Non-Banking Financial Companies (NBFC՚s) -Classification, Types, Market Makers Commerce YouTube Lecture Handouts

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Non-Banking Financial Companies (NBFC՚s) - Classification, Types, Market Makers | Commerce
Non-Banking Financial Companies
  • NBFCs full form is Non-Banking Financial Company/Institution
  • Refers to a company that has been registered under the Companies Act, 1956 & COA, 2013.
  • Engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures and securities.
  • These are entities which provide bank-like financial services but do not hold a banking license.
  • NBFCs are regulated by the Ministry of Corporate Affairs and the Reserve Bank of India.
  • Play a pivotal role in the Indian financial system and have taken a great leap in the last 10 years and have penetrated the remote areas of the country and offer credit facilities to those millions of individuals and small firms which generally are ignored by the banks.

Role of NBFCs

  • Strengthening an economy
  • Providing multiple alternatives to transform an economy՚s savings into capital investment
  • Introduces competition in the provision of financial services
  • Offer a set of financial services as a packaged deal
  • May specialize in one particular sector and develop an informational advantage
  • Supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits.
  • Enhances competition within the financial services industry through the process of unbundling, targeting, and specializing.
  • Support investments in property and prepare feasibility, market or industry studies for companies.
  • Expanded greatly in the last several years as venture capital companies, retail and industrial companies.
  • Provide wealth management such as managing portfolios of stocks and shares, discounting services e. g. , discounting of instruments and advice on merger and acquisition activities.
  • Offer most sorts of banking services, such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs (Term Finance Certificate) and other obligations.
  • NBFCs have taken a lead over the banks in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) as they offer the most suitable package to them, based on their business requirements.
  • Emerged as a large employment generator by lending their support to small scale businesses and companies.

Classification of NBFCs

  • Financial service providers
  • Specialized sectorial financiers
  • Market makers
  • Contractual savings institutions
  • Risk-pooling institutions

Financial Service Providers

Financial service providers include brokers (both securities and mortgage) , management consultants, and financial advisors, and they operate on a fee-for-service basis.

Their Services Include

  • Improving informational efficiency for the investors and,
  • In the case of brokers, offering a transactions service by which an investor can liquidate existing assets

Specialized Sectorial Financiers

Provide a limited range of financial services to a targeted sector.

For example,

  • Real estate financiers channel capital to prospective homeowners,
  • Leasing companies provide financing for equipment and
  • Payday lending companies that provide short-term loans to individuals that are Underbanked or have limited resources.

Market Makers

  • Market makers are broker-dealer institutions that quote a buy and sell price and facilitate transactions for financial assets.
  • Such assets include equities, government and corporate debt, derivatives, and foreign currencies.
  • A major contribution of the market makers is improving the liquidity of financial assets in the market.

Contractual Savings Institutions

  • Contractual savings institutions/Institutional Investors give individuals the opportunity to invest in collective investment vehicles (CIV) as a fiduciary rather than a principal role.
  • Collective investment vehicles pool resources from individuals and firms into various financial instruments including equity, debt, and derivatives.
  • The individual holds equity in the CIV itself rather what the CIV invests in specifically.
  • The two most popular examples of contractual savings institutions are pension funds and mutual funds.

Risk-Pooling Institutions

  • Insurance companies underwrite economic risks associated with illness, death, damage and other risks of loss.
  • Covers risk against uncertainties in return of premium paid by the insured.
  • Although insurance companies do not have banking licenses, in most countries՚ insurance has a separate form of regulation specific to the insurance business and may well be covered by the same financial regulator that also covers banks.
  • There have also been a number of instances where insurance companies and banks have merged thus creating insurance companies that do have banking licenses.

Types of NBFC Companies

  • Asset Finance Company - BIRLA SUN LIFE AMC
  • Investment Company - Cholamandalam Investment and Finance Company Limited (Chola)
  • Micro Finance Company - Annapurna Microfinance Pvt Ltd.
  • Infrastructure Finance Company - NIIF Infrastructure Finance Limited
  • Loan Company - HDB Financial Services
  • Mortgage Guarantee Company - Muthoot Finance Ltd.
  • Core Investment Company – India Infoline Finance Ltd.
  • Housing Finance Company - General Insurance Corporation of India Ltd.

MCQs

Q. NBFCs are registered under ________Act.

Q. Name any 3 types of NBFCs in India.

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