NBFCs or Non-Banking Financial Companies, are becoming popular around the world. They help people by giving loans and other financial services without being a bank. They are more flexible than banks and take more risks. This is why many people turn to NBFCs when banks say “no.” Let’s understand NBFCs in this article.
Full Form of NBFC
NBFC stands for Non-Banking Financial Company. It is a company that provides financial services like loans, investments and insurance but does not have a banking license like regular banks.
What is an NBFC?
An NBFC (Non-Banking Financial Company) offers services like giving loans, accepting investments, and providing insurance. However, it is not a bank. In India, all NBFCs are regulated and supervised by the Reserve Bank of India (RBI) to ensure safe financial practices.
History of NBFC in India
NBFCs started in India in the 1960s to serve those not reached by banks. In 1964, RBI changed its rules and included NBFCs under the RBI Act, 1934.
Later, two committees studied NBFCs to make them better:
- James S Raj Committee (1970s)
- Chakravarty Committee (1982)
Today, NBFCs have grown a lot and offer digital services, easy loans and much more.
Objectives of NBFCs
- Creates jobs by funding private businesses.
- Helps in spreading income through funds distribution.
- Makes the financial market stronger by supporting small companies.
Types of NBFCs in India
NBFCs in India are divided into three main types:
- Asset Finance Companies: These give money to buy machines, vehicles or tools.
- Loan Companies: These give loans for many needs.
- Investment Companies: These invest in shares, stocks and other financial products.
What NBFCs Do?
NBFCs help people and businesses who cannot get loans from banks. They serve small businesses, shopkeepers, farmers and professionals. Their main work includes:
- Giving hire purchase finance
- Providing leasing services
- Offering bill discounting
- Giving term loans
- Supporting venture capital
- Providing bridge loans
- Offering equipment finance
- Helping with factoring services
Services of NBFCs
- Hire Purchase Finance: NBFC buys an item for the customer. The customer pays every month. After all payments are done, the item becomes theirs.
- Leasing: NBFC lets a customer use an item for a fixed time. The customer pays rent. After the lease ends, the customer can buy or return the item.
- Bill Discounting: NBFC buys bills from companies at a lower price. Later, it collects the full amount from customers when the bill date comes.
- Term Loans: NBFC gives a fixed amount of money. The person repays it in fixed parts over time.
- Venture Capital: NBFC gives money to new or small businesses. In return, it becomes part owner.
- Bridge Loans: These are short loans given for a short time, like one or two years, to help during emergencies.
- Equipment Finance: NBFC buys machines or tools for a person or company. The buyer pays monthly until the price is fully paid.
- Factoring: NBFC buys a company’s unpaid bills (invoices). The NBFC collects the money from the company’s customers.
Benefits of NBFC
- More Services: They offer services like mutual funds, insurance and more.
- Easier Loans: People who don’t get loans from banks can go to NBFCs.
- Lower Interest Rates: Many NBFCs offer cheaper loans than banks.
- Flexible Rules: They are less strict than banks, so they give better options.
- Faster Services: They have smaller branches but provides quick help.
- Better Returns: They give higher interest on deposits than banks.
Problems with NBFCs
- NBFCs do not have all the powers of banks.
- They cannot take savings (demand deposits) from the public.
- They can’t use money from old loans to give new ones.
- They cannot give cheques or open ATM, credit or debit cards.
- They cannot handle government money or business.