Goseeko blog

What is Non-banking financial institutions/companies?

by Team Goseeko

Non-banking financial companies (NBFCs) are those institutions which are non-banking in nature. Initially, The Reserve Bank of India Act, 1934 amended on 1 December 1964 by Reserve Bank Amendment Act, 1963. Moreover, in this new ‘Chapter III-B’ introduced to Regulate ‘Deposit Accepting’ NBFCs. Further, these are registered as company under the Companies Act, 1956. However, they are engaging in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities. Moreover, Government or local authority issues such marketable securities. For example, the business of a nature like leasing, hire purchase, insurance business and chit business.


Therefore, some of the silent features of non banking financial companies are as-

1. Heterogeneous

  1. Initially, these are heterogeneous in nature. The services provided by each NBFCs are not identical with each other.

2. Regulations

Secondly, the RBI, SEBI, SCRA, IRDA, Ministry of corporate affairs etc. regulates the non banking financial companies.

3. Gap filler

Additionally, it supplements the role of banks by filling the gaps where the banks unable to access.

4. Promotes investment and savings

Furthermore, NBFC promotes saving an investment in the economy by protecting consumer interest.

5. Capital formation

Lastly, it facilitates capital formation in the economy by mobilizing the funds from surplus sectors to deficit sectors.

There are some apparent restrictions to NBFC issued by RBI mainly as given below:

  1. Firstly, NBFC company should keep away from accepting demand deposits from any sources.
  2. Secondly, it can’t issue cheques drawn on itself.
  3. Further, NBFC Company can’t form part of the payment and settlement system.
  4. Finally, epositors of a NBFC company cannot have facilities like deposit insurance scheme.

Further, some of the significant role of NBFC in Indian economy are

  • Mobilization of Resources – It converts savings into investments
  • Capital Formation – Aids to increase capital stock of a company
  • Provision of Long-term Credit and specialised Credit
  • Aid in Employment Generation
  • Help in development of Financial Markets
  • Helps in Attracting Foreign Grants
  • Lastly, it helps in Breaking Vicious Circle of Poverty by serving as government’s instrument

Above all, FAs of 2021 following entities are exempted by RBI for registration requirements-

1. Insurance companies

Insurance companies which falls under Insurance Regultory and Development Authority

2. Asset reconstruction company

3. Stock exchanges – Only recognised stock exchanges under authority of Securities and Exchange Board of India.

4. Merchant Banking companies

5. Stock Brokering companies – It includes brokers and sub brokers who are required to get themselves registered with SEBI

6. Venture capital Funds

7. Housing Finance Companies – These are regulated by National Housing Bank

8. Nidhi Companies (Section 406 of Companies Act)

9. Chit Fund Companies (Section 2 of Chit Fund Act)

10. Alternative Investment Companies

11. Micro Finance Companies –

Generally, the Task Force on Supportive Policy and Regulatory Framework for Microfinance set up by NABARD in 1999 provided various recommendations. Accordingly, it was decided to exempt NBFCs which are engaged in micro financing activities, licensed under Section 8 of the Companies Act, 2013, and which do not accept public deposits, from the purview of Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer of profits to the Reserve Fund) of the RBI Act, 1934.

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