History of NBFC

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The regulation and evolution of Non-Banking Financial Companies (NBFCs) in India have been shaped by several legislative amendments and committees:

Reserve Bank Amendment Act, 1963

  • The Reserve Bank of India Act, 1934 was amended on December 1, 1964, introducing ‘Chapter III-B’ to regulate ‘Deposit Accepting’ NBFCs.

Committees and Legislative Actions

James S. Raj Committee

  • In the early 1970s, the Government of India tasked the Banking Commission with studying the functioning of chit funds and examining activities of Non-Banking Financial Intermediaries.
  • In 1972, the Banking Commission recommended uniform chit fund legislation for the entire country.
  • The Reserve Bank of India prepared a Model Bill to regulate chit funds and referred it to a study group chaired by James S. Raj.
  • By June 1974, the study group recommended banning Prize Chit and other schemes, urging Parliament to enact legislation ensuring uniform provisions for chit funds nationwide.
  • Accordingly, Parliament enacted the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, and the Chit Funds Act, 1982.

Chakravarty Committee

  • During the Planning Era, the Reserve Bank of India endeavored to manage money and evolve a sound monetary system, yet faced challenges in realizing the social objectives of monetary policy.
  • In December 1982, Dr. Manmohan Singh, then Governor of RBI, appointed a committee chaired by Prof. Sukhamoy Chakravarty to review the functioning of the monetary system in India.
  • The committee recommended assessing the links among the banking sector, non-banking financial institutions (NBFCs), and the unorganized sector to evaluate various monetary and credit policy instruments in terms of their impact on the credit system and the economy.
  • During this period, the number of NBFCs grew significantly, from around 7,000 in 1981 to approximately 30,000 by 1992.

These legislative actions and committee recommendations have played a pivotal role in shaping the regulatory framework and growth trajectory of NBFCs in India, ensuring their alignment with broader financial and economic goals.