Q.13 “The NBFCs are fast emerging as an important segment of Indian financial system and are complementing the banking sector”. Give your comments in light of the regulatory framework for the NBFCs.

Ans. NBFCs (Non-Banking Financial Companies) are fast emerging as an important segment of Indian financial system. It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They can not have certain activities as their principal business—agricultural, industrial and sale- purchase or construction of immovable property. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. In this way, they have broadened and diversified the range of products and services offered by the Indian financial sector. Gradually, they are being recognised as complementary to the banking sector due to their—

• customer-oriented services;

• simplified procedures;

• attractive rates of return on deposits; and

• flexibility and timeliness in meeting the credit needs of specified sectors.

RBI, the regulator of the NBFCs, has given a very wide definition of such companies (a kind of ‘umbrella’ definition)—”a financial institution formed as a company involved in receiving deposits or lending in any manner.” They are classified into two broad categories:

(a) deposit-taking NBFCs (NBFC-D), and

(b) non-deposit taking NBFCs (NBFC-ND).

It is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. For registration they need to be a company (incorporated under the Companies Act, 1956) and should have a minimum NOF (net owned fund) Rs. 2 crore.

There are certain other category of the NBFCs which are regulated by other financial regulators—venture capital fund, merchant bank, stock broking firms (SEBI registers and regulates them); insurance company (registered and regulated by the IRDA); housing finance company (regulated by the National Housing Bank); nidhi company (regulated by the Ministry of Corporate Affairs under the Companies Act, 1956); and chit fund company (by respective state governments under Chit Funds Act, 1982).

The Government has proposed to facilitate the process of their strengthening as they are seen to be a big fund-provider to the infrastructure sector.