TOPIC INFO (UGC NET)
TOPIC INFO – UGC NET (Economics)
SUB-TOPIC INFO – Money and Banking (UNIT 7)
CONTENT TYPE – Detailed Notes
What’s Inside the Chapter? (After Subscription)
1. Meaning of Non-Banking Financial Institutions
2. Distinction Between Banks and NBFIs
3. Classification of NBFCs by Liability Structure
4. Scale-Based Regulatory Framework
5. Major Types of NBFIs
6. Other Important Non-Banking Financial Institutions
7. Economic Role and Significance of NBFIs
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Non-Banking Financial Institutions
UGC NET ECONOMICS
Money and Banking (UNIT 7)
Meaning of Non-Banking Financial Institutions
Non-Banking Financial Institutions (NBFIs), also referred to as Non-Banking Financial Companies (NBFCs) in the Indian regulatory context, are institutions that provide financial services and perform quasi-banking functions, such as lending, investment, and asset financing, without holding a full banking license and therefore without being permitted to perform certain core banking functions. NBFIs form an important part of the financial system, supplementing the role of commercial banks in the process of financial intermediation, that is, channelling savings from surplus units to deficit units in the economy. In India, NBFCs are governed and regulated principally under the Reserve Bank of India Act, 1934, particularly Chapter III-B, and are registered with and supervised by the RBI.
Distinction Between Banks and NBFIs
Although NBFIs perform many functions similar to those of commercial banks, such as accepting deposits and extending credit, