Non-Banking Financial Company (NBFC)

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956.
• Engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
• It does 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.
• A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
• Deposit Insurance facility of Deposit Insurance & Credit Guarantee Corporation is not available to depositors of NBFCs

Difference between banks & NBFCs?

• NBFCs Registered under Companies Act,1956. Whereas Banks are registered under Banking Regulation Act, 1949
• NBFCs lend and make investments and hence their activities are akin to that of banks;
• NBFC can accept deposits but cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
• deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

RBI Regulated NBFCs

(Deposit taking & Loan giving is Regulated by RBI)

Asset Finance company

• AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment’s, moving on own power and general purpose industrial machines. (Ex: Bajaj Finance)
•  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.

Loan Companies

• Loan Companies (LC) means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances.

Investment Companies (IC)

(Regulated by both SEBI & RBI)

Any company which is a financial institution carrying on as its principal business

• The acquisition of securities
• Acquire stake in other companies to earn profits
• Major part of income of company must come because of investment

Insurance Fund Development Authority of India

• Regulate Insurance Company.

Pension Fund

• Regulate Pension Giving Company.

Stock Brokering Company

Venture Capital Fund

• VCF is an investment fund that manages money from different investors seeking to provide capital in startup and small- and medium-size enterprises that have strong growth potential,
• but in return demand part of ownership
• Venture Capitalist companies themselves borrow money from other companies like mutual funds, pension funds or may issue their own ‘bonds’to get money.

Angel Investment Funds

• Are the High Net-Worth Individuals (HNIs), who generally forms closed groups called angel network and collectively invests in a venture.
• Angel investors encourage entrepreneurship by financing small startups at the early stage.
• At the beginning stage, startups usually find it difficult to obtain funds from traditional sources of finance such as banks, financial institutions, etc.
• It is apt to say that angel investors are like financial mentors for the beginners.

Difference between Venture Capital and Angel

• Angel investors invest mostly as individuals, while venture capitalists are business enterprises/ companies comprising of several individual investors.
• Angel investors usually fund start-ups and new businesses where as Venture capital are seldom interested in early-stage, unless there are compelling reasons.
• Angel investors invest their own money into businesses, but venture capitalists invest money contributed by several investors.
• In addition to the invested funds, angel investors usually contribute personal experience and relevant contacts to the growth of businesses they invest in. Some venture capitalists don’t go this far.
• Angel investors may be willing to “hands-off” your business if they have nothing relevant, aside the capital to contribute. But venture capitalists will always require board seats and complex deal terms including the ability to control subsequent financings.
• Angel investors tend to believe in the entrepreneur and invest in them as a person. Venture capitalists being less emotional and more process involved mainly evaluate deals and make offers.
• Angel investors allow for flexibility in deal structuring and financial decisions. venture capitalists are rigid.
• An angel investor fund businesses for motives beyond financial gains (such as social responsibility and community involvement). A venture capitalist is obligated to maximize investors’ returns and outperform other venture capitalists, in order to attract even more investors.

State Government Regulated

1) Chit Funds

(Deposit regulated by RBI & Management Regulated by State)

• According to Section 2(b) of the Chit Fund Act, 1982, "Chit means a transaction under which
• It refers to an agreement arrived at by a group of individuals to invest a certain amount through periodic instalments over a specified period of time.
• that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and
•  that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount.
• Recently Unregulated Deposit Schemes Bill, 2018 was passed by Lok Sabha.
• The Bill seeks to provide for a mechanism to ban unregulated deposit schemes and protect the interests of depositors.
• It also seeks to amend three laws, including the Reserve Bank of India Act, 1934 and the Securities and Exchange Board of India Act, 1992.

Ministry of Corporate Affairs Regulated

• Nidhi Company in the Indian context / language means “treasure”. However, in the Indian financial sector it refers to any mutual benefit society notified by the Central / Union Government as a Nidhi Company. They are created mainly for cultivating the habit of thrift and savings amongst its members.
• The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company.
• Nidhis are more popular in South India and are highly localized single office institutions.
• They are mutual benefit societies, because their dealings are restricted only to the members; and
• membership is limited to individuals.
• The principal source of funds is the contribution from the members.
• The loans are given to the members at relatively reasonable rates for purposes such as house construction or repairs and are generally secured.
• The deposits mobilized by Nidhis are not much when compared to the organized banking sector.
• Dual Regulation: Administrative aspects by DCA and lending terms by RBI