7 Types of Non-Banking Financial Companies (NBFCs) You Should Know
Non-banking financial companies (NBFCs) are financial institutions that offer various services and products to customers, but do not have a banking license. They are regulated by the Reserve Bank of India (RBI) and follow different rules and regulations than banks. NBFCs play an important role in the Indian economy, especially in providing credit and financial inclusion to the unbanked and underbanked segments of the society. In this article, we will discuss the different types of NBFCs and their functions.
1. Asset Finance Company (AFC)
An AFC is a type of NBFC that provides finance for the acquisition of physical assets, such as machinery, equipment, vehicles, etc. The assets financed by an AFC serve as collateral for the loan. An AFC can also refinance existing loans taken for asset acquisition.
2. Investment Company (IC)
An IC is a type of NBFC that invests in securities, such as shares, bonds, debentures, etc. An IC can also act as a merchant banker, underwriter, portfolio manager, etc. An IC can also raise funds from the public by issuing securities.
3. Loan Company (LC)
An LC is a type of NBFC that provides loans and advances to individuals and businesses for various purposes, such as personal loans, business loans, education loans, etc. An LC can also offer other services, such as leasing, hire purchase, factoring, etc.
4. Infrastructure Finance Company (IFC)
An IFC is a type of NBFC that provides finance for infrastructure projects, such as roads, bridges, power plants, telecom, etc. An IFC can also provide advisory and consultancy services for infrastructure development.
5. Systemically Important Core Investment Company (CIC-ND-SI)
A CIC-ND-SI is a type of NBFC that holds at least 90% of its assets in the form of investments in shares, bonds, debentures, etc. of group companies. A CIC-ND-SI does not accept public deposits and does not trade in its investments. A CIC-ND-SI has to maintain a minimum capital adequacy ratio of 30% and a leverage ratio of not more than 2.5.
6. Infrastructure Debt Fund (IDF)
An IDF is a type of NBFC that raises funds from domestic and foreign investors and lends them to infrastructure projects that have completed at least one year of commercial operation. An IDF can issue bonds or units to raise funds and has to maintain a minimum credit rating of A or equivalent.
7. Micro Finance Institution (MFI)
An MFI is a type of NBFC that provides small loans and other financial services to low-income households and micro enterprises. An MFI can also offer savings, insurance, remittance, etc. An MFI has to follow the RBI guidelines on interest rates, loan size, repayment period, etc.
These are some of the types of NBFCs that operate in India and provide various financial solutions to customers. NBFCs are subject to the supervision and regulation of the RBI and have to comply with the norms and standards prescribed by it. NBFCs are also required to submit periodic reports and returns to the RBI and disclose their financial information to the public.
Types of Non Banking Financial Companies (NBFCs)
Non banking financial companies (NBFCs) are financial institutions that provide certain bank-like services but do not have a banking license or follow the same regulations as banks. NBFCs cannot accept traditional demand deposits, which are funds that can be withdrawn at any time. Some examples of NBFCs are investment banks, insurance companies, hedge funds, and P2P lenders. [1]
According to the Reserve Bank of India (RBI), NBFCs are mainly classified into four types based on their nature of activity: asset finance company, loan company, investment company, and infrastructure finance company. [2] Asset finance companies provide finance for physical assets such as automobiles, machinery, equipment, etc. Loan companies provide finance for various purposes such as personal loans, business loans, education loans, etc. Investment companies acquire securities and hold them as investments. Infrastructure finance companies provide finance for infrastructure projects such as roads, bridges, power plants, etc.
Global Demand for NBFCs
The global demand for NBFCs has increased in recent years due to various factors such as financial inclusion, innovation, diversification, and competition. NBFCs play a key role in meeting the credit needs of the unbanked and underbanked segments of the population, especially in developing countries. NBFCs also offer innovative and customized products and services that cater to the specific needs of different customers and sectors. NBFCs also diversify the financial system by providing alternative sources of funding and risk management. NBFCs also enhance competition in the financial sector by offering lower costs, higher returns, and better customer service than traditional banks. [3]
According to a report by KPMG, the global NBFC market size was estimated at USD 58.5 trillion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 8.6% from 2020 to 2027. The report also identified some of the key drivers and challenges for the growth of NBFCs in different regions of the world. [4] Some of the drivers include increasing digitalization, rising consumer demand, supportive regulatory policies, and growing infrastructure development. Some of the challenges include cybersecurity risks, liquidity constraints, operational inefficiencies, and regulatory uncertainties.
References:
http://osdbu.treas.gov/cooply.html
http://www.investopedia.com/terms/n/nbfcs.asp
https://www.investopedia.com/terms/n/nbfcs.asp
https://www.lopol.org/article/types-of-non-banking-financial-companies-nbfc
https://corporatefinanceinstitute.com/resources/wealth-management/non-banking-financial-company-nbfc/
https://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/NBFC-Report-2019.pdf
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92
https://www.investopedia.com/terms/n/nonbank-financial-institutions-nbfis.asp
https://www.bankbazaar.com/finance-tools/knowledge-centre/types-of-nbfc-in-india.html
