Points to Ponder in This Article – Know about what are NBFIs and how they differ from banks. Understand the primary roles of AIFIs and motive behind their setup. You can look at their categories, classification & regulations but cramming who regulates what & to what extent is not that important.
Non Banking Financial Intermediaries (NBFI)
A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples include:
All India Financial Institutions (AIFI)
Exim
Nabard
Sidbi
NHB
Primary Dealers (PD)
Non-banking financial companies
All India Financial Institutions (AIFI)
EXIM Bank
Export-Import Bank of India – Established in 1982
Controlled by Government of India (100%)
Provides Loan/credit/finance to exporters and importers
Promotes cross border trade and investment
NABARD
National Bank for Agriculture and Rural Development – Established in 1982
Controlled by > GoI (99.3%) + RBI (0.7%)
Regulatory authority of Cooperative banks + RRBs
Manage Rural infra. Development fund (RIFD)
Finances State cooperative banks (SCB), RRBs, MFIs, Cottage/handicraft (SHG) etc.
NHB
National Housing Bank – Established in 1988
Apex institution for housing finance in India
Controlled by RBI (100%)
Provides finance to banks and NBFCs for housing projects.
Manages RESIDEX index (Housing sector-inflation index)
SIDBI
Small industries development bank of India – Established in 1990
Controlled by SBI, LIC, IDBI other public sector banks, insurance companies etc.
Manages SEDF (Small enterprises development fund – Funded by Foreign banks < 20 branches if PSL not met)
Provides finance to State Industrial Development Corporation (SIDC), State finance corporations, MSME sector and banks.
Primary Dealers (PD)
Deal in “primary” market
Directly buy G-sec via “auction”.
Can Participate in OMO (Open Market Operations)
Must get license from RBI
Examples > Morgan Stanley, Goldman Sachs, JP Morgan Chase, Standard Chartered Bank, HSBC + SBI, BoB, Kotak Mahindra etc.
Financial institutions that provide banking services without meeting the legal definition of a bank, i.e., one that does not hold a banking license.
RBI is entrusted with the responsibility of regulating and supervising some of the NBFCs by virtue of powers vested under Reserve Bank of India Act, 1934.
Source of NBFC funding includes.
From clients via insurance, mutual funds etc.
Can borrow from banks.
Can be financed by NHB, NABARD, SIDBI etc.
Can raise money via issuing bonds.
Very few permitted for External Commercial Borrowing (ECB)
Non Banking Financial Companies
Difference between Banks and NBFCs
Banks
NBFCs
License under Banking regulation Act
license under Company Act
All supervised by RBI
Depends
Insurance Co. : IRDA
Merchant Banks : SEBI
Microfinance Co. : State + RBI + NABARD
Deposit from public
Time deposit (FDRD)
Demand deposits (CASA)
They can accept Time deposit (such NBFC are called Deposit taking NBFC)
But They cannot accept demand deposits
Do not form part of the payment and settlement system > Cannot issue cheques drawn on itself
PSL applies
PSL doesn’t apply
Deposit insurance facility of DICGC applies
Deposit insurance facility of DICGC does not applies
Loan rates linked with Base Rate system
Depends
Gold Loans > risk factor (15%, 25%)
Shares: dividend
Bonds: 8/12/16%
Loan recovery powers under SARFAESI
SARFAESI applicable only for Housing finance companies
Gold loan: auction
Bonds holders of NBFC: first to get paid
Shares holders of NBFC: last to get paid
Standard CRR & SLR Ratios apply
CRR does not apply
Approx. 15% SLR applies only to Deposit taking NBFC
Do provide finance to invest in share market
Can lend money to finance companies for the same
NBFC Classification
Insurance company
Regulated by IRDA
Take “premium” from you; invest in shares/bonds
Examples include LIC, Bajaj Allianz etc.
Housing Finance Companies
Regulated by NHB
Arrange money from variety of sources; lend it to home-loan seekers.
Examples include DHFL, Muthoot Housing finance etc.
RBI Regulated
Asset Finance Co.s (AFC)
Provides loan to buy economically productive assets e.g. truck, tractor, pump set, bulldozer, earthmover, etc.
Infrastructure Finance Company
Gives loans for infra. Projects viz. roads, electricity etc.
Infrastructure Debt Fund (IDF)
Gives loans for infra. Projects, but give very long term loans.
Can even raise money from abroad
Investment Co.s
Invest in securities.
Examples include Muthoot finance, L & T finance etc.
Core Investment Co.s
Long term investment in securities
Can accept public funds (NBFC-Deposit)
Cannot enter in insurance
E.g. Tata Capital, Birla Capital
Loan Co.s
Muthoot Gold Loan, Mannapuram Gold Loan
Factor Company
Factoring business ex. HSBC
Misc. Chit Fund
Managed by RBI + Registrar of Chit Fund
SEBI Regulated
Stock Brokers, Mutual Funds
They help buying-selling of shares (of their clients)
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2 comments
very good effort
Excellent Post