M.

COM

History of NBFCs in India

The Reserve Bank of India Act, 1934 amended on 1 December 1964 by Reserve Bank
Amendment Act, 1963. In this new 'Chapter III-B' introduced to Regulate 'Deposit Accepting'
NBFCs. Different types of Committees to Review existing framework of NBFC James S. Raj
CommitteeIn early 1970s Government of India asked Banking Commission to Study the
Functioning of Chit Funds and Examining activities of Non-Banking Financial Intermediaries. In
1972, Banking Commission recommended Uniform Chit Fund Legislation to whole country.
Reserve Bank of India prepared Model Bill to regulate the conduct of chit funds and referred to
study group under the Chairmanship of James S.Raj. In June 1974, study group recommended ban
on Prize Chit and other Schemes. Directed the Parliament to enact a bill which ensures uniformity
in the provisions applicable to chit funds throughout the country. Parliament enacted two acts. Prize
Chits and Money Circulation Schemes (Banning) Act, 1978 and Chit Funds Act, 1982Chakravarty
CommitteeDuring Planning Era, Reserve Bank of India tried best to 'Manage Money's and evolve
'Sound Monetary' system but no much appreciable success in realising social objectives of monetary
policy of the country.In December 1982, Dr Manmohan Singh, Governor of RBI appointed
committee under the Chairmanship of 'Prof. Sukhamoy Chakravarty' to review functioning of
monetary system in India.Committee recommended assessment of links among the Banking Sector,
the Non-Banking Financial Institutions and the Un-organised sector to evaluate various instruments
of Monetary and Credit policy in terms of their impact on the Credit System and the Economy.
A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a
financial institution that does not have a full banking license or is not supervised by a national or
international banking regulatory agency. NBFI facilitate bankrelated financial services, such as
investment, risk pooling, contractual savings, and market brokering Examples of these include
insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending,
currency exchanges, and microloan organizations. Alan Greenspan has identified the role of NBFIs
in strengthening an economy, as they provide "multiple alternatives to transform an economy's
savings into capital investment which act as backup facilities should the primary form of
intermediation fail."Operations of non-bank financial institutions are often still covered under a
country's banking regulations.

SHARNABASVA UNIVERSITY , KALABURAGI Page 1 of 20

 M.COM

Meaning:

Non-Banking Financial Companies (NBFC) are establishments that provide financial

services and banking facilities without meeting the legal definition of a Bank. They are covered
under the Banking regulations laid down by the Reserve Bank of India and provide banking
services like loans, credit facilities, TFCs, retirement planning, investing and stocking in money
market. However they are restricted from taking any form of deposits from the general public.
These organizations play a crucial role in the economy, offering their services in urban as well as
rural areas, mostly granting loans allowing for growth of new ventures.

NBFCs also provide a wide range of monetary advices like chit-reserves and advances.
Hence it has become a very important part of our nation’s Gross Domestic Product and NBFCs
alone count for 12.5% raise in Gross Domestic Product of our country. Most people prefer NBFCs
over banks as they find them safe, efficient and quick in assisting with financial requirements.
Moreover, there are various loan products available and there is flexibility and transparency in their
services.

Growth
Some research suggests a high correlation between a financial development and economic
growth. Generally, a market based financial system has better developed NBFIs than a bank-based
system, which is conducive for economic growth. linkages between bankers and brokers.

Stability
A multi-faceted financial system that includes non-bank financial institutions can protect
economies from financialshocks and enable speedy recovery when these shocks happen. NBFIs
provide “multiple alternatives to transform an economy's savings into capital investment, [which]
serve as backup facilities should the primary form of intermediation fail.’’ However in the absence
of effective financial regulations, non-bank financial institutions can actually exacerbate the fragility
of the financial system. Since not all NBFIs are heavily regulated, the shadow banking system
constituted by these institutions could wreak potential instability. In particular, CIVs, hedge funds,
and structured investment vehicles, up until the financial crisis of 2007–2008, were entities that
focused NBFI supervision on pension funds and insurance companies, but were largely overlooked
by regulators.Because these NBFIs operate without a banking license, in some countries their
activities are largely unsupervised, both by government regulators and credit reporting agencies.
Thus, a large NBFI market share of total financial assets can easily destabilize the entire financial
system. A prime example would be the 1997 Asian financial crisis, where a lack of NBFI regulation
fuelled a credit bubble and asset overheating. When the asset prices collapsed and loan defaults
skyrocketed, the resulting credit crunch led to the 1997 Asian financial crisis that left most of
Southeast Asia and Japan with devalued currencies and a rise in private debt.

