1.

Introduction
Non-bank financial companies (NBFCs) are financial institutions that pro
vide banking services without meeting the legal definition of a bank. A Non Bank
ing Financial Company (NBFC) is a company registered under the Companies Act,195
6 of India, engaged in the business of loans and advances, acquisition of shares
, stock, insurance business, the sale, purchase or construction of immovable pro
perty.
2. Definition
Non Banking finance company is defined as a company which is a financial
institution and has its business of receiving the deposits or pending under any
scheme or arrangement.
3. NBFC Registration
With the Amendment of the RBI Act, 1934, (Section 45 IA) all Non-Bank Fi
nance Companies have to be mandatorily registered with the Reserve Bank of India
. Any company registered properly under the Companies Act, 1956 of India, and de
aling with matters and transactions in any of the above-mentioned fields, is man
datorily required to have the NBFC registration certificate issued by the Reserv
e Bank of India.
The role of NBFCs is very impressive and vital for development and prosp
erity in the industrial, commercial, institutional, and service sectors of econo
my in any progressing country. Now-a-days, these NBFCs have fortified their resp
ected place as significant complementary to the banking and financial sector in
every country. These non-banking financial companies help and support small to b
ig investors and businessmen in transactions related with the fields of deposits
, diverse loans, investment funds, hire-purchasing, leasing, instruments of the
capital and money markets, and finance.
4. Types of Non-Banking Financial companies:
(i) Hire-purchase finance companies:
Hire Purchase Finance Company means company is carrying on as its busine
ss the hire purchase transactions or the financing of such transactions. Hire-pu
rchase or installment credit is needed by transport operators, farmers and profe
ssionals needing equipment who find it difficult to offer security to the lendin
g institutions. A Hire Purchase Act, 1972, was enacted to control and regulate t
his type of finances.According to Section 7 of the Hire Purchase Act, 1972, the
statutory charges shall be calculated at the rate of 30% per annum.
(ii) Investment Companies and Unit Trusts:
Investment Company means any company, which is carrying on as its princi
pal business the acquisition of securities. An investment company may also be ca
lled as an investment trust. The principle aim of an investment company is to pr
otect the small investors by collecting their small savings and investing them o
n diversified securities so that risk may be spread.
Investments Companies are of two types of investment companies in India:
1] Management Investment Companies and
2] Unit Trusts.
1] Management Investment Companies: Management investment companies are discreti
onary trusts who enjoy wide discreationary powers on the choice of the compositi
on of their investment portfolios. The management companies are divided into two
groups such as Closed-ended companies and Open-ended companies.
2] Unit Trusts: Unit Trust is an investment company which is designed to pool th
e savings of small investors by selling their units and employ the savings in co
rporate securities as well as other securities in order to earn safe and fair re
turns on such investments.
(iii) Chit Fund Companies:
A chit fund is a financing agency which collects subscriptions from a gr
oup of persons and distributes the same to each member of the find. One of the o
ldest forms of indigenous financial institution in India is chit fund also known
as kuries. Such institutions have their origin and are more popular in South In
dia. The word chit means a written note on a small piece of paper.
(iv) Nidhis or Mutual Benefit Finance Companies:
Nidhis or Mutual Benefit Finance Companies are one of the oldest forms o
f non-financial companies. Some of the important objectives of Nidhis are to ena
ble the members to save money, to invest their savings and to secure loans at fa
vorable rates of interest. Mutual Benefit Financial Company means any company wh
ich is notified by the Central Government under Sec.620A of the Companies Act 19
56.
5.NBFCs In India
The total number of Non-Banking Financial Companies (NBFCs) registered w
ith Reserve Bank of India (RBI) declined to 12,809 in June 2008, latest figure w
hich is available, from 12,968 a year ago. The decline was mainly due to the exi
t of many NBFCs from deposit-taking activity. Total number of NBCs-D registered
with the RBI dropped to 364 from 401 last year. The consulting firm attributed t
he drop mainly due to exit of many NBFCs from deposit-taking activity.
6.Role Of NBFCs
Non Banking Financial Companies (NBFCs) in India were having golden days
during 1990s. Their heady days were fueled with the rapid industrial growth due
to liberalization in 1991, simple resource-raising regulations and eager & gree
dy investors ready to put their saving into any finance company.
7.Deposits With NBFCs
Non-banking financial institutions (NBFIs), engaged in varied financial
activities are part of the Indian financial system providing a range of financia
l services. NBFCs are incorporated under the Companies Act, 1956. NBFCs include
a loan company, an investment company, asset finance company ( i.e. a company co
nducting the business of equipment leasing or hire purchase finance) and Residua
ry Non-Banking Companies.
Acceptance of deposits by companies engaged in activities including plan
tation activities, commodities trading, multilevel marketing, manufacturing acti
vities, housing finance, nidhis, and potential nidhis and companies engaged in c
ollective investment schemes do not come under the purview/regulations of the RB
I.
Individuals, firms and other unincorporated association of individuals or bodi
es shall not accept deposits from the public
(i) if his or its business wholly or partly includes any of the financial activi
ties such as loans and advances, acquisition of shares or marketable securities,
leasing or hire purchase activities , or
(ii) if his or its principal business is that of receiving deposits or lending i
n any manner.
8. Services provided
NBFCs offer most sorts of banking services, such as loans and credit fac
ilities, private education funding, retirement planning, trading in money market
s, underwriting stocks and shares, TFCs(Term Finance Certificate) and other obli
gations. These institutions also provide wealth management such as managing port
folios of stocks and shares, discounting services e.g. discounting of instrument
s and advice on merger and acquisition activities. The number of non-banking fin
ancial companies has expanded greatly in the last several years as venture capit
al companies, retail and industrial companies have entered the lending business.

NBFCs mobilize the small savings of the public and direct them to produc
tive ventures. Industrialists are able to carry on their production with lesser
capital since the capital intensive equipment are supplied to them by leasing co
mpanies. People with limited means are not able to enjoy the consumer durable go
ods. By providing consumer goods on easy installments basis, these NBFCs increas
es the standard of living of the people.
9. Interest Rates
The Reserve Bank today tightened the prudential norms for non-banking fi
nancial companies to protect them from any impact of possible economic downturn,
a development that may push up their lending rates. Under the new RBI norms, bo
th deposit and non-deposit taking NBFCs will have to set aside 0.25 per cent of
performing loans to meet any financial exigencies.
10. Conclusion
NBFCs are gaining momentum in last few decades with wide variety of prod
ucts and services. NBFCscollect public funds and provide loan able funds.There h
as been significant increase in such companies since1990s.They are playing a vit
al role in the development financial system of our country. NBFCs in India have
become prominent in a wide range of activities like hire purchase finance, equip
ment lease finance, loans, and investments. NBFCs have greater reach and flexibi
lity in tapping resources. NBFCs have ventured in to the domain of mutual funds
and insurance. NBFCs under take both life and general insurance business as join
t venture participants in insurance companies.