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Non Banking Financial Companies (NBFC)

NON-BANKING FINANCIAL COMPANY (NBFC)

 
 
Non-Banking Financial Companies (NBFCs) are financial institutions that offer various banking services but do not have a full banking license. They operate in a manner similar to banks by providing financial services such as loans and advances, asset financing, investments, money market activities, and wealth management
 

Types of Non-Banking Financial Institutions

Non-Banking Financial Institutions (NBFIs) encompass various entities that offer financial services similar to traditional banks but operate without a full banking license. These institutions play a vital role in the financial system by providing diverse financial services. Some key types of NBFIs include:

  1. Non-Banking Financial Companies (NBFCs): These entities engage in activities like loans and advances, investments, asset financing, and other financial services but do not hold a banking license. NBFCs cater to specific sectors such as consumer finance, housing finance, infrastructure finance, leasing, microfinance, etc.

  2. Housing Finance Companies (HFCs): These specialize in providing loans for purchasing, constructing, renovating, or repairing houses. They primarily focus on housing-related financial services.

  3. Asset Management Companies (AMCs): AMCs manage and invest funds in various financial products such as mutual funds, exchange-traded funds (ETFs), and other investment vehicles. They create and manage investment portfolios for individuals and institutions.

  4. Insurance Companies: Though not traditional banks, insurance companies fall under the umbrella of NBFIs. They offer insurance policies that cover life, health, property, and various other risks in exchange for premiums.

  5. Microfinance Institutions (MFIs): These institutions provide financial services, including small loans, savings accounts, insurance, and payment services, to low-income individuals, often in rural or underdeveloped areas.

  6. Pension Funds: These funds manage contributions made by employees and employers for retirement benefits. They invest these funds to generate returns and provide pensions or retirement benefits to individuals upon retirement.

  7. Venture Capital and Private Equity Firms: While not strictly financial institutions, these entities invest in companies by providing capital in exchange for ownership stakes, aiming for high returns.

These NBFIs offer specialized financial services, catering to specific needs and segments within the economy, contributing significantly to financial inclusion and the overall financial system\'s stability and growth

IRDA Act, 1999

The Insurance Regulatory and Development Authority (IRDA) Act of 1999 is a significant legislation in India\'s insurance sector. It established the IRDA as an autonomous and regulatory body tasked with overseeing and regulating the insurance industry in the country.

Key objectives of the IRDA Act, 1999, include:

  • The Act aimed to promote the development of the insurance industry while ensuring it operates in a fair, transparent, and efficient manner
  • It focuses on safeguarding the interests of policyholders and ensuring the solvency and financial stability of insurance companies
  • The IRDA Act empowers the IRDA to issue licenses, regulate, and supervise insurance companies to maintain compliance with regulations
  • Encouraging competition within the insurance sector to enhance efficiency, innovation, and product offerings while preventing monopolistic practices
  • The Act empowers the IRDA to set norms, guidelines, and standards for various aspects of insurance operations, including capital requirements, solvency margins, and code of conduct for insurers
  • It provides mechanisms for the resolution of disputes between insurers and policyholders and aims to ensure fair and efficient grievance redressal systems
  • Encouraging education and awareness programs to promote the understanding of insurance products among the public
 

 

MCQs on Non Banking Finance Company (NBFC)

Question: Which of the following is NOT a characteristic of NBFCs in India?

A) NBFCs cannot accept demand deposits.
B) NBFCs are regulated by the Reserve Bank of India (RBI).
C) NBFCs can issue checks drawn on themselves.
D) NBFCs can provide banking services like demand drafts and money orders.

Answer: B) NBFCs are regulated by the Reserve Bank of India (RBI).

Question: NBFCs are primarily involved in:

A) Issuing currency notes.
B) Raising funds through deposits.
C) Providing credit and financial services.
D) Regulating commercial banks.

Answer: C) Providing credit and financial services.

Question: What is the minimum Net Owned Fund (NOF) requirement for an NBFC to operate in India without accepting public deposits?

A) Rs. 5 crore
B) Rs. 10 crore
C) Rs. 25 lakh
D) Rs. 50 lakh

Answer: B) Rs. 10 crore

Question: NBFCs categorized as Asset Finance Companies primarily:

A) Provide loans for housing and real estate.
B) Offer loans against securities and shares.
C) Focus on financing the acquisition of physical assets like vehicles, machinery, etc.
D) Specialize in providing short-term loans for working capital.

Answer: C) Focus on financing the acquisition of physical assets like vehicles, machinery, etc.

Question: Which committee recommended the establishment of NBFCs in India?

A) Narasimham Committee I
B) Narasimham Committee II
C) Raghuram Rajan Committee
D) Tandon Committee

Answer: A) Narasimham Committee I
 
Previous Year Questions
 
1.With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: (UPSC CSE 2010)
1. They cannot engage in the acquisition of securities issued by the government.
2. They cannot accept demand deposits like Savings Accounts.
Which of the statements given above is/are correct?
A.1 only
B.2 only
C.Both 1 and 2
D. Neither 1 or 2
Answer (B)