NON-BANKING FINANCIAL
COMPANY (NBFC) - ECONOMY
News: NBFCs raise fixed deposit
rates: Go for longer tenures in FDs with higher credit ratings
What's in the news?
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NBFCs are raising their fixed deposit (FD) rates to
attract funds, compensating for reduced bank borrowings.
Non-Banking Financial
Company (NBFC):
●
An NBFC is a company registered under the Companies Act 1956 engaged 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.
Important Takeaways:
●
It excludes
institutions primarily engaged in agricultural or industrial activities,
sale/purchase/construction of immovable property, or providing non-financial
services.
●
NBFCs also provide a wide range of monetary advice
like chit-reserves and advances.
●
A subcategory of NBFCs, called Residuary non-banking companies, is constituted by companies
primarily receiving deposits under any scheme.
Deposit-taking
Activities:
●
NBFCs are permitted to accept deposits but only in
the form of time deposits, and they
cannot provide demand deposit facilities like savings or current accounts.
●
They are restricted to accepting deposits for a
period ranging from 12 to 60 months,
with interest rates capped at 12.5% per
annum.
Regulations:
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NBFCs are regulated by both the Ministry of Corporate Affairs and the Reserve Bank of India
(RBI).
●
The RBI issues licenses to NBFCs, regulates their
operations, and ensures compliance with established norms and regulations.
Classification of NBFCs:
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NBFCs are categorized based on their liabilities
into Deposit and Non-Deposit accepting
NBFCs.
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Non-deposit taking NBFCs are further classified
based on their size into systemically
important and other non-deposit holding companies.
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Systemically important NBFCs are those with an
asset size of ₹500 crore or more, as per the last audited balance sheet, and
their activities significantly impact the financial stability of the economy.
Difference between Banks
and 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.
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NBFCs do not
form part of the payment and settlement system and cannot issue cheques drawn
on itself.
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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.
Scope of NBFCs:
●
NBFCs encompass a diverse range of financial
institutions, including investment banks, mortgage lenders, insurance
companies, equipment leasing companies, and peer-to-peer lenders.