Non Banking Financial Intermediaries (NBFI)

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.

Non banking financial companies (NBFC)

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)

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) Earn commission/brokerage) in between Examples → Indiabulls, Sherkhan, IIFL
Investment Bankers (US term)	Merger, acquisition, Underwriting, Wealth Management; Merchant Banker They lend money to company via buying its “shares”
Merchant Banking Companies (UK term)	Underwriting, Corporate advising They lend money to company via buying its “shares”
Venture Capital Fund	They finance start-up companies via share in equity

Department of Company affairs Regulated

Nidhi companies	Form a group → Borrow money from members → lend it among the members Mutual benefit funds Example → South Madras Benefit Fund ltd.
Microfinance company	Focus on poor people, women clients, SHG Provide loan without collateral Borrower given flexibility to decide EMI and repayment Actual interest rate: 26% Example → SKS (Andhra), Cashpor (UP), Ujjivan (Karnataka)