Non-Banking Financial Company (NBFC)

The Reserve Bank of India recently imposed ₹20 lakh monetary penalty on Manappuram Finance for non-compliance with certain provisions of Non-Banking Financial Company (NBFC).

About Non-Banking Financial Company (NBFC):

• An NBFC is a company registered under the Companies Act 1956engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature.
• They offer various banking services but do not have a banking license. 
• They provide banking services like loans, credit facilities, TFCs, retirement planning, investing and stocking in the money market.
• Generally, these institutions are not allowed to take traditional demand deposits—readily available funds, such as those in checking or savings accounts—from the public. 
• NBFCs also provide a wide range of monetary advice like chit-reserves and advances.
• Regulation:
  • NBFCs are regulated by the Reserve Bank of India (RBI), the central bank of India.
  • The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure that they adhere to the established norms and regulations.
• Banks vs NBFCs: NBFCs lend and make investments and, hence their activities are akin to that of banks; however, there are a few differences as given below,
  • NBFC cannot accept demand deposits;
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
  • Unlike banks, NBFCs are not subjected to stringent and substantial regulations. 
• Examples of NBFCs include investment banks, mortgage lenders, money market funds, insurance companies, equipment leasing companies, infrastructure finance companies,  hedge funds, private equity funds, and P2P lenders