In News:

• To provide greater operational flexibility to non-banking lenders, the Reserve Bank created a single category for them by bundling their present three-tier structure.

Explained:

• To provide NBFCs with greater operational flexibility, harmonization of different categories of NBFCs into fewer ones shall be carried out based on the principle of regulation by activity rather than regulation by entity
• Asset finance, loan, and investment companies have been merged into a new category called NBFC- Investment and Credit Companies

What is a Non-Banking Financial Company (NBFC)?

• A Non-Banking Financial Company (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 Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

What is the Difference Between Bank And NBFC?

• 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.

Earlier classification:

NBFCs are categorized

• In terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
• Non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:
  • Asset Finance Company (AFC)
  • Investment Company (IC)
  • Loan Company (LC)
  • Infrastructure Finance Company (IFC)
  • Systemically Important Core Investment Company (CIC-ND-SI)