Non-Banking Financial Company (NBFC) is [1] a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose principal business is that of agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. [2]
The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III-B) and the directions issued by it. On 9 November 2017, Reserve Bank of India (RBI) issued a notification outlining norms for outsourcing of functions/services by Non-Bank Financial Institution (NBFCs). As per the new norms, NBFCs cannot outsource core management functions like internal audit, management of investment portfolio, strategic and compliance functions for know your customer (KYC) norms and sanction of loans. Staff of service providers should have access to customer information only up to an extent which is required to perform the outsourced function. Boards of NBFCs should approve a code of conduct for direct sales and recovery agents. For debt collection, NBFCs and their outsourced agents should not resort to intimidation or harassment of any kind. All NBFCs’ have been directed to set up a grievance redressal machinery, which will also deal with the issues relating to services provided by the outsourced agency.
The Reserve Bank of India Act, 1934 was amended on 1 December 1964 by Reserve Bank Amendment Act, 1963. In this, new 'Chapter III-B' introduced to Regulate 'Deposit Accepting' NBFCs.
Different types of Committees to Review existing framework of NBFCs:
In early 1970s Government of India asked Banking Commission to Study the Functioning of Chit Funds and Examining activities of Non-Banking Financial Intermediaries. In 1972, Banking Commission recommended Uniform Chit Fund Legislation to whole country.
Reserve Bank of India prepared Model Bill to regulate the conduct of chit funds and referred to study group under the Chairmanship of James S. Raj.
In June 1974, study group recommended ban on Prize Chit and other Schemes. It recommended the Parliament to enact a bill which ensures uniformity in the provisions applicable to chit funds throughout the country.
Accordingly, Parliament enacted two acts: Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and Chit Funds Act, 1982.
During Planning Era, Reserve Bank of India tried best to 'Manage Money's and evolve 'Sound Monetary' system but not much appreciable success in realizing social objectives of monetary policy of the country.
In December 1982, Dr Manmohan Singh, Governor of RBI appointed committee under the Chairmanship of 'Prof. Sukhamoy Chakravarty' to review functioning of monetary system in India.
Committee recommended assessment of links among the Banking Sector, the Non-Banking Financial Institutions and the Un-organised sector to evaluate various instruments of Monetary and Credit policy in terms of their impact on the Credit System and the Economy.
During this time, the number of NBFCs grew from 7,000 in 1981 to around 30,000 in 1992. [3]
Different types of NBFCs are as follows:
Merging three categories of NBFCs viz asset finance companies (AFC), Loan companies (LC), Investment companies (IC) into a new category called NBFC - ICC.
CIRCULAR : RBI/2018-19/130 DNBR (PD) CC No. 097/03.10.001/2018-19 dated 22 February 2019
ICC means any company which is a financial institution carrying on as its principal business asset financing, the providing of finance whether by making loan and advances or otherwise for any activity other than its own and the acquisition of securities; and is not any other category of NBFC as defined by RBI in any of its master directions.
Infrastructure finance companies deploys a minimum of three-fourths of their total assets in infrastructure loans. The net owned funds are more than 3 billion and a minimum crediting rating of 'A' and the Capital to Risk-Weighted Assets Ratio is 15%.
IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
NBFC Factors has principal business of factoring. Factoring is a financial transaction and a type of debtor finance
Over the years, gold loan NBFCs witnessed an upsurge in Indian financial market, owing mainly to the recent period of appreciation in gold price and consequent increase in the demand for gold loan by all sections of society, especially the poor and middle class to make ends meet. Though there are many NBFCs offering gold loans in India, about 95 per cent of the gold loan business is handled by three Kerala based companies, viz., Muthoot Finance, Manapuram Finance and Muthoot Fincorp. Growth of gold loan NBFCs eventuating from various factors including Asset Under Management (AUM), number of branches, and also the number of customers etc. Growth of gold loan NBFCs occurred both in terms of the size of their balance sheet and their physical presence that compelled to increase their dependence on public funds including bank finance and non-convertible debentures. Aggressive structuring of gold loans resulting from the uncomplicated, undemanding and fast process of documentation along with the higher Loan to Value (LTV) ratio include some of the major factors that augment the growth of Gold loan NBFCs. [4]
Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets.
