The ever-evolving financial framework of India is welcoming all entities with open arms, be it commercial banks, co-operatives, pension & mutual funds, insurance firms, etc. Similarly, Non-banking financial companies (NBFC) operate as an integral part of the Indian financial system as they deal in lending small loans, investing, and collecting money under any appropriate scheme. In India, any company can function as an NBFC if it doesn’t undertake agriculture, industrial, and trading & purchase of immovable properties as its principal business activity. Any company that performs the business accepting deposits as its primary business is also considered an NBFC.
Now, before one starts wondering that since NBFCs are generally doing what any bank loan app would do, then how come it is different? Below are the points of difference between the two financial entities.
- NBFCs cannot accept demand deposits, but commercial banking organizations can.
- There is no involvement of NBFCs in the payment and settlement process, so they cannot issue cheques, unlike the banking firms.
- Credit guarantee corporation is not available to the depositors of NBFCs, whereas, to those of banking institutions, it is available.
According to the guidelines of RBI, any institution will be declared as NBFC only if it passes the 50-50 test. This means that a company’s financial assets constitute more than 50% of the total asset, and income earned through the financial assets constitute more than 50% of the gross income. There are different types of NBFCs categorized according to the types of liabilities and activities they conduct. Let us delve into how they contribute to the day-to-day banking needs of the customers.
- Asset Finance company: It is the type of company whose primary purpose is to finance physical assets and promote automobiles’ productive and economic activities.
- Investment company: The principal business of such companies is to acquire different kinds of securities.
- Loan company: Such companies sell financial aid through mobile loan apps and advances.
- Infrastructure Finance company: Such non-banking finance companies deploy a significant portion of their asset into infrastructure loans and have a minimum net owned funds of rs 300 crores.
In terms of benefits provided by these NBFCs, consider the following:
- Many borrowers prefer taking a fast loan from any NBFC because they have almost equivalent or sometimes even lower interest rates compared to the leading banking organizations. Like modern banks, they also provide online platforms for easy application and approval process of the loans, be it personal loans, home loans, education loans, or whichever they want.
- They need to emphasize fulfilling the eligibility criteria more strictly. They have a pretty lenient approach, making it possible for many borrowers to apply for and receive loans instantly through urgent loan apps in dire need. Sometimes, when the banks reject them for poor credit scores, NBFC is their final resort.
- While a large section of the corporate sector leans towards banking institutions for financial assistance, retail sectors find solace in NBFC because of the flexibility of repayment options and not-so-stringent rules to follow. NBFCs have been booming in the Indian financial industry due to this reason.
The financial framework of India is diversified and rapidly expanding. Not only one but all the financial entities play a part in shaping the country as one of the most vibrant capital markets.