Santharam Finance non banking _ financial

non_banking financial institution

1. Non-Banking Financial Institutions(NBFI) Definition and Structure SANTHARAM B 2023501029

2. NBFI In the Indian financial system, the NBFCs fall within the description of 'shadow banking’ as defined by the Financial Stability Board (FSB). Shadow banking is defined as credit intermediation involving entities and activities outside the regular banking system. Shadow banks look like a bank but they are not banks. Shadow banking system has a role in supplying credit or liquidity to the economy but it is also the source of systemic risk.

3. The legal definition of NBFCs is given in the RBI Act. According to RBI, a company is considered as NBFC if it carries on the business of loans and advances, acquisition of shares and other securities, leasing, hire purchase finance, insurance business, chit fund activities or lending in any manner. The principal business of such companies should not be in agriculture or industrial activities, and construction and real estate activities. NBFI-Definition

4. An NBFC, in a layman's language , is simply a finance company. It is a non-banking institution which does not accept demand deposits and is not part of the payment and settlement system as that of banks. NBFC is registered as a company under the Companies Act and is subject to regulation and supervision by the Board for Financial Supervision (BFS) of the RBI.

5. Structure of NBFI

6. This has been illustrated well by Shri Vijaya Bhaskar , the Executive Director of RBI, in an article in the RBI Bulletin.

7. Of these classification 10 different entities shown in the first column of the figure are called 'NBFCs' and are regulated by the RBI 1.Equipment Leasing Companies (ELCs): Any financial institution whose principal business is that of leasing equipment or the financing of equipment leasing. 2. Hire-purchase Companies (HPCs): Any financial intermediary whose principal business relates to hire-purchase transactions or financing of hire-purchase transactions. 3. Loan Companies (LCs): Any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any commercial activity other than its own. 4. Investment Companies (ICs): Any financial intermediary whose principal business is that of buying and selling securities . 5. Residuary Non-Banking Companies: Receiving deposits in one lump sum or instalments by way of contributions.

8. Reclassification of NBFCs Asset Finance Company (AFC) 2. Investment Company (IC) 3. Loan Company (LC) AFC is defined as any company which is a financial institution carrying on as its principal business the financing of physical/real assets supporting productive or economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment, moving on own power and general-purpose industrial machines etc. IC is a company whose principal business is acquisition of securities . LC is an NBFC that provides finance by making loans and advances but does not include a leasing company or a hire-purchase company.

9. NBFC-D and NBFC-ND Classification Above type of companies was further categorised into NBFCs deposit taking (NBFC-D) and NBFCs non-deposit taking (NBFC-ND) based on their liability structure. Thus, the structure of NBFCs in India currently appears. This categorisation has been done in connection with the application

10. Liabilities-based classification: Deposit taking NBFCs and Non-deposit taking NBFCs. 2. Activity-based classification: AFCs, loan companies, investment companies etc. 3. Size-based classification: NBFCs-ND with assets less than Rs. 500 crore and NBFCs withassets of Rs. 500 crore and above. NBFC-D and NBFC-ND Classification

11. 1.Infrastructure Finance Company (IFC): IFC is a non-banking finance company which deploys at least 75% of its total assets in infrastructure loans, has a minimum net owned funds of Rs. 300 crore , has a minimum credit rating of 'A' or equivalent and a CRAR of 15%. 2.Infrastructure Debt Fund-Non-Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered as NBFC to facilitate the flow of long-term debt into infrastructure projects . IDF-NBFC raise resources through issue of rupee or dollar denominated bonds of minimum 5-year maturity . Only IFCs can sponsor IDF-NBFCs. 3. Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria: Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000. Loan to be extended without collateral .

12. 4.Non-Banking Financial Company - Factors: NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 75% of its total assets and its income derived from factoring business should not be less than 75% of its gross income. 5. Mortgage Guarantee Company: MGC means a company which primarily transacts the business of providing mortgage guarantee. A mortgage guarantee is a financial product which compensates the housing finance companies for the losses that may arise when a home owner defaults on a mortgage plan. The India Mortgage Guarantee Corporation (IMGC) is the first mortgage guarantee company formed in India in 2012. 6. Residuary Non-Banking Company receives deposits in one lump sum or in instalments by way of contributions.

13. Salient Features of NBFCs 1.Registration: It is mandatory that every NBFC should be registered under the RBI Act to commence or carry on its business. This applies to both deposit-taking as well as non-deposit taking NBFCs. 2. Acceptance of deposits: Public deposits are one of the sources of funding for the NBFCs. 3. Regulation by the RBI: NBFCs are well regulated now by the RBI. The regulations govern the deposit acceptance, maintenance of liquid assets and creation of reserve fund. 4. Supervision by the RBIs: The RBI has an effective supervisory through the BFS. The objective of such supervision is healthy lines and avoid excessive risk taking.

14. References Shanmugham,R.(2017)”Financialservices”.Wiley India pvt.ltd.,Daryaganj,New delhi-110002,pgno:293-297. https://www.worldbank.org https://www.rbi.org.in/ https://www.india.gov.in/official-website-reserve-bank-india Cafiso, G., & Rivolta, G. (2024). Conventional monetary interventions through the credit channel and the rise of non-bank institutions.  Economic Systems ,  48 (1), 101150.