NBFCs

• An NBFC is a company registered under the Companies Act, 1956 which provides banking services without meeting the legal definition of a bank. 
• They engage in the business of loans and advances, acquisition of shares, bonds, etc. issued by Government or local authority. 
• They also deal in other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but 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. 

What is the difference between banks & NBFCs?

• NBFCs lend and make investments and hence their activities are similar to that of banks; however there are a few differences:
  1. NBFC cannot accept demand deposits; 
  2. NBFCs cannot issue cheques drawn on itself;
  3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks. 

Examples of NBFCs

• Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are examples of NBFCs.

Does the Reserve Bank regulate all financial companies?

• No. 
• Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. 

• Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by the Ministry of Corporate Affairs. 

Why in News?

• Reserve Bank of India’s deputy governor M Rajeshwar Rao cautioned non-banking finance companies (NBFCs) saying some of their business practices related to peer-to-peer lending do not appear to be in line with the regulatory guidelines. 
• A large proportion of lenders on NBFC-P2Ps (NBFC peer-to-peer) are individuals and they are not expected to be well-equipped to understand the risks involved in providing credit. 
• Instead of educating the lenders about the inherent risks in the lending activity, NBFC-P2Ps have been observed to underplay the risks through various means such as promising high/ assured returns, structuring the transactions, providing anytime fund recall facilities, etc.