NBFC is an entity that is incorporated as per the Companies Act, 1956 and the Companies Act, 2013. These companies have played an essential role in the Indian Financial System by bringing in diversity and efficiency in the financial sector.
These companies are engaged in the business of loans and advances, acquisition of shares, stocks and bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose business is related to agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
The Reserve Bank of India (RBI) regulates the working and operations of NBFCs within the framework of the RBI Act, 1934 (Chapter III-B) and the direction issued by it.
NBFCs are considered as a go-to option when you need urgent cash to fulfil a myriad of needs and these have become a great alternative for individuals and businesses whose needs could not be fulfilled by the existing banking system.
NBFCs provide credit and loans at micro-level, i.e., mainly to small, medium scale enterprises, to help them overcome their cash insufficiency and also provides finance to the economically weaker sections of the society.
CONDITIONS TO REGISTER AS NBFC
There are certain conditions that an enterprise has to meet before applying to RBI for NBFC license. These are as follows –
- It should be registered as a company under the Companies Act, 1956 or 2013.
- The minimum capital requirement (Net Owned Fund) should be 2 crores.
- The principal business of the applicant should be financial activities and the company’s financial assets should constitute more than 50% of it’s total assets and income from financial assets should constitute more than 50% of the gross income.
- It should have at least 1 Director from the financial field or a senior banker as a Director.
- The CIBIL (Credit Information Bureau Limited) records should be clean.
FUNCTIONS OF NBFCs
NBFCs performs major functions such as-
- Hire-Purchase Services- A way through which the seller delivers the goods to the buyers without transferring the ownership of the goods and the payment of the goods are made in instalments.
- Retail Financing- companies that provide short-term funds for loans against shares, gold, property, primarily for consumption purposes.
- Trade Finance- Companies dealing in Dealer/Distribution finance so that they can for working capital requirements, vendor finance, and other business loans.
- Infrastructural funding- This is the largest section where major NBFCs deal in and a lot portion of this segment alone makes up a major portion of funds lent, amongst different segments. Majority of this includes Real Estates, Railways or metros, flyovers, ports, airports, etc.
- Asset Management Company- These are the companies that consists of fund-managers who invest the funds pooled by small investors and actively manage it.
- Leasing Services- The companies that provide leasing, i.e., providing a property to small businesses or sometimes even larger ones who cannot afford it for whatsoever reason. The leasing contracts are made for a fixed period of time.
- Venture Capital Services- The companies that invest in small businesses at their initial stage but their success rate is high and are promising enough of sufficient return in the coming time.
- Micro Small Medium Enterprise (MSME) Financing- MSME is one of the roots of our economy and millions of lives depends on this sector, that’s why the Government has announced such schemes for MSME sector to promote it’s growth.
TYPES OF NBFC
NBFCs can be categorised under two broad heads—
- On the nature of their activity
- On the basis of
TYPES OF LOANS PROVIDED BY NBFCs
References: pictures and digram taken from social site and NBFC site
Name: Dr. Ruchita Masih
Department of BBA
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