About NBFC and MFI in India
About NBFC and MFI in India
NBFC refers to Non-Banking Financial Company. It is registered under the Companies Act and performs most activities like the regular Banks and Financial Institutions. NBFC’s deal with financial products like Advances, loans, Government Securities, Debentures, Stocks, Bonds, and Shares. They also deal with Insurance, Hire Purchase, Chit, and Leasing which fall under the Marketable Securities category. Businesses whose principle activities fall under Industrial, Agriculture or Sales and Purchase of Goods do not fall under the NBFC category.
One of the main responsibilities of Non-Banking Financial Company is to receive deposits from Investors either in
a lump sum or in small installments. When it falls under this purview, it is termed as Residuary Non Banking Finance Company.
Some of the main differences between regular Banks and NBFC’s are as follows:
• NBFC cannot accept Demand Deposits. Note: Life Insurance Corporation (LIC) and General Insurance Corporation(GIC) by RBI accepts take demand deposits.
• Banks can issue Cheque drawn on themselves while NBFC is not authorized to do so
• NBFC is not a part of Payment and Settlement Systems of India. Transaction services not available in NBFCs.
• Maintenance of Reserve Ratios Not required in case of NBFC unlike in Banks.
• Banks offer Credit Guarantee and Deposit Insurance to its customers whereas NBFC’s does not offer such facilities to its customers
• NBFC cannot create credit, unlike banks.
• FDI limit in NBFC is 100% whereas in Banks 74% for private sector banks.
A Non-Banking Financial Company can commence functioning only when the Net Funds owned by it is minimum 2 crores. In order to avoid dual regulation, some NBFC’s that deal with regulators other than Banks are offered exemption from registration with Banks. For instance, NBFC’s dealing with Insurance products need to be registered with IRDA and NBFC’s dealing with Stocks, Merchant Banking and Shares need to be registered with SEBI. NBFC’s that fall under the Nidhi Companies category need to be registered under the Companies Act and NBFC’s that deal with Chits need to be registered with the Chit Funds Act. NBFC’s dealing with Housing Finance need to be registered with Housing Bank.
MFI stands for Micro Finance Institutions. The main function of Micro Finance Institution is to offer financial support for people belonging to the lower income group. Members belonging to such groups get loan facilities, insurance, deposits among many other specialized services. Micro Finance Institutions play a crucial role in
Micro Finance Institutes neither belong to the Banking sector nor considered as non-banking Finance Companies. This deprives them of functionalities that institutions that belong to either of these categories enjoy. This has given rise to the demand that Micro Finance Institutions must also be considered as one of the Non-Banking Finance Companies so they can have greater access to Banking services. Micro Finance Institutes play a crucial role in the financial sector by joining hands with Banks for providing financial services to the poor. the development of the middle and poor class of people who need money to get them lifted up financially.