SHARNABASVA UNIVERSITY , KALABURAGI Page 2 of 20

 M.COM

Role in financial system

The number of non-banking financialcompanies hasexpanded greatly in the last NBFIs

supplement banks by providing the infrastructure to allocate surplus resources to individuals and
companies with deficits. Additionally, NBFIs also introduces competition in the provision of
financial services. While banks may offer a set of financial services as a packaged deal, NBFIs
unbundle and tailor thes service to meet the needs of specific clients. Additionally, individual
NBFIs may specialize in one particular sector and develop an informational advantage. Through the
process of unbundling, targeting, and specializing, NBFIs Role in financial system enhances
competition within the financial services industry.

Non-bank financial companies (NBFCs) offer most sorts of banking services, such as loans
and credit facilities, private education funding, retirement planning, trading in money markets,
underwriting stocks and shares, TFCs (Term Finance Certificate) and other obligations. These
institutions also provide wealth management such as managing portfolios of stocks and shares,
discounting services e.g. discounting of instruments and advice on merger and acquisition several
years as venture capital companies, retail and industrial companies have entered the lending
business. Non-bank institutions also frequently support investments in property and prepare
feasibility, market or industry studies for companies. Howeverthey are typically not allowed to take
deposits from the general public and have to find other means of funding their operations such as
issuing debt instruments.NBFCs are not providing the cheque book nor saving account and current
account. It only takes fixed deposit or time deposit.

SHARNABASVA UNIVERSITY , KALABURAGI Page 3 of 20

 M.COM

SHARNABASVA UNIVERSITY , KALABURAGI Page 4 of 20

 M.COM

Types of non- banking financial company

1. Asset Finance Company (AFC):-

An AFC is a company which is a financial institution carrying on as its principal business the
financing of physical assets supporting productive/economic, such as automobiles, tractors, lathe
machines, cranes, generator sets, earth moving and material handling equipments, moving on own
power and general-purpose industrial machines. Principal business for this purpose is defined as
aggregate of financing real/physical assets supporting economic activity and income arising
therefrom is not less than 60% of its total assets and total income respectively.[3]

2. Investment company (IC) :-

investment Company means any company which is a financial institution carrying on as its
principal business with the acquisition of securities.

SHARNABASVA UNIVERSITY , KALABURAGI Page 5 of 20

 M.COM

3. Loan Company (LC) :-

Loan company means any company which is a financial institution carrying on as its
principal business the providing of finance whether by making loans or advances or otherwise for
any activity other than its own but does not include an Asset Finance Company.

4. Infrastructure Finance Company (IFC):-

Infrastructure finance companies deploys a minimum of three-fourths of their total assets in

infrastructure loans. The net owned funds are more than 3 billion and a minimum crediting rating of
'A' and the Capital to Risk-Weighted Assets Ratio is 15%.

SHARNABASVA UNIVERSITY , KALABURAGI Page 6 of 20

 M.COM

5. Infrastructure Debt Fund:-

Non- Banking Financial Company (IDF-NBFC):-IDF-NBFC is a company registered as

NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise
resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure
Finance Companies (IFC) can sponsor IDF-NBFCs.

6. NBFC-Factors: -

NBFC Factors has principle business of factoring. Factoring is a financial transaction and a
type of debtor finance.

SHARNABASVA UNIVERSITY , KALABURAGI Page 7 of 20

 M.COM

7. Gold Loan NBFCs in India:-

Over the years, gold loan NBFCs witnessed an upsurge in Indian financial market, owing
mainly to the recent period of appreciation in gold price and consequent increase in the demand for
gold loan by all sections of society, especially the poor and middle class to make ends meet.
Though there are many NBFCs offering gold loans in India, about 95 per cent of the gold loan
business is handled by three Kerala based companies, viz., Muthoot Finance, Manapuram Finance
and Muthoot Fincorp. Growth of gold loan NBFCs eventuating from various factors including
Asset Under Management (AUM), number of branches, and also the number of customers etc.
Growth of gold loan NBFCs occurred both in terms of the size of their balance sheet and their
physical presence that compelled to increase their dependence on public funds including bank
finance and non-convertible debentures. Aggressive structuring of gold loans resulting from the
uncomplicated, undemanding and fast process of documentation along with the higher Loan to
Value (LTV) ratio include some of the major factors that augment the growth of Gold loan NBFCs.
[4]

SHARNABASVA UNIVERSITY , KALABURAGI Page 8 of 20

 M.COM

8. Residuary Non-Banking Companies (RNBCs):-

Residuary Non-Banking Company is a class of NBFC which is a company and has as its
principal business the receiving of deposits, under any scheme or arrangement or in any other
manner and not being Investment, Asset Financing, Loan Company. These companies are required
to maintain investments as per directions of RBI, in addition to liquid assets.

