What is an NBFC?
Understanding the language of finance can sometimes be like unraveling a cryptic puzzle. Non-Banking Financial Companies (NBFCs) can really make finance lingo seem confusing. But we got you! This article will delve into what really is NBFC.
In simple words, think of an NBFC as a financial company that follows the rules set in the Companies Act of 1956. They do money-related things like leasing, providing insurance, lending money, and dealing with financial stuff like stocks and bonds. However, they stay away from activities like real estate, making and selling regular stuff, farming, or running factories.
Also, if a company takes money from people in the form of deposits under different plans, it’s still considered an NBFC, just a special kind called a Residuary NBFC.
One key distinction between an NBFC and other business models is the use of the term “principal business”. For a company to be considered an NBFC, the Reserve Bank of India (RBI) requires that more than half of its total assets are financial assets and that over half of its total income comes from these assets. This is how they determine if a company qualifies as an NBFC or not. This “50-50 test” makes sure that the only businesses governed by RBI regulations are those that are primarily involved in financial activities.
NBFCs and traditional banks appear to provide comparable financial services, but there are some important differences:
There are certain rules one needs to follow by the Reserve Bank of India to be an NBFC. First, have yourself registered with them, and second you should also have at least ₹2 crores in your bank. However, there’s a twist – some NBFCs don’t have to follow these rules if they’re already playing by different rules under other regulatory bodies. For example, insurance companies, venture capital funds, and stockbrokers get a bit of a pass.
To become an NBFC, a company needs to check a few boxes. First, it should be a registered company under the Companies Act of 1956. Second, it needs to have at least ₹2 crores saved up in its financial piggy bank. But, keep in mind, if a company specializes in certain kinds of financial business, that savings requirement might be different.
NBFCs come in various types, categorized based on their activities, liabilities, and size. Some common types include:
In conclusion, NBFCs are crucial participants in the financial industry, providing a vast array of services that intersect with those provided by conventional banks. Even though they have certain limitations—like not taking demand deposits—knowing their function and classifications can make it easier for people and companies to deal with the intricate world of finance.