NON BANKING FINANCIAL INSTITUTION

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CONTENTSMeaningDifference between NBFI and banksImportanceRole of NBFIFunctionsRegulationsTypesGuidelinesCurrent statusTop five NBFIConclusion

Financial institutionA financial institution is an

institution which collects funds from the public, and places them in financial assets, such as deposits, loans and bonds rather than tangible property. FINANCIAL

INSTITUTION

Banking institution

Non banking institution

NON BANKING FINANCIAL INSTITUTIONA non-bank financial institution (NBFI)

is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.

Non-banking financial institutions, are financial institutions that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public.

NBFI’s VERSUS BANK’sBANKS NBFIS

Definition Banking is acceptance of deposits withdraw able by cheque or demand;

NBFI cannot accept demand depositsNBFI are companies carrying financial business

Scope of business

Scope of business of the bank is limited.

There is a various types of business regarding financial activities.

Major limitation on Business

No non banking activity are carried.

Cannot provide checking facilities.

Need for a license

License norms are tightly controlled and generally it is perceived to be quite difficult to get a license for a bank

It is comparatively much easier to get a registration as an NBFI.

Regulations BR Act and RBI Act lay down the stringent control over the bank.

Much lesser control over NBFI

IMPORTANCENon banking financial institutions

have the following importance in Indian economy.

Greater reach. Flexibility in tapping resources. Retail services to small and

medium business. Important component of

financial market.

Role of NBFIs

Development of sectors like Transport & Infrastructure

Substantial employment generation Help & increase wealth creation Broad base economic development To finance economically weaker

sections

FUNCTIONSBrokers of loanable funds.Mobilization of savings.Channelization of funds into

investment,Stabilize the capital market,Provide liquidity.

REGULATIONSRBI Act, 1934, it is mandatory

that every NBFI should be registered with RBI to commence or carry on any business of non-banking financial institution.

TYPES

types

Risk pooling

institutions

Contractual saving institution

s

Market makers

Specialized sectoral financiers

Financial services providers

Cont. Risk-pooling institutions: Insurance companies underwrite economic risks

associated with illness, death, damage and other risks of loss.

There are two main types of insurance companies: (a)general insurance (b)life insurance.

Contractual savings institutions: Contractual savings institutions (also called

institutional investors) give individuals the opportunity to invest in collective investment vehicles (CIV).Collective investment vehicles pool resources from individuals and firms into various financial instruments including equity, debt and derivatives.

Eg- mutual funds, pension funds.

contMarket makers Market makers are broker-dealer institutions that

quote a buy and sell price and facilitate transactions for financial assets. Such assets include equities, government and corporate debt, derivatives, and foreign currencies.

Specialized sectoral financiers: They provide a limited range of financial services

to a targeted sector. For example, real estate financiers channel capital to prospective homeowners, leasing companies provide financing for equipment and payday lending companies that provide short term loans to individuals that are under banked or have limited resources.

Cont.Financial service providers Financial service providers include

brokers management consultants, and financial advisors, and they operate on a fee-for-service basis.

Their services include: improving informational efficiency for the investors and, in the case of brokers, offering a transactions service by which an investor can liquidate existing assets.

COMPANY’S UNDER NBFC

They are also categorized in a different format among 8 categories

LOAN COMPANY

HIRE PURCHASE COMPANY

INVESTMENT COMPANY

MUTUAL BENEFIT COMPANY

HOUSING FINANCE COMPANY

EQUIPMENT LEASING COMPANY

GUIDELINES ON FAIR PRACTICES• Application for loans and their

processing.• Loan appraisal and terms\conditions.

• Disbursement of loan.

• Customer acceptance policy.

• Customer identification procedure.

• Monitoring of transactions.

• Risk management.

• Kyc for existing accounts.

• Appointment of principal officer

Current statusNBFI have improved their operations and

strategies. Industry experts opine that they are much more mature today than they were during the last decade.

In fact, aggressive strategies helped LIC housing finance to grab new customers and increase its market share in national mortgage market.

The segment which was hit hardest was vehicle financing.

Fortunately, since vehicle finance is asset based business, their asset quality did not suffer as against other consumer financing business.

Top five NBFCs in India:

• Housing Development Finance Corporation Limited

• Power Finance Corporation Limited

• Rural Electrification Corporation Limited

• National Bank of Agricultural and Rural Development

• Infrastructure Development Finance Company Limited

FUTURE PROSPECTS

Some of the future prospects of NBFI are-

FUTURE CAPITALASHOK LEYLAND FINANCE.RELIANCE CAPITAL.

FUTURE CAPITALFuture Capital, the financial arm of

Future Group, will soon start rolling out Money Bazaars across the country.

This one stop-shop would be providing numerous services like-

o Housing loanso Personal loanso Insuranceo MFso Credit cards

ASHOK LEYLAND FIN.Traditionally, ALF has depended on

commercial vehicle financing for a significant proportion of its revenue.

• The other segment they are concentrating on is passenger cars.

• The other segment they have is multi-utility vehicles (MUVs).

• The move of Ashok Leyland Finance to launch a finance portal that would be used to sell products of other financial intermediaries.

RELIANCE CAPITALReliance Capital, an arm of the Anil

Dhirubhai Ambani Group, will set up a separate housing financial subsidiary and non-banking financial company (NBFC) for the consumer finance sector.

Ambani said his company is also planning to selectively expand its-

o Asset management.o Life insurance.o Broking operations.

CONCLUSIONStrengthening the professionalism

of NBFC sector through education and training, making them more organised.

RBI needs to educate people about NBFC.

The credit delivery mechanism needs to be more transparent and hassle free.

There should be more stringent norms for the defaulters.