what is nbfc

What is the Full Form of NBFC? Its Meaning, Types, Role & Scope

December 04, 2022 • 12047 views

As of December 2021, Statista reported that NBFCs constituted 36% of India's lending landscape. This implies that NBFCs play a significant role in the country's digital transformation, especially as India stands as the world's second-largest internet-using nation. 
The increasing adoption of embedded finance and digital lending suggests that NBFCs are poised to revolutionise the financial ecosystem in the coming years. Let us delve into what NBFC is and its pivotal role in this evolving landscape.

What are NBFCs?

NBFCs provide banking and other financial services without holding a banking licence and are registered under the Company's Act of 1956. These companies engage in loans and advances, credit facilities, savings and investment products. NBFCs offer credit to many sectors of the Indian economy, covering a wide range of unbanked sections of society and budding businesses.
In today’s financial landscape, NBFCs are playing an integral role by providing loans at affordable rates. The NBFC sector has also introduced new credit disbursal procedures to micro, small and medium enterprises (MSMEs). This contributes largely to the Indian economy and the overall financial system.

What is the Full Form of NBFC?

The full form of NBFC is Non-banking Financial Companies. At present, India is brimming with new-age NBFCs that offer a plethora of financial services and products. 

What are the Functions of an NBFC?

The different functions of NBFCs are listed below:

  • Meeting Credit Needs: NBFCs play a crucial role in the Indian financial system by providing credit to sectors overlooked by traditional banks, promoting financial inclusion for neglected segments.
  • Addressing the Needs of Overlooked Sectors: NBFCs are vital in serving the requirements of low-income households, and other underserved markets, bridging the gaps left by traditional banks and addressing the needs of unorganised sectors.
  • Fulfilling Funding Requirements: Non-banking Financial Companies significantly contribute to economic growth by meeting the fund requirements for various investment and infrastructure projects.
  • Offering Diverse Financial Products: NBFCs in India have a broad and rapidly expanding role, catering to the increasing demand for credit and financial services. They provide a range of financial products and services, including loans and other credit facilities, benefiting the general public.

ALSO READ :- Top 5 Challenges for MSME Business Loans…!

What are the Different Types of Non-banking Financial Companies (NBFC)?

NBFCs can be classified into two broader categories based on their activity and the deposits they hold. Let’s explore them further:

  1. Asset Finance Company: An asset finance company provides funds for procuring assets to companies that are involved in manufacturing, or other economic activities. These assets include tractors, industrial machines, automobiles, and more.
  2. Investment Company: These companies solely deal in investments by investing funds on behalf of their clients. The clients are expected to share the total profit or loss with the investment company
  3. Infrastructure Finance Company: These companies provide loans for infrastructural development of projects such as energy, transport, communication, water & sanitation, and other social and commercial infrastructure.
  4. Loan Company: These companies offer loans in the form of financial products, such as Personal Loan, Business Loan, and Working Capital Loans.
  5. Micro-Finance Company: These companies provide small-scale financial services in the form of credit or savings to the unbanked population in rural and semi-urban areas.

What is the Difference Between NBFCs and Banks?

The following table highlights the difference between NBFCs and Banks:

Parameters

NBFCs

Banks

Definition

It is a company that provides financial services to the public and does not have a banking licence.

It is a government-authorised company that provides banking services to the public.

Regulatory Act          

Incorporated under the Banking Regulations Act of 1956.

Incorporated under the Banking Regulations Act of 1949.

Functions

Provides lending and investment activities.

Provides a wide range of banking services.

Deposit Acceptance  

Does not accept deposits from the general public.

Accepts deposits from the general public.

Risk Assessment

Relatively lenient risk assessment.

Strict risk assessment.

What is the Role & Scope of Non-banking Financial Companies (NBFC)?

Digital lending has become one of the most promising financial services across India. High demand for comparatively smaller loans with easy, digital application processes by individuals and small and medium enterprises has widened the scope for NBFCs.
NBFCs have the business agility to serve various small and medium businesses faster as compared to traditional banks. Flexible payment plans, low-cost EMIs, and competitive interest rates are some of the top USPs of loan products offered by new-age NBFCs.
In addition to this, the rising adoption of artificial intelligence (AI) and blockchain-based financial services will further enhance the product portfolios of NBFCs in the future. The growing availability of internet and telecom services across villages, rural areas, and semi-urban areas is also creating a conducive environment for NBFCs.

What are the Guidelines for NBFC Functioning?

The RBI has issued certain guidelines that NBFCs have to follow, which are as follows:

  • NBFCs need to have a minimum Net Owned Funds to maintain a barrier against losses and absorb financial shocks.
  • They need to maintain a certain Capital Adequacy Ratio to ensure that they have enough funds to cover sudden losses. 
  • NBFCs have to maintain a minimum level of assets like government securities and cash to meet their short-term liabilities to avoid liquidity crunches.
  • NBFCs must not have exposure to a group of borrowers as it may lead to concentration risk.

To Conclude

After understanding what NBFC is, its role and its significance, you can now go ahead and explore the various financial products and services offered by these financial establishments. Find tailored loans for specific financial requirements at competitive interest rates, with simplified documentation and swift disbursal, ensuring a seamless process.

Frequently Asked Questions About NBFC

1.    Who regulates NBFCs in India?
The Reserve Bank of India regulates Non-Banking Financial Companies (NBFCs) in India.
2.    How can NBFCs contribute to India's economy?
NBFCs play a crucial role in the economic growth of India by providing a wide range of financial services to the public, especially the underserved communities.
3.    What are the different types of NBFCs?
Asset Finance Companies (AFC), Loan Companies (LC), Investment Companies (IC), and Infrastructure Finance Companies (IFC) are the different types of NBFCs available in India.

 

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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