december,2006)
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and
Definition
It does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
NBFCs : CLASSIFICATION
FUND BASED ACTIVITIES
Deposits, Equipment Leasing, Hire Purchase, Bills Discounting, Loans/ Investments, Housing Finance, Factoring, Credit Cards etc.
NBFCs
Financial Services
Types of NBFC
Loan Companies: Lend money to companies and individuals. Eg: Housing finance companies
Investment Companies: These companies mobilize savings and invest them in industrial securities. They provide the benefits of diversification of risk and a steady return to investors. Eg: UTI, LIC
Leasing Companies: They provide loans to small firms and individuals who want to buy new machines and equipment. Chit Funds: Under this scheme the promoter collects subscriptions at specified time periods from enrolled members and the amount so collected if handed over to a member on rotation.
Housing Finance Companies: HUDCO is a national level institution which gives loans to individuals and societies for building houses and flats
Types of NBFC
Asset finance Companies (AFC) AFC are financial institutions whose principal business is of financing physical assets such as automobiles, tractors, construction equipments material handling equipments and other machines. ex: Bajaj Auto Finance corp. , Fullerton India etc Investment Companies (IC) ICs generally are involved in the business of shares, stocks, bonds, debentures issued by government or local authority that are marketable in nature ex: Stock Broking Companies, Gilt firms Loan Companies (LC) LCs are loan giving companies which operate in the business of providing loans. These can be housing loans, gold loans etc ex: Manapuram Gold Finance, HDFC
BANKS-financial institutions-reached the major section of every country of the world still there were some rural, under-privileged and under-served sections in each of the nations Requirement of the services of some financial institution which could cater to their needs. Lead to the creation of the NON-BANKING FINANCIAL COMPANIES or simply NBFCs. UNTOUCHED AREAS IMPORTANT ROLE TO BE PLAYED NEED OF BETTER FINANCIAL SERVICES UNDER-SERVICED SEGMENTS
NBFCs concentrate their activities on areas NOT ENTERTAINED by the BANKING sector -like-
1. HIRE-PURCHASE
2. LEASING 3. EQUIPMENT-LEASING 4. LOANS 5. CHIT FUNDING,etc. Cost efficiency -NBFCs are better than BanksNBFCs-important role in the provision of QUALITY CUSTOMER SERVICES -much better than banks can ever do.
So to sum up we can define this section BANKS OVER NBFCs in the following points-
functions
Act as supplier of loan and credit facilities. Supporting investment in property. Trade money market instruments. Fund private education. Underwrite stocks and shares. Advise companies merger and acquisition. Portfolio Management
Importance
Development of sectors like Transport & Infrastructure Substantial employment generation Help & increase wealth creation Broad base economic development Irreplaceable supplement to bank credit in rural segments Major thrust on semi-urban, rural areas & first time buyers/users To finance economically weaker sections Huge contribution to the State exchequer
Concentrated on
Commercial vehicles Passenger cars Multi-utility & multi-purpose vehicles
Reliance Capital, an arm of the Anil Dhirubhai Ambani Group, will set up a separate housing financial subsidiary and non-banking financial company (NBFC) for the consumer finance sector. Ambani said his company is also planning to selectively expand its