There are various types of Non-Banking Financial Companies (NBFCs) which are currently present in the Indian financial system. NBFCs are rapidly emerging as an important segment of the Indian financial system. It is a diverse group of institutions (other than commercial and cooperative banks) that perform financial intermediation in a variety of ways, such as accepting deposits, making loans and advances, leasing, hire purchase, and so on. They are not permitted to conduct agricultural, industrial, or sale-purchase or construction of immovable property as their primary business.

What is NBFC?

• A non-banking financial company, also known as a non-banking financial institution, provides financial services and products but is not recognised as a bank with a full banking licence.
• NBFCs are not banks, but their activities include lending and other activities such as providing loans and advances, credit facilities, savings and investment products, trading in the money market, managing stock portfolios, money transfers, and so on.
• NBFC Registration is required before NBFC activities can begin.
• Their activities include hiring, leasing, infrastructure finance, venture capital finance, housing finance, and so on.
• Deposits can be accepted by NBFC, but only term deposits and deposits repayable on demand are notaccepted.
• Some examples of well-known NBFCs are: Kotak Mahindra Finance, SBI Factors, Sundaram Finance, and ICICI Ventures.

Types of NBFCs

On the Basis of Deposits

• Deposit Non-Banking Financial Companies - Deposit NBFCs are NBFCs that can accept deposits from the general public.
• Non-deposit Non-Banking Financial Companies - Non-deposit NBFCs are those that cannot accept deposits from the general public.

On the Basis of Their Assets Size

• Systematically Important NBFCs - Systemically important NBFCs are those with assets of INR 500 crore or more as of the most recent audited balance sheet.
• Non-systematically Important NBFCs – Non-systemically important NBFCs are those with assets of less than INR 500 crore as of the most recent audited balance sheet.

On the Basis of Their Activity

Asset Finance Company (AFC)

• As its primary business, an AFC is a financial institution that finances various assets for individuals and businesses to support productive/economic activity.
• Automobiles, tractors, machinery, heavy industrial equipment, large power generator sets, earthmoving & material handling equipment, production & farming equipment, self-propelled vehicles, and general-purpose industrial machines are examples.
• The income from these should not be less than 60% of the total assets.

Loan Company (LC)

• It is a financial institution that provides loans for a variety of purposes except for AFC.
• The loan is being offered for purposes other than assets, such as working capital finance, etc. However, housing finance firms are included.
• Some examples of NBFC – LC are LIC Finance Ltd, PNB Housing Finance Firm, and HDFC.

Mortgage Guarantee Company (MGC)

• NBFC-MGCs are financial institutions for which:
  • at least 90% of the business turnover is mortgage guarantee, or
• 90% of the gross income is from the mortgage guarantee business, or
• the NOF is Rs. 100 crores.

Investment Company (IC)

• The primary business of a financial institution is the acquisition of securities.
• That is, it collects money from the general public and invests it in various securities and financial products.
• The remaining profit is distributed to shareholders after the company deducts its operational costs from the earned profit.
• Some investment companies include Bajaj Alliance General Insurance Company, IDFC, and HDFC mutual funds.

Systematically Important Core Investment Company (CIC-ND-SI)

• At least 90% of its total assets are held in the form of investments in shares, stocks, debt, or loan group companies.
• Within a period of not more than ten years from the date of issue, 60 percent of the 90 percent should be invested in equity shares or those that compulsorily convert later in equity shares.
• Does not trade in its investments in group companies' shares, debt, or loans, except through block sales for the purpose of dilution or disinvestment.
• It is not engaged in any of the activities listed in sections 45(c) or 45(f) of the RBI Act of 1934.
• The assets are worth at least Rs. 100 crore.
• It accepts government funds.

Infrastructure Finance Company (IFC)

• Infrastructure loans account for roughly 3/4th of the company's total assets.
• Has a Net Owned Fund of at least Rs. 300 crores
• Has a credit rating of at least "A" or a comparable CRAR of at least 15%.
• GMR Infrastructure Ltd., Hindustan Construction Company, and other companies are examples.

Micro Finance Institutions (NBFC-MFI)

• NBFC-MFI is a Non-Deposit Accepting NBFC (ND-NBFC) with at least 85 percent of its assets in the form of qualifying assets that meet the following criteria:
  • loan disbursed by it to a borrower with an annual income of less than Rs. 60,000 in rural households or less than Rs. 1,20,000 in urban and semi-urban households;
  • the loan amount is not more than Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles;
  • the borrower's total indebtedness is not more than Rs. 50,000;
  • the loan duration is not less than 24 months for loan amounts in excess of Rs. 15,000, with prepayment without penalty;
  • the loan is extended without any security,
  • The aggregate amount of loans given for income generation is not less than 75% of the total loans given by MFIs, and the loan is repayable in weekly, fortnightly, or monthly installments at the borrower's discretion.
  • Some examples include Bandhan Financial Service Ltd and Ujjivan Financial Service.

Infrastructure Debt Fund (IDF-NBFC)

• IDFs raise funds for long-term infrastructure projects through bonds.
• The bonds are issued in multiple currencies and have a minimum maturity of 5 years for investors.
• It makes it easier for long-term debt to flow into infrastructure projects.
• IDF-NBFCs can only be sponsored by IFC-NBFCs.

Non-Banking Financial Company-Factors (NBFC-Factors)

• This type of NBFC is uncommon in India.
• Such companies usually purchase loans or advances at a heavily discounted rate from lenders and then adjust the debtor's repayment schedule to ensure easy settlement while earning a small profit.
• Normal lending by a bank against the security of receivables, etc. is not included.
• A minimum NOF of Rs. 5 Crore is required for an NBFC-Factoring company.
• Furthermore, its financial assets in the factoring business should account for at least 75% of its total assets.
• And its income from the factoring business should not be less than 75% of its gross income.

NBFC-Non-Operative Financial Holding Company (NOFHC)

• It is a distinct type of NBFC, consisting of the establishment of a new bank by the promoters.
• It is a non-operative financial holding company that is wholly owned by the company.
• The RBI has granted permission under the applicable regulatory prescription.
• To establish or maintain a bank as well as another financial service.

NBFCs not Registered under RBI

• There are certain businesses that provide financial services but do not need to be registered with the RBI.
• These entities are regulated by other financial sector regulators and are not required to obtain an NBFC License from the RBI in order to avoid dual regulation. They are as follows:

Conclusion

NBFCs collect funds from the general public, either directly or indirectly, and lend them to final spenders. They make loans to wholesale and retail traders, small businesses, and self-employed people. As a result, they have broadened and diversified the range of products and services available in the financial sector.