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NBFCs are Non Banking Finance Companies engaged in Financing various activities . They are registered under Companies Act , 1956 and are also registered with Reserve Bank of India to carry financing activities .Their main functions can be categorized into :--

 1) Funding activities such as Housing finance, Equipment leasing, hire purchase financing of vehicles and equipments, Granting various types of retail loans, factoring services and venture capital financing etc

2) Fee based activities such as portfolio management, Loan Syndication, Mergers & Acquisitions, Credit Rating etc . They also include Mutual Benefit Finance Companies notified by Govt. under Section 620A of the Companies Act, 1956.

There are 2 types of NBFCs -

  NBFC - (permitted to accept public deposits)

  NBFC - (not permitted to accept public deposits ) 

In spite of charging higher interest rates than Banks, customers prefer NBFCs  because of

  Lesser Pre & Post sanction requirement

  Services are simpler and speedier

Services are tailor made to the need of the client

Cater to the businesses who remain outside the purview of the commercial banks as a result of RBI Monetary & Credit Policy or due to individual Bank's own restrictions.

NBFCs normally raise resources through deposits from public, stakeholders , Directors and other companies or resort to borrowing by issue of non convertible debentures. It is estimated that nearly 60% of loan requirement of Trading sector, 50% of loan requirement of Manufacturing sector and 65% of loan requirement of the construction sector are met by NBFCs and Private financiers.

NBFCs compete with banks in all of their investment services. Their investment services include:
·         Merchant Banking & Underwriting – A business wants to raise capital.
·         Stock Broking – trading on behalf of customers.
·         Asset Management – managing client funds. Mutual funds, pension funds, PE funds etc. offer them.
·         Venture Capital & Private Equity – equity capital to start-up companies; and private (not public) equity capital for other businesses.
·         Custodial Services – Settlement of security transactions.
Most NBFCs focus on a combination of lending, leasing and hire purchase or investment services.

Difference Between NBFCs & Banks

NBFCs cannot take CASA or demand deposits. They accept term deposits from 1-5 years. Hence their cost of fund is higher. Banks take CASA deposits. Their cost of fund is lower.
For NBFC, overdue period is 180 days and for leasing and hire purchase, it is 12 months. Any overdue loan more than 90 days becomes NPA.
In carrying out Hire Purchase activity, they have no limit. Banks can do leasing or hire purchase so long as the asset value is not more than 10% of their total assets. Banks cannot do operating lease as it is a Non-Banking Activity.
Capital to Risk Weighted Asset Ratio (CRAR) is higher CRAR is lower for Banks
All assets of NBFC have a risk weight of 100% All assets of banks do not have a risk weight of 100%.
100% FDI allowed Maximum 74%

That rules for restructuring loans by non-banking financial companies will be the same as those of banks.

The key provisions include that the relaxation or extension of commencement of projects will not amount to restructuring for infrastructure, non-infrastructure and corporate real estate projects, the Reserve Bank of India said in a statement.

The central bank also said a special classification benefit will be provided to corporate debt restructuring cases, including small and medium enterprises, until the end of March 2015.


As per RBI Guidelines


Comparison of loan, lease & hire purchase


Hire Purchase
Title/ownership of asset
Passes immediately to the borrower
Remains with the lessor
Transfers to the hirer at end of HP contract
Tax treatment
Interest expenses are tax deductible.  In India, home loan principal repayments are also tax deductible.
Complete lease rentals are tax deductible.
Only interest component is tax deductible.
Upfront payment by borrower/hirer/lessee
Borrower must pay some amount as lender doesn’t finance 100%
Lessor may collect 1 or 2 lease rentals upfront
Owner may collect 1 or 2 lease rentals upfront
Installment payment
Higher as it is for the full value of the asset
Lower as it is for the part value of the asset
Higher than lease of loan as HP charges are higher
Tax depreciation
Claimed by borrower as he is the owner
Claimed by the lessor as he is the owner
Claimed by the hirer though not the owner (ownership passes to him after expiry of HP)



Misc. NBFC Related Issues

Now RBI has introduced a common application form for registration of various categories of NBFCs such as NBFC-MFIs ( Micro finance Institutions ), NBFC-factors & IDF-NBFCs (Infrastructure-development finance). The Application form for CICs ( Core Investment Companies ) has been redesigned with 2 checklists of documents.

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