A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India. NBFCs engage in various financial activities such as loans and advances, acquisition of shares, stocks, bonds, hire-purchase, insurance, or chit-fund businesses. However, they do not include institutions primarily involved in agricultural, industrial activities, sale/purchase of goods (excluding securities), providing services, or dealing in immovable property.
Regulation
The operations of NBFCs are regulated by the Reserve Bank of India (RBI) under the framework of the Reserve Bank of India Act, 1934 (Chapter III-B) and the directives issued by the RBI.
Outsourcing Norms
On November 9, 2017, the RBI issued norms governing the outsourcing of functions/services by NBFCs. According to these norms:
- Core Management Functions: NBFCs are prohibited from outsourcing core management functions such as internal audit, management of investment portfolios, strategic and compliance functions related to Know Your Customer (KYC) norms, and loan sanction processes.
- Customer Information: Service providers’ staff are allowed access to customer information only as necessary to perform their outsourced functions.
- Code of Conduct: NBFC boards must approve a code of conduct for direct sales and recovery agents.
- Debt Collection: NBFCs and their outsourced agents are prohibited from using intimidation or harassment tactics for debt collection.
- Grievance Redressal: Every NBFC is required to establish a grievance redressal mechanism that addresses issues related to services provided by outsourced agencies.
Difference between NBFCs and banks
NBFCs perform functions similar to that of banks but there are a few differences –
- NBFCs provide banking services to people without holding a Bank licence
- An NBFC cannot accept Demand Deposits
- An NBFC is not a part of the payment and settlement system
- An NBFC cannot issue Cheques drawn on itself
- Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks
- An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
- An NBFC cannot indulge primarily in agricultural or industrial activities or sale-purchase, construction of immovable property
- Foreign Investment allowed up to 100%
- An NBFC accompanies working in Financial Body and Money handling
- Unlike banks NBFC is not required to lend loans to priority sector.