What is an NBFC? Meaning, Functions, Types & Importance

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Now let's understand its types. NBFCs are classified based on their activities, deposit-taking status, and RBI's Scale Based Regulation framework. Only authorised NBFC-Ds can accept term deposits. Also, NBFCs cannot accept demand deposits. 

What are the services offered by NBFCs?

The main services offered by NBFCs are personal loans, vehicle loans, home loans, gold loans, credit card services, insurance, and microfinance. Also, they provide services related to lease financing and hire purchase, investment, and asset management. 

Features of NBFCs in the Indian financial sector.

In India, NBFCs are a backbone of the financial system. They are important because: 

• NBFCs are involved in savings and investment activities.
• They provide financial products and services to the unserved population of India.
• NBFCs like microfinance institutions and asset management companies play an important role in financial inclusion.
• NBFCs like infrastructure finance companies give a boost to the growth and development of infrastructure. 

What are the different types of NBFCs regulated by the RBI? 

There are different types of NBFCs regulated by the RBI. These companies are:

• Asset finance companies: These companies finance the physical assets that help productive economic activities. For example, automobiles, generator sets, equipment, etc. 

• Investment companies: These financial companies are involved in the acquisition of securities. These securities are bonds, mutual funds, and stocks. 

• Loan company: The main purpose of these companies is to give loans and advances. Asset finance companies are not involved in these companies.

• Infrastructure finance company: These companies deploy at least 75% of their assets in infrastructure loans. Their minimum net owned fund is 300 crore, and they have a minimum credit rating of “A”. 

• Systematically important core investment companies: These companies are involved in the business of shares and security Acquisition. 

• Infrastructure debt funds: These companies are registered as NBFCs to make the flow of long-term debt easy. These companies should have a minimum 5-year maturity. 

• Microfinance institutions: These companies are bound to give loans to people whose household income should not be more than ₹3 lakh.

• NBFC factors: These companies are involved in the principal business of factoring. 

• Mortgage guarantee company: These are the financial companies with at least 90% of their business turnover from mortgage guarantee business.

• Financial holding company: These are the companies through which the promoter group is permitted to set up a new bank. NBFCs are now categorized into four layers:
  • Base
  • Middle
  • Upper
  • Top layers

These were the NBFCs. Different types of NBFCs have different functions. Now RBI has merged AFCs, loan companies, and Investment Companies into a single category called Investment and Credit Company (NBFC-ICC).

What is the difference between banks and NBFCs?

The primary difference between banks and NBFCs is about the function. Banks can do almost all financial services, while NBFCs are limited to some. 

 These are the core differences between banks and NBFCs. 

Things to check before borrowing from an NBFC

You should always compare the following factors before applying for the loan. 

• Interest Rate and APR: You should check the annual percentage rate (APR). This includes the base interest rate and other mandatory fees.
• Processing Fees: You should also check upfront processing and administrative charges.
• Foreclosure & Prepayment Charges: You need to verify prepayment rules, especially regarding floating-rate personal/business loans.
• Regulatory Status: You should know about the NBFC's credibility. So that you can check whether the NBFC is registered on the RBI's official list of registered financial companies.
• Tenure & EMI Affordability: This is very important. You should check repayment timelines. Because it affects your EMI.  

Conclusion

Non-banking financial companies (NBFCs) are very important for India's financial system. Banks can not provide loans to every borrower, and they have high eligibility criteria for loan approval. 

There are different types of NBFCs. The type depends on the function of the NBFCs, like housing finance, microfinance, infrastructure funding, and business loans.  That's why NBFCs are an important part of the financial system in India. 

Frequently asked questions

What is the basic function of an NBFC?

NBFCs provide structured credit and financial intermediation. It depends on their specific RBI registration. Their functions are retail lending, MSME and corporate advances, infrastructure financing, and investments.

Which are some famous NBFCs in India?

Shriram Finance limited, bajaj finance limited are famous NBFCs in India. You can get a loan from these NBFCs. 

Is NBFC good or bad?

Neither is always better. Banks can offer lower interest rates to borrowers with a good income and credit history. NBFCs can offer more flexible loan options, but their interest rates and fees can vary. It is best to compare the total cost of the loan before choosing.

What can I do to get a personal loan with a bad credit score?

 If your loan application is rejected by the bank due to a bad credit score, you can get help through two methods. Apply for a low-amount loan or bring an applicant or guarantor who has a good CIBIL score. Also, if you have a secure job, banks can sanction loans. 

Can I get a loan online from NBFCs?

Yes, NBFC services are available online and offline. You can prefer either. Applying for a loan online is a simple process. Documentation and digital KYC requirements vary widely by lender and product.

Is NBFC safe for FDs?

The biggest difference between NBFC FD and bank FD is about safety. Eligible deposits with insured banks are covered by DICGC insurance up to ₹5,00,000 per depositor per bank, including principal and interest. But there is no such scheme for NBFCs. 

What can NBFC not accept?

NBFCs usually do not accept demand deposits. Also, they can not issue cheques.

 Can an NBFC issue credit cards?

Eligible NBFCs require prior RBI approval to undertake credit card activities and must comply with applicable regulatory requirements. Normally, NBFCs partner with commercial banks as co-branded card arrangements. 

What happens if a borrower defaults on an NBFC loan?

If any borrower defaults in NBFCs, that NBFC reports the delinquency to credit information bureaus. These CICs add this information to the credit report, and it negatively affects the credit score.

If I want to take out a loan for my startup, can I go to the NBFCs?

Yes, you can take a loan from NBFCs for startups. You can go for business loans for MSMEs, equipment and machinery, loans against property, and venture debt. Before going for a loan you should carefully review interest rate and vintage requirements.