The financial sector in any economy consists of several intermediaries. Apart from banking entities, there are investment intermediaries (such as mutual funds, hedge funds, pension funds, and so on), risk transfer entities (such as insurance companies), information and analysis providers (such as rating agencies, financial advisers, etc), investment banks, portfolio managers and so on.
All such entities that offer financial services other than banking, may be broadly called non-banking financial institutions. What is banking? Banking is commonly understood to mean taking of deposits withdrawable on demand or notice - that is, banks can hold people's deposits and promise to pay them on demand. There are variety of other entities that may accept deposits - hence, acceptance of deposits is not the essence of banking.
In India, the term "non-banking financial companies" acquires a new meaning, and a huge significance. The meaning of the term is such entities which are not banks, and yet carry lending activities almost at par with banks. They may also accept deposits - however, these deposits are term deposits and not call deposits.
The significance of non-banking financial companies in India lies in the massive capabilities of NBFCs - short of acceptance of call deposits and remittance function, NBFCs can virtually do everything that a bank can. Compared to this disability, the ease of entry and lightness of regulation applicable to NBFCs makes it a tremendous focus of interest, particularly for foreign investors wanting to enter India's financial sector.
For instance, it is possible to hold 100% foreign ownership of NBFCs, while in case of banks, there are serious caps.
It is possible to either start an NBFC or buy one of the 17000-odd companies many of which are formed for sale. On the other hand, getting a banking license requires a real penance.
There are numerous articles and presentations on this site as well as Staff Publications Page pertaining to NBFCs.
- Presentation on New Regulatory Regime for NBFCs, by Vinod Kothari, 13th December 2012-the presentation provides a comprehensive view of the revised regulations applicable to NBFCs
- Vinod Kothari's presentation on Regulatory Framework for NBFCs in India and abroad
- Overview chart on NBFC Sector in India, by Nidhi Ladha, 03rd July 2012
- Primer on NBFCs by Vinod Kothari : written in FAQ form, this write tries to answer several questions that querists commonly have regarding NBFCs.
- Overview of the NBFC sector in India, by Nidhi Bothra and Kamil Sayeed:This 2011 write up traces the progress and performance of NBFCs in India
- Core investment companies - Vinod Kothari's article appeared in Chartered Secretary, Feb 2011 issue. The article discusses the exemption from registration requirements given to core investment companies.
- Definition of NBFCs - concept of Principality of business: This article by Payel Jain, then of Vinod Kothari & Company, discusses the definition of NBFCs and RBI circular requiring a certain percentage of assets and income, and was published in Chartered Secretary, August 2010.