NBFCs (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI) recently announced that it has increased the risk weights in respect of consumer credit exposure of commercial banks and non-banking finance companies (NBFCs) by 25 percentage points to 125 per cent. 

Non-banking finance companies (NBFCs)

• About: NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds etc.

o However, it should 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.

• Difference between banks & NBFCs:

o NBFC cannot accept demand deposits;

o NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

o Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

• Systemically important NBFCs: NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet.
• Registration & Regulations: Depending upon the type of functioning, different NBFCs are differently regulated as mentioned in the image.