Meaning of Non-Banking Financial Companies
Registered companies that provide certain financial services similar to a bank but without any banking license are known as Non-Banking Financial Companies (NBFCs). These companies do not come under the purview of the country’s banking regulations and are instead covered under separate acts. This similarity in activities without being registered as a bank has led to NBFCs being referred to as shadow banks in some instances. An obvious example of an NBFC is the German insurance and asset management company, Allianz.
NBFCs differ from traditional banks in their functions in more than one way. Generally, NBFCs cannot accept demand deposits and can only deal with time deposits, unlike a bank. NBFCs also have to face certain restrictions and regulations on dealing with agricultural and industrial activities.
NBFCs play a prominent role in the capital formation of a nation. They carry the potential to reach untouched sectors through their specialized services and thereby, increase financial inclusivity.
Types of NBFCs
NBFCs may be differentiated based on their size as systematically important companies and non-systematically important companies. In contrast to banks, NBFCs are also at liberty to choose whether to accept deposits or not and what kind of activities to associate with. Based on the nature of their activities, they may be of the following types.
These companies predominantly deal in the business of securities and financial instruments. They are committed to managing the public’s funds and building a strong portfolio for client companies. A rise in investment companies has resulted in the rise of financial literacy amongst the general public in recent years. E.g.- Vanguard
Infrastructure Finance Company
These companies offer credit and aid in the financing of infrastructure projects. They are active in the development of a nation’s structural growth. Infrastructure, in this case, may refer to the energy sector, communication sector, water supply, and transport sector.
Housing Finance Company
This category of NBFC is involved in financing the construction or obtaining of houses for its clients. HFCs provide an alternative to individuals with a lower credit score or individuals not meeting the eligibility criteria of banks.
Infrastructure Debt Fund
Infrastructure Debt Funds issue long-term debt instruments such as bonds or debentures. They then assemble the funds of their investors to finance the infrastructure sector. IDF may even be in the form of mutual funds.
These companies provide small-scale loans to low-income individuals or small businesses without any collateral. They are primarily focused on providing credit availing opportunities to meet the needs of financially struggling borrowers. E.g.- BRAC USA
Mortgage Guarantee Company
They offer credit default guarantees to lenders on behalf of a borrower, mostly for financing in the housing sector. They act as an assurance to lenders against non-performing assets. Simultaneously, they help in building a smooth process of credit availing services for borrowers. These guarantees only become active when a borrower fails to repay their debt.
Asset Finance Company
Asset Finance Companies are involved in financing tangible assets for the purpose of productive economic activity. Since these assets must lead to capital growth, the focus is on long-term assets such as machinery, equipment, automobile, etc.
To meet its immediate financing needs, a company may sell its receivables to a financial institution for less than the owed amount. This process is known as factoring and the intermediary financial institution is known as a factor. Factors, eventually, collect the original sum from the debtors. E.g.- altLine
Equipment Leasing Company
Leasing is the process of forming an agreement between two parties, wherein the owner (lessor) of equipment allows the user (lessee) the authority to utilize their equipment. This is done for an agreed-upon period at agreed-upon installments of rent. The financial institutions that enable leasing or the financing of such leases are also categorized as NBFCs. E.g.- Crest Capital
Hire-purchase companies are similar to equipment leasing companies in their scope of business operations. They are comparatively more accessible to lessees who are seeking low-priced equipment for a shorter period. Another difference is that after the necessary amount of rent has been paid off, the lessee may choose to have the ownership rights of the equipment transferred to him. Both Equipment Leasing Companies and HPCs play a major role in providing businesses with the necessary tools for their operations without a significant down payment.
Venture Capital Companies
These financial institutions comprise a group of investors or partners who pursue up-and-coming companies in their early stages with promising futures in their respective fields. They then invest in these companies, in exchange for a stake in their business equity. E.g.- Accel