Wednesday, 2 December 2015

Banking Knowledge Study : Non Banking Finance Companies

About NBFC:
  • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of     shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities.
  • Like nature, leasing, hire-purchase, insurance business, chit business but 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.
  • A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
  • NBFCs are doing functions similar to banks.
What is difference between banks & NBFCs?
  • NBFC cannot accept demand deposits
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; (eg you can give an axis bank cheque to be deposited in your SBI account , but this transfer and settlement is not possible between , say Bajaj Finance and Manappuram Finance)
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks ( means unlike banks where deposits upto 1 lakh are insured in case the bank goes bust, no protection of that sort is available to depositors of NBFCs)
Basically for our understanding (safely assuming that the ambit of NBFCs we are referring to  will only include the following) , NBFCs are firms which
  1. Provide Cash loans ( to businesses/ individuals) for commercial/ personal purposes and in general these loans are backed by assets ( liquid/ illiquid/immovable). most NBFCs fall under this category. e.g housing loan/ commercial loan / personal loan firms like LIC HF, HDFC, Dewan Housing, Shriram Transport Finance, Manappuram Finance, Bajaj Finserve etc.
  2. Provide investment opportunities by accepting deposits . In general this is done either through term deposits or through NCDs. Many of the above mentioned NBFCs use this practice to raise funds at cheaper costs vis a vis Banks.
  3. Provide leasing services like First Leasing etc.
  4. Microfinance activities which are mostly unbacked loans to small retail customers of poor sections of society / rural India who are otherwise generally not approved for loans by Banks/ first tier NBFCs e.g SKS microfinance.
 Also read :

Computerization in banks

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