As you already know, financial services sector consists of various types of institutions, among them Non-banking financial companies are very important. NBFCs are financial intermediaries engaged primarily in the business of accepting deposits and delivering credit. They play an important role in channelising the scarce financial resources to capital formation. NBFCs supplement the role of banking sector in meeting the increasing financial needs of the corporate sector, delivering credit to the unorganized sector and to small local borrowers.
Since NBFCs have a more flexible structure as compared to banks, they take quick decisions, assume greater risks and tailor- make their services and charges according to the needs of the clients. They broaden the range of financial services. These are partly fund based and partly fee based.
NBFC has also been defined as “a non- banking financial company, which is a loan company or an investment company or a hire purchase company or an equipment leasing company or a mutual benefit finance company”.
NBFCs provide a wide range of services such as hire purchase, equipment lease finance, loans, and investments. Due to rapid growth of NBFCs and a wide variety of services provided by them, there has been a gradual blurring of distinction between banks and NBFCs except that commercial banks have the exclusive privilege in the issuance of cheque. All NBFCs are under direct control of RBI in India.
NBFCs can be classified into different segments depending on the type of activities they undertake :
Hire purchase finance company
Investment company including primary dealers
Mutual benefit financial company
Equipment leasing company
Chit fund company
Miscellaneous non-banking companies.
The above mentioned entities are either partially or wholly regulated by the RBI. Before we proceed forward let’s understand few terms as these are important for further learning.
Deposits: Definition of the deposit is in its broadest sense to include any receipt of money by way of deposit or loan or in any other form. The term excludes following receipts:
Amount received from bank.
Amount received from development/ State financial corporation or any other financial institution,
Amount received in the ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against order for goods/properties and services.
Amount received by way of subscription in respect of a chit and
Loan from Mutual Funds.
Financial Institutions : These mean any non-banking institution / financial companies engaged in any of the following activities :
Financing by way of loans, advances and so on any activity except of its own.
Acquisition of shares/ stocks/ bonds/ debentures/ securities.
Any class of insurance, stock-broking etc.
Collection of money by way of subscription/ sale or units or other instruments/ any other manner and their disbursement.
Now let us discuss various types of NBFCs.
Equipment Leasing Company: This means the company which is a financial institution carrying on the activity of leasing (or lease financing) of equipments as its principal (main) business.
Hire Purchase Finance Company: It is a company which is a financial institution carrying on as its principal activity hire purchase transactions or the financing of such transactions.
Investment Company: It means a company which is a financial institution carrying on as its principal business the acquisition of securities.