9. Account Aggregators (AA):-

Account Aggregators are a new class of NBFC instituted by the Reserve Bank of India in
2016.An account aggregator NBFC takes the business of account aggregation for a fee or otherwise.
The NBFC once registered with the RBI, should only provide account aggregation and data to
financial institutions based on customer consent. The actual mechanism should follow the consent
architecture laid down by the RBI.The account aggregators are expected to make loan by providing
data access to financial institutions. RBI has given in-principle approvals to five NBFC Account
Aggregators.

SHARNABASVA UNIVERSITY , KALABURAGI Page 9 of 20

 M.COM

DIFFERENCE BETWEEN NON -BANKING FINANCIAL COMPANIES AND

BANK

Basis for comparison Non - Banking Financial Bank

Company

An NBFC is a company that Bank is a government

Meaning provides banking services to authorized financial
people without holding a bank intermediary that aims at
license. providing banking services to
the general public.

Incorporated under Companies Act 1956 Banking Regulation Act, 1949

Demand Deposit Not Accepted Accepted

Foreign Investment Allowed up to 100% Allowed up to 74% for private

sector banks

Payment and Settlement Not a part of system. Integral part of the system.
system

Maintenance of Reserve Ratios Not required Compulsory

Deposit insurance facility Not available Available

SHARNABASVA UNIVERSITY , KALABURAGI Page 10 of 20

 M.COM

There are a huge number of NBFCs operating in our country but here’s a look at the
current top 10 NBFCs in India.

1. Power Finance Corporation Limited: -

Finance Corporation Limited was founded in 1986 and is a Navratna Status company.
Mukesh Kumar Goel is the Chairman & Managing Director of the company. Power Finance
Corporation Limited is known to provide financial assistance to different power projects in the
country. It supports organizations involved in Power generation, transmission and distribution. The
company is also listed in National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Period Monthly (%) Quarterly (%) Annually (%) Deduction at

(months) sources
24 - 8.05 - 62000
3648 & 24 8.75 8.81 9.11 54000
Minimum 25000 25000 25000 -
deposits in Rs
SENIROR CITIZEN (58 YEAR &ABOVE)
Rate of interest per annum
Further deposited in multiple of RS.1000
OTHER
Period (months) Monthly (%) Quarterly (%) Annually (%) Deduction at
sources
24 - 7.80 - 64000
3648 & 60 8.25 8.31 8.57 58000
Minimum 25000 25000 25000 -
deposited in RS

SHARNABASVA UNIVERSITY , KALABURAGI Page 11 of 20

 M.COM

2. Shriram Transport Finance Company Limited: -

Transport Finance Company Limited focuses on funding commercial and business vehicles,
besides others. The company was founded in 1979 and has been offering funding services for Light
Duty Trucks, Heavy Duty Trucks, Mini Trucks, Passenger Vehicles, Construction Vehicles and
Farm Equipment’s. The company’s specialisation is in general insurance, mutual funds, common
assets, stock broking and general protection.

It is a non-banking financial company which provides products such as fixed deposit schemes at
attractive interest rate ranging between 7.95% P.a. and 8.88% P.a.

