NBFCs- Non Banking Financial Companies/Institutions

What are NBFCs
NBFCs – Non Banking Financial Campanies or Institutions

A Non Bnaking Financial Institutions are Financial Instituons that provides banking services but does not have banking license.

Some of these institutions are not allowed to take deposits from public.
here are some examples of NBFCs in India, 
Muthoot Finance LTD
Bajaj Finance LTD
L&T Finance LTD
Tata Capital

Unlike banks who offer a packaged deal on a set of financial services, NBFCs offer custamised services to fulfill the needs of clients.

They can’t accept deposits repayable on demand.
They can’t offer higher interest rates higher than ceiling rate prescribe by RBI.

RBI does not guarantee the repayment of deposits by NBFCs.

Categories of NBFCs
1.Development Finance Institutions
2.Leasing companies.
3.Investment Companies
4.Housing Finance Companies…and some more.

History of NBFCs

NBFCs started humbly in India in the 1960s as an alternative for savers and investors whose financial needs were not sufficiently met by the existing banking system. 

The NBFCs initially operated on a limited scale without making much impact on the financial industry.

They invited fixed deposits from investors and worked out leasing deals for big industrial firms. 

In the first stages of development, the Companies Act regulated financing. However, the unique and complex nature of operations and with financial companies acting as financial intermediaries, there was a call for a separate regulatory mechanism.

Hence, Chapter III B was included in the Reserve Bank of India Act, 1934, which assigned the Bank with limited authorities to regulate deposit-taking companies. Since then the RBI has initiated measures to regulate the NBFC sector.

The RBI accepted and implemented that hire purchase and leasing companies could accept deposits to the extent of their net owned funds, as per the key recommendations of James S. Raj Study Group formed in 1975. 

The Companies were also required to maintain liquid assets in the form of unencumbered approved government securities.

Between the 1980s and 1990s, NBFCs, with their customer-friendly reputation, began to attract a huge number of investors.

The number of NBFCs rose swiftly from a mere 7000 in 1981 to around 30000 in 1992, which made the RBI feel the need to regulate the industry.

In 1992, the RBI formed a Committee headed by the former Chairman of Bank of Baroda, Mr. A. C. Shah, to suggest measures for effective regulation of the industry. 

The Shah Committee's recommendations included most things from compulsory registration to prudential norms.In January 1997 there were huge changes in the RBI Act, 1934, especially the Chapters III-B, III-C, and V of the Act seeking to put in place a complete regulatory and supervisory structure, which would protect the interests and also ensure the smooth functioning of NBFCs.After the amendment of the Act in 1997, the NBFCs have grown significantly in terms of operations, range of instruments and market products, technological advancement, among others.

In the last 20 years, the NBFCs have gained prominence and added depth to the financial sector.

In August 2016, the union cabinet gave the go-ahead for foreign direct investment (FDI) under the automatic route in regulated NBFCs.

NBFCs regulatory Framework - 
revised Oct 2021
NBFCs Regulatory structure comprises of four layers based on their size,activity and perceived riskiness.

Lets have look on structure. This is a pyramid like structure formed as on revised regulatory framework on oct 2021

1.Base layer- a]These are non deposit taking NBFCs having asset size below 1000cr
 b] Activities- i] Peer to peer lending platform 
 ii] NBFC account aggregator 
 iii] Non-operating financial holding campany.
 iv]Do not avail public funds and not have public interface.

2.Middle layer- a] All deposit taking NBFCs irrespective of asset size and non-deposit with asset size 1000cr.
B] Activities- i]Standalone Primary Dealers (SPD)
 ii]Infrastructure Debt Fund (IDF)
 iii]Core Investment Companies (CICs)
 iv]Housing Finance Companies (HFCs)
 v]Infrastructure Finance Campanies (NBFC-IFCs)

3.Upper layer- 
UL comprises specifically indentified NBFCs by RBI based on parameters and soaring metodology.
The top 10 NBFCs fit in parameters shall always reside in upper layer.

4.Top layer-
It is a empty layer.
It can get populated if RBI opinion that substancial increase in the systematic risk from specific NBFCs 
In UL such NBFCs shall move to Top layer from UL.

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