The Reserve Bank of India (RBI), in a strategic attempt to provide greater operational flexibility to non-banking lenders, has decided to consolidate three categories of Non-Banking Financial Companies (NBFCs). The merging will result in Asset Finance Companies (AFCs), Loan Companies (LCs), and Investment Companies (ICs) coming under a new unified category named NBFC – Investment and Credit Company (NBFC-ICC).
Understanding the Categories
To understand the significance of this move, it’s crucial to delve into what each category implies.
An AFC is a financial institution that primarily focuses on financing physical assets that support productive or economic activity. These assets could include automobiles, tractors, generator sets, and more.
On the other hand, an IC is a financial institution whose main business revolves around acquiring securities. Conversely, an LC defines any company that provides finance as its principal business, offering loans or advances for any activity other than its own. However, it should be noted that an LC does not include an Asset Finance Company.
What is a Non-Banking Financial Company?
A Non-Banking Financial Company (NBFC) represents a company registered under the Companies Act, 1956. It is engaged in the business of loans, advances, acquisition of shares, stocks, bonds, debentures, and securities issued by Government bodies, local authorities, or other marketable securities. The term NBFC excludes any institution whose principal business relates to agriculture, industrial activities, purchase or sale of goods (excluding securities), or providing services and construction or sale/purchase of immovable property.
Furthermore, any non-banking institution registered as a company with the primary business of receiving lump sum deposits or installments through contributions or any other format is also considered an NBFC. This type of entity is categorized as a ‘Residuary non-banking company’.
Key Difference between Banks & NBFCs
NBFCs and banks operate similarly by lending and investing. However, there are some key distinctions.
| Nature | Banks | NBFCs |
|---|---|---|
| Demand Deposits | Can Accept | Cannot Accept |
| Payment System | Part of the System | Not Part of the System |
| Issue Cheques | Can Issue | Cannot Issue |
| Deposit Insurance | Available | Not Available |
Conclusion of Merger
An important conclusion drawn from the merger is that NBFCs cannot accept demand deposits. They are also excluded from the payment and settlement system, which restricts them from issuing checks on themselves. Furthermore, the deposit insurance facility provided by the Deposit Insurance and Credit Guarantee Corporation remains unavailable to NBFC depositors, differing from typical banking institutions.
