What Is The Full Form Of NBFC?

NBFC are the non-banking financial institutions which lends money to the individual or businesses as loan. Read to know more about NBFC in details.

23 Sep,2022 11:28 IST 20 Views
What Is The Full Form Of NBFC?

The capital market of any economy can be broadly divided into two categories: the equity side and the debt side. The equity market includes the stock market as also the private equity and venture capital segments while the debt side is represented by lending as also bonds and their associated forms.

If we look at lending in particular, it accounts for one of the biggest blocks of financial activity in the country and acts as the lubricant for businesses cutting across sectors. The lending can be done by banks as also other institutions.

One such big category is the ‘non-banking financial institutions’ (NBFIs) or ‘non-banking finance companies (NBFCs). NBFCs are also called shadow banks as most of them function like a bank but have looser regulatory controls, even though they are also monitored and operate under the norms assigned by the Reserve Bank of India (RBI).

As against banks, which are limited in number as the banking system is tightly regulated, there are over 10,000 NBFCs in India.

Technically, an NBFC is a company registered under the Companies Act, 1956. It is engaged in the business of providing loans and advances; acquisition of shares, bonds, debentures, securities issued by government or local authority or other similar marketable securities; leasing, hire-purchase, insurance business and chit business.

However, it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

Financial activity as the principal business is when a company’s financial assets constitute more than 50% of the total assets and income from financial assets constitute more than 50% of the gross income. A company which fulfills both these criteria will be registered as an NBFC by the RBI.

Hence, if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the RBI.

NBFCs can be classified into two broad categories: NBFCs accepting public deposit (NBFCs-D) and NBFCs not accepting or holding public deposit (NBFCs-ND). Just under 0.5% of NBFCs are authorised to accept deposits.

Then, there are offshoots under these including NBFC-MFI, or NBFCs which are essentially microfinance institutions and represent a category of NBFCs who are into microlending and so on.

Almost all NBFCs must be registered with the RBI but many sub-categories are not directly governed by it and need to be registered with other authorities. For instance, stock brokers are monitored by the Securities and Exchange Board of India (SEBI).

Conclusion

NBFCs are an essential part of the financial ecosystem and not just as an alternate form of lenders but also other activities they are engaged in. Although there are over 10,000 NBFCs, most come under the RBI while some are governed by other regulatory bodies like National Housing Bank and SEBI.

Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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