What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956, that engages in the business of loans and advances, the acquisition of shares, stocks, bonds, debentures, or other marketable securities of a like nature issued by the government or a local authority, leasing, hire-purchase, insurance, or chit business, but does not include any institution whose principles are based on the banking system.
NBFC can be categorised into two streams.
- Based on the nature of the financial activity
It includes Asset Finance Company, Loan Company, Mortgage Guarantee Company, Investment Company, Core investment Company, Infrastructure Finance Company, Micro Finance Company, Housing Finance Company, etc
- Based on the nature of deposits
It includes Deposit accepting NBFC and Non-Deposit Accepting NBFC.
What are the major differences between NBFCs and banks?
There are some significant distinctions between NBFCs and banks. Some key differences between NBFCs and banks include: NBFCs cannot accept demand deposits; NBFCs are not part of the payment and settlement system and cannot issue checks drawn on themselves; and, unlike banks, NBFC depositors do not have access to the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facility. In simple word, An NBFC is a financial company that offers banking services to people without holding a banking license, whereas a bank is a government authorized financial institution which has a banking license and aims to provide banking services to the general public. Besides, NBFCs can attract 100% Foreign Direct Investments whereas private banks holding a valid license, can have only up to 74% of Foreign Direct Investment. However, NBFCs do not offer foreign currency transactions. Banks provide transaction services to the customers, such as providing overdraft facilities, the issue of traveler’s cheque, transfer of funds, etc.
Can I get my financial needs fulfilled from NBFC instead of the Bank?
Yes, it is true! Financial needs can be met by NBFCs rather than banks. NBFCs can only invest or lend; demand deposits are not accepted. NBFCs and banks offer loans of various types. However, when it comes to borrowing money, most people choose NBFCs over banks. This is because banks have strict procedures and take longer to approve or sanction a loan. NBFCs, on the other hand, ensure that the processing is faster and that the required loan money is disbursed within days. Even though NBFCs have higher interest rates than banks, borrowers prefer to seek loans from NBFCs since they are easier to obtain and have fewer complications. However, the best response to the issue of whether sort of borrowing and lending is safe is “banks.” These are far more regulated, with defined rules and regulations in place, and a great deal of scrutiny is carried out before approving a loan (thus less chance of defaults).
We hope you find the information provided above to be useful. Please visit our website to learn more about India’s financial industries.