NON BANKING FINANCE COMPANIES (NBFCs)

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NBFCs
Introduction
Non Banking Finance Companies (NBFCs) are financial institutions that provide services, similar to banks,
but they do not hold a banking license. The main difference is that NBFCs cannot accept deposits
repayable on demand.

Classification if NBFCs
NBFCs have been classified into three types:
1. Asset Finance Company (AFC): An AFC is an NBFC, whose principal business is the financing of
physical assets.
This includes financing of automobiles, tractors, lathe machines, generator sets, earth moving
and material handling equipments and general purpose industrial machines.
An AFC may be either
1. Giving loans to businesses for purchasing the physical assets tractors, machinery etc.
2. Leasing these assets to businesses.
Examples of AFCs are Infrastructure Finance Limited, Diganta Finance etc.
2. Investment Company (IC): This is an NBFC whose primary business is purchase and sale of
securities (financial instruments, such as stocks and bonds).
A mutual fund would come under this category. Examples of an Investment Company (IC) are
Motilal Oswal, UTI Mutual Fund etc.
3. Loan Company (LC): Loan Company (LC) means any NBFC whose principal business is that of
providing finance, by giving loans or advances. It does not include leasing or hire purchase. Example
of a Loan Company (LC) is Tata Capital Limited.
NBFCs can be further classified into those taking deposits or those not taking deposits. Only those NBFCs
can take deposits, that
a) Hold a valid certificate of registration with authorization to accept public deposits.
b) Have minimum stipulated Net Owned Funds (NOF i.e. owners funds)
c) Comply with RBI directions such as investing part of the funds in liquid assets, maintain reserves,
rating etc. issued by the bank.
NBFCs which accept deposits are further categorized as
Systematically Important (SI) - if they have assets > INR 100 crore
Systematically not Important - if they have assets < INR 100 crore
The highest level of regulation/strictness is for deposit taking systematically important.

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NON BANKING FINANCE COMPANIES (NBFCs)

A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM

How do NBFCs Access Funds?

NBFCs cannot access CASA funds, they can only access fixed deposits which are the most expensive
among all deposits. Also, not all NBFCs can access deposits there are regulations governing which can,
and which cannot.
Their cost of funds, and hence lending rate, is typically higher than a banks. People borrow from NBFCs
because their lending norms are not as strict as a banks. However, their default rates are therefore also
generally higher.

NBFC Business Offerings

NBFCs focus primarily on the areas which banks do not service, or service sparingly. Deposits (for some), lending,
leasing and hire purchase are key activities. Business offerings of an NBFC are:

1. Deposits: Customers deposit with NBFCs because they pay rates higher than those of banks.
They can accept public deposits which are of fixed maturity. The minimum maturity period is 12
months and the maximum 60 months.
2. Leasing & Hire Purchase: An asset finance company, mainly derives revenues from financing
assets such as equipment, vehicles, etc.
In a Lease transaction two parties are involved:
a) Lessor: The person who pays rent for land or property from a lessor.
b) Lessee: The person who rents land or property to a lessee.
The ownership of the asset rests with the asset finance company. The AFC earns lease rentals,
which comprise finance or hiring charge and recovery of the used up value of the leased asset.
In hire purchase the ownership of the asset is transferred to the hirer at the end of the HP
period.
3. Lending: NBFCs tend to take on higher risk than a bank. They are not constrained by the
priority sector lending requirement which banks have.
4.

Investment Services:
NBFCs offer a wide range of investment services such as:
Merchant Banking and Underwriting - Investment Banking functions where a business that
wishes to raise capital is provided various services.
Stock Broking - Trading on behalf of customers.
Asset Management - Managing clients funds. Mutual Funds, Pension Funds, Private Equity Funds
all offer these services.
Venture Capital & Private Equity - Equity capital to start-up companies; and private (not public)
equity capital for other businesses.
Custodial services - Settlement of securities transactions.

Most NBFCs tend to focus on a combination of lending, leasing & hire purchase or investment services.

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