an in in ndia           12.3
                                                                 offered by a financial sector. Gradually, they are
         IntroductIon                                            being recognised as complementary to the banking
     The sense in which we today use the term                    sector due to their—
     banking has its origin in the western world. It was               (i) customer-oriented services;
     introduced in India by the British rulers, way back              (ii) simplified procedures;
     in the 17th century. Since then, enough water                  (iii) attractive rates of return on deposits; and
     has flown and today Indian banks are considered
                                                                     (iv) flexibility and timeliness in meeting the
     among the best banks in the developing world and
                                                                             credit needs of specified sectors.
     its attempts to emerge among the best in the world
     is going on.                                                      RBI, the regulator of the NBFCs, has gives
                                                                 a very wide definition of such companies (a kind
                                                                 of ‘umbrella’ definition)—“a financial institution
                                                                 formed as a company involved in receiving deposits
     Bank is a financial institution engaged primarily           or lending in any manner.” Based on their liability
     in mobilising deposits and forwarding loans The             structure, they have been classified into two broad
     deposits and loans are highly differentiated in             categories:
     nature. Banks are regulated by the Central bank                   (i) deposit-taking NBFCs (NBFC-D), and
     of the country—in case of India, the RBI (Reserve                (ii) non-deposit taking NBFCs (NBFC-
     Bank of India). The another category of financial                       ND).
     institution—the non-bank— is almost similar
                                                                       It is mandatory for a NBFC to get itself
     in its functions but main difference (though,
                                                                 registered with the RBI as a deposit taking
     highly simplified) being that it does not allow
                                                                 company. For registration they need to be a
     its depositors to withdraw money from their
                                                                 company (incorporated under the Companies Act,
                                                                 1956) and should have a minimum NOF (net
           NBFCs (Non-Banking Financial Companies)1              owned fund)2 Rs. 2 crore.
     are fast emerging as an important segment of
                                                                       To obviate dual regulation, certain category of
     Indian financial system. It is an heterogeneous
                                                                 the NBFCs which are regulated by other financial
     group of institutions (other than commercial
                                                                 regulators are exempted from the regulatory
     and co-operative banks) performing financial
                                                                 control of the RBI:
     intermediation in a variety of ways, like accepting
     deposits, making loans and advances, leasing, hire                (i) venture capital fund, merchant bank,
     purchase, etc. They can not have certain activities                     stock broking firms (SEBI registers and
     as their principal business—agricultural, industrial                    regulates them);
     and sale-purchase or construction of immovable                   (ii) insurance company (registered and
     property.                                                               regulated by the IRDA);
           They raise funds from the public, directly or
                                                                    2.    The term ‘NOF’ means, owned funds (paid-up capital
     indirectly, and lend them to ultimate spenders.                      and free reserves minus accumulated losses, deferred
     They advance loans to the various wholesale                          revenue expenditure and other intangible assets) less,
     and retail traders, small-scale industries and self-                 (i) investments in shares of subsidiaries/companies in
                                                                          the same group and all other NBFCs; and (ii) the book
     employed persons. Thus, they have broadened                          value of debentures, bonds, outstanding loans and
     and diversified the range of products and services                   advances, including hire purchase and lease finance
                                                                          made to, and deposits with, subsidiaries/companies in
         1.  RBI update, 11 March, 2016 and the,          the same group, in excess of 10 per cent of the owned
             Government of India, April 2016.                             funds.