What is a Non-Banking Financial Company (NBFC)?

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What is a Non-Banking Financial Company (NBFC)? Blog Image

Overview:

The Reserve Bank of India recently imposed ₹20 lakh monetary penalty on Manappuram Finance for non-compliance with certain provisions of Non Banking Financial Company (NBFC).

About Non-Banking Financial Company (NBFC):

  • An NBFC is a company registered under the Companies Act 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature.
  • They offer various banking services but do not have a banking license
  • They provide banking services like loans, credit facilities, TFCs, retirement planning, investing and stocking in the money market.
  • Generally, these institutions are not allowed to take traditional demand deposits—readily available funds, such as those in checking or savings accounts—from the public
  • NBFCs also provide a wide range of monetary advice like chit-reserves and advances.
  • Regulation:
    • NBFCs are regulated by the Reserve Bank of India (RBI), the central bank of India.
    • The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure that they adhere to the established norms and regulations.
  • Banks vs NBFCs: NBFCs lend and make investments and, hence their activities are akin to that of banks; however, there are a few differences as given below,
    • NBFC cannot accept demand deposits;
    • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
    • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
    • Unlike banks, NBFCs are not subjected to stringent and substantial regulations. 
  • Examples of NBFCs include investment banks, mortgage lenders, money market funds, insurance companies, equipment leasing companies, infrastructure finance companies,  hedge funds, private equity funds, and P2P lenders.

 


Q1) What are demand deposits?

A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time, without advance notice. DDA accounts can pay interest on the deposited funds but aren’t required to. Checking accounts and savings accounts are common types of DDAs.

Source: RBI imposes ₹20 lakh penalty on Manappuram Finance. Details here