Deposit rates: The FD rate for Shriram fixed deposit have been mentioned below.
Tenure Rate of interest on Senior citizens (per annum)
cumulative FD (per annum)
1 year 7.95% 8.20%
2 year 8.19% 8.44%
3 years to 5 years 8.65-8.88% 8.90%-9.13%

STFC FD interest rate Quarterly Pay out

Tenure Rate of interest on Senior citizen
cumulative FD

1 year 8.00% 8.25%

2 year 8.25% 8.50%

3 year to 5 year 8.71%-8.91% 8.96%-9.20%

3. Mahindra & Mahindra Financial Services Limited: -

SHARNABASVA UNIVERSITY , KALABURAGI Page 12 of 20
 M.COM

Mahindra& Mahindra Financial Services Limited (MMFSL) was established in 1991 and
has over 1000 branches, and a customer base of over 3 million, all over the country. MMFSL is one
of the most renowned organizations and has two affiliates offering Insurance services and rural
housing financial services. It also specialises in offering gold advances, vehicle advances, corporate
advances, home credits, working capital advances and much more.
Mahindra finance, a leading NBFC has increased the interest rate on deposit. The company offers a
maximum of 8.75% interest rate on deposit of tenure 40 months.
Tenure Interest hike Interest rate
12 months 30 basis points 8.00%
18 months 35 basis points 8.10%
24 months 10 basis points 8.35%
40months 10 basis points 8.75%
Inventors can also gain an additional rate of 0.25% by investing money online. It is worth
mentioning that senior citizens get an additional interest of 0.10% above card rates on fixed
deposits.
The minimum deposit amount for Mahindra finance fixed deposit is 5000 and a depositor gets free
personal accident insurance cover of up to 1 Lakhs. The detailed interest rate for all tenure is
mentioned below.
Tenure (in months) Regular interest rate in % Senior citizen interest rate %
15 8.25% 8.35%
20 8.35% 8.45%
27 8.60% 8.70%
33 8.75% 8.85%
40 8.75% 8.85%

4. Muthoot Finance Ltd: -

SHARNABASVA UNIVERSITY , KALABURAGI Page 13 of 20

 M.COM

Muthoot Finance Ltd is India’s first NBFC tracing its history back to 1888, when it began as
a small lender from a village in Kerala. Muthoot Finance Ltd sanctions loans only against pledge of
gold ornaments. It is a leader in India’s gold loan and finance market. Besides financing gold
transactions, Muthoot Finance Ltd offers foreign exchange services, money transfers, wealth
management services, travel and tourism services. Gold coins are also sold at Muthoot Finance
Branches. The company has its headquarters in Kerala, India, and operates over 4,400 branches
throughout the country. It is also the parent company of Muthoot Housing Finance (India) Ltd,
which offers home loans.
Muthoot offers of lowest gold loan rate of 12.00%, both for its existing bank customer as well as
new borrowers. Muthoot jewel loan interest rate varies by amount of loan, purity of gold and loan to
value ratio.
Gold loan Loan details

Muthoot gold loan rate 12.00% onward

Processing fee 0.52% to 1% of loan amount.

Loan tenure 7 days to 36 months

Loan amount 1500 to 1 crore

Payment charges Nil

5. HDB Finance Services: -

SHARNABASVA UNIVERSITY , KALABURAGI Page 14 of 20

 M.COM

HDB Financial Services is operated by India’s largest private sector HDFC Bank. It offers a
variety of secured and non-secured financial loans through a network of more than 1,000 branches
in 22 Indian states and 3 Union Territories. It provides secured and unsecured loans, including
personal and business loans, doctor's loans, auto loans, gold loans, new to credit loans, enterprise
business loans, consumer durables loans, construction equipment loans, new and used car loans,
equipment loans, and tractor loans. The company operates through Lending Business and BPO
Services segments. It is considered the fastest growing NBFC in India today.

HDB personal loan interest rates start from 13.99% with lowest rates for salaried borrowers

Lowest interest rate 13.99%

Processing fee Up to 2% of loan amount
Loan tenure 12 months to 60 months
Loan amount 1 Lakhs to 20 Lakhs
Part repayment charges Allowed after 6 EMI, Nil payment charges
Reclosure charges Allowed after 6 EMI, Nil foreclosure
charges
working with reputed companies. Personal loan rates for self employed are higher.

SHARNABASVA UNIVERSITY , KALABURAGI Page 15 of 20

 M.COM

6. Cholamandalam: -

Cholamandalam Investment and Finance Company Limited (Chola), was incorporated in

1978 as the financial services arm of the Murugappa Group. Chola started as an equipment
financing company and has surged ahead as a complete financial services provider offering all kinds
of services like - vehicle finance, home loans, home equity loans, SME loans, investment advisory
services, stock broking and a host of other financial services to customers. Chola has 725 branches
across India with assets under management above INR 35,000 Crores.
The interest rate could range between 12.6% to 29%. The interest rate is subject to change at the
determined tenure: the repayment period is determined based on the loan amount, repaying ability
and income.