Account Aggregators are a new class of NBFC instituted by the Reserve Bank of India in 2016. [5] An account aggregator NBFC takes the business of account aggregation for a fee or otherwise. The NBFC once registered with the RBI, should only provide account aggregation and data to financial institutions based on customer consent. The actual mechanism should follow the consent architecture laid down by the RBI. [5]
The account aggregators are expected to make loan applications easier for users by providing data access to financial institutions. [6] RBI has given operating licences to four account aggregators and in-principle approvals to three NBFC account aggregators. The full list of companies is as follows: [7] [8]
New categorization of NBFCs as per revised framework by Reserve Bank of India (RBI):
Reserve Bank of India through a circular in October 2021, [9] has categorized the NBFCs into three layers: [10]
Base layer – This layer covers NBFCs which are non-systematically important, i.e., they have a lesser risk and impact on the financial system. It also covers peer-to-peer lending platforms, Account Aggregators (AA), and non-operative financial holding companies. The asset size for NBFCs in the base layer has been increased from INR 500 crores (~US$66.45 MM) to INR1000 crores (~US$132.90 MM)
Middle layer – This layer covers systematically important non-deposit taking NBFC and deposit taking NBFC having an asset size of more than INR1000 crores (~US$132.90 MM). It also covers NBFC-HFCs, NBFC-IFCs, IDF-NBFCs, and Core Investment companies (CICs).
Upper layer – This layer covers the top ten NBFCs based on asset size, as well as other systematically important NBFCs based on size, interconnectedness, complexity, liabilities, etc.
NBFCs perform functions similar to that of banks but there are a few differences-
Micro finance Institutions, also known as MFIs, [11] a microfinance institution is an organisation that offers financial services to low income people. Almost all give loans to their members, and many offer insurance, deposit and other services. A great scale of organisations are regarded as microfinance institutes. They are those that offer credits and other financial services to the representatives of poor strata of population (except for extremely poor strata). [12] [13]
An Increasing number of microfinance institutions (MFIs) are seeking non-banking finance company (NBFC) status from RBI to get wide access to funding, including bank finance. [14]
As of 2021 following entities are exempted by RBI for registration requirements:
Insurance Companies - Insurance companies which falls under Insurance Regultory and Development Authority
Asset Reconstruction Companies
Stock Exchanges - Only recognised stock exchanges under authority of Securities and Exchange Board of India
Merchant Banking Companies
Stock Broking Companies - It includes brokers and sub brokers who are required to get themselves registered with SEBI
Venture Capital Funds
Housing Finance Companies - These are regulated by National Housing Bank
Nidhi Companies (Section 406 of Companies Act)
Chit Fund Companies (Section 2 of Chit Fund Act)
Alternative Investment Companies
Micro Finance Companies - The Task Force on Supportive Policy and Regulatory Framework for Microfinance set up by NABARD in 1999 provided various recommendations. Accordingly, it was decided to exempt NBFCs which are engaged in micro financing activities, licensed under Section 8 of the Companies Act, 2013, and which do not accept public deposits, from the purview of Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer of profits to the Reserve Fund) of the RBI Act, 1934. [15]
In a joint fact-finding study on microfinance conducted by the Reserve Bank of India and a few major banks, the following observations were made:
obtaining in the SHG – Bank linkage programme, which takes about six to seven months for group formation and nurturing. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.
Forbes magazine named seven microfinance institutes in India in the list of the world's top 50 microfinance institutions.
Bandhan, as well as two other Indian MFIs—Microcredit Foundation of India (ranked 13th) and Saadhana Microfin Society (15th) – have been placed above Bangladesh-based Grameen Bank (which along with its founder Mohammed Yunus, was awarded the Nobel Prize). Besides Bandhan, the Microcredit Foundation of India and Saadhana Microfin Society, other Indian entries include Grameen Koota (19th), Sharada's Women's Association for Weaker Section (23rd), SKS Microfinance Private Ltd (44th) and Asmitha Microfin Ltd (29th). [17] [18]
According to a report by CareEdge Ratings, the MFI sector will continue to grow at double-digit rates in 2024. [19]
Microfinance has come under fire in the state of Andhra Pradesh due to allegations of MFIs using coercive recollection practices and charging usurious interest rates. [20] These charges resulted in the state government's passing of the Andhra Pradesh Microfinance Ordinance on 15 October 2010. The Ordinance requires MFIs to register with the state government and gives the state government the power, suo moto, to shut down MFI activity. [21] A number of NBFCs have been affected by the ordinance, including sector heavyweight SKS Microfinance. [22]
Microfinance consists of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient. ID Ghana is an example of a microfinance institution.
ICICI Bank Limited is an Indian multinational bank and financial services company headquartered in Mumbai with a registered office in Vadodara. It offers a wide range of banking and financial services for corporate and retail customers through various delivery channels and specialized subsidiaries in the areas of investment banking, life, non-life insurance, venture capital and asset management.
Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.
Small Industries Development Bank of India (SIDBI) is the apex regulatory body for overall licensing and regulation of micro, small and medium enterprise finance companies in India. It is under the jurisdiction of Ministry of Finance, Government of India headquartered at Lucknow and having its offices all over the country.
Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets: those showing
Village banking is a microcredit and saving methodology whereby financial services are administered locally in a community bank rather than in a centralized commercial bank. Village banking has its roots in ancient cultures and was most recently adopted for use by micro-finance institutions (MFIs) as a way to control costs. Early village banking methods were innovated by Grameen Bank and then later developed by groups such as FINCA International founder John Hatch. Among US-based non-profit agencies there are at least 31 microfinance institutions (MFIs) that have collectively created over 800 village banking programs in at least 90 countries. And in many of these countries there are host-country MFIs—sometimes dozens—that are village banking practitioners as well. The latest developments globally can be seen in Southeast Asia, where digitization is pacing fast to reach rural areas with hybrid on- and offline solutions.
BASIX is an institution concerning the promotion of livelihood established in 1996 in India. It is headquartered in Hyderabad, Telangana. Around 2010 it's NBFC arm raised funds from private equity investors and declared bankruptcy after couple of years.
A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that is not legally a bank; it does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFC facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include hedge funds, insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations.
Financial inclusion is the availability and equality of opportunities to access financial services. It refers to processes by which individuals and businesses can access appropriate, affordable, and timely financial products and services - which include banking, loan, equity, and insurance products. It provides paths to enhance inclusiveness in economic growth by enabling the unbanked population to access the means for savings, investment, and insurance towards improving household income and reducing income inequality
The Muthoot Group is an Indian multinational conglomerate headquartered in Kochi, Kerala. It has interests in financial services, information technology, media, healthcare, education, power generation, infrastructure, plantations, precious metal, restaurant, and hospitality. Muthoot Group operates in 29 states in India, and has presence in Nepal, Sri Lanka, US, UK and UAE. The group manages assets of over $4.5 billion. It is owned and managed by the Muthoot family.
External commercial borrowing (ECBs) are loans in India made by non-resident lenders in foreign currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs. ECBs include commercial bank, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate. The DEA, Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.
Hattha Bank (HKL) is a Cambodian bank and microfinance institution (MFI) in Cambodia.
Bandhan Bank Ltd. is a banking and financial services company, headquartered in Kolkata.
Small finance banks (SFB) are a type of niche banks in India. Banks with a SFB license can provide basic banking service of acceptance of deposits and lending. The aim behind these is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
Bajaj Finance Limited (BFL) is a deposit-taking Indian non-banking financial company headquartered in Pune. It has a customer base of 88.11 million and holds assets under management worth ₹354,192 crore (US$42 billion), as of June 2024.
ESAF Small Finance Bank is an Indian small finance bank headquartered in Thrissur, Kerala, providing banking services and small loans to the underbanked. Having started its operations as an NGO in 1992 under the name of Evangelical Social Action Forum, ESAF Microfinance was a non-banking finance company and microfinance institution (NBFC-MFI), licensed by the Reserve Bank of India (RBI). It became a small finance bank in March 2017 and started operating in January 2018.
Samit Ghosh is the founder of Ujjivan Financial Services Limited, and served as its managing director and chief executive officer until 31 January 2017, when he accepted an equivalent role with subsidiary Ujjivan Small Finance Bank. Prior to 2004, he held positions at Citibank, Standard Chartered, and HDFC Bank. He served as CEO of Ujjivan Financial Services till 2017. Ghosh is currently the non-executive Chairman of Ujjivan Financial Services.
Satin Creditcare Network Limited is a non-banking finance company (NBFC), licensed by the Reserve Bank of India. It was founded in 1990 by Mr. H P Singh. The company's offers financial requirements for excluded households at the bottom of the pyramid. Satin Creditcare Network Limited is a micro-finance institution (MFI) in the country with presence in 7 states and more than 12,00 villages.
VFS Capital Limited formerly known as Village Financial Services Ltd (VFS), is headquartered in Kolkata, was incorporated on 28 June 1994, as a private limited company before it got its present name.
Financial regulation in India is governed by a number of regulatory bodies. Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled by either a government or non-government organization. Financial regulation has also influenced the structure of banking sectors by increasing the variety of financial products available. Financial regulation forms one of three legal categories which constitutes the content of financial law, the other two being market practices and case law.