7. Bajaj Finance Limited: -

It was founded in 2007 and is a unit of Bajaj Holdings and Investments. It offers loans to
doctordom for career enhancement, home loans, gold loans, individual Loans, business and
entrepreneur loans and is an extremely popular finance company. Apart from these, Bajaj FinServ
also provides services like wealth advisory, lending money and general insurance. It has over 1400
branches across the country with more than 20000 employees.

Bajaj FinServ personal loan interest rate 11.99% to 15.50% processing fee payable to Bajaj FinServ
up to 2000. Current offer for processing fee is starting from 1.50%, up to 3%

SHARNABASVA UNIVERSITY , KALABURAGI Page 16 of 20

 M.COM

8. Tata Capital Financial Services Ltd: -

Tata Capital Financial Services Limited is top of India’s leading NBFCs. Established in
2007, it is a subsidiary of Tata Sons Limited. TCFS describes itseld as a one-stop financial service
provider that caters to the diverse needs of retail, corporate and institutional customers across
businesses. It is registered with RBI as ‘Systemically Important Non-Deposit Accepting Non-
Banking Financial Company (NBFC)’. Among the various products offered by TCFS to
individuals, families and businesses, are commercial finance, infrastructure finance, wealth
management, consumer loans and distribution and marketing of Tata Cards.
Tata capital personal loan interest rates start from 10.99% with lowest rates for salaried borrowers
working with reputed companies. Personal loan rates for self-employed are higher.
Salaried Self employed

Lowest interest rate 10.99% 13.50%

Processing fee Flat fee of RS.1499*. up to From 1.50% to 2.50%

2.50%

Loan tenure 12 months to 72 months 12 months to 48 months

Loan amount 75000 to 25 Lakhs 5 Lakhs to 35 Lakhs

Part prepayment charges Allowed after 6 EMI, Nil Not allowed

prepayment charges

SHARNABASVA UNIVERSITY , KALABURAGI Page 17 of 20

 M.COM

9. L & T Finance Limited:-

L & T Finance Limited is a strong player in the non banking financial sector and was
established in 1994. Headquartered in Mumbai, L & T offers funding services to different sectors
like trade, industry, agriculture, Commercial Vehicle loans, Individual Vehicle loans, and corporate
and rural loans. The company caters to more than 10 lakh people. In 2010, L & T was awarded the
“Company of the year” in the Economic Times awards.
L & T finance home loans provides instant online approval with interest rates starting from 9.75%.
get balance transfers and top-up facilities. Flexible documentation and quick processing with no
prepayment penalties.

5th December 2019 RBI keeps repo rate unchanged at 5.15%

Loan amount 10-year loan 15-year loan 30-year loan

20 lakhs 26,320 21,370 17,404

30 lakhs 39,479 32,055 26,106

50 lakhs 65,799 53,425 43,510

SHARNABASVA UNIVERSITY , KALABURAGI Page 18 of 20

 M.COM

10.Aditya Birla Finance Ltd; -

Aditya Birla Finance Limited, a part of the Aditya Birla Financial Services, was
incorporated in 1991 and is an ISO 9001:2008 certified NBFC. ABFL is registered with RBI as a
‘systemically important non-deposit accepting NBFC’ and it ranks among the top five largest
private diversified NBFCs in India. It offers precise and customised solutions across a wide range,
from corporate finance to commercial mortgage, and from capital markets to structured finance.
The interest rate of finance home loan stands at 8.85% - 11.75% currently.
Interest loan 8.60%

Loan tumoroid period 8-15 days

Loan to value Get loan up to 85% of project cost

Who can apply? Self-employed professionals, salaried

individual, Indian resident

Co- applicants Up to 4 applicants are allowed as co-

applicant

Lowest EMI 776 per lakhs

Conclusion
SHARNABASVA UNIVERSITY , KALABURAGI Page 19 of 20
 M.COM

NBFCS have been playing a very important role both from the macroeconomic perspective and the
structure of the Indian financial system. NBFCS are the perfect or even better alternatives to the
conventional banks for meeting various financial requirements of a business enterprise. They offer
quick and efficient services without making one to go through the complex banking formalities. The
coming years will be very crucial for NBFCS and only those who will be able to face the challenge
and prove themselves by standing the test of time will survive in the long run.

SHARNABASVA UNIVERSITY , KALABURAGI Page 20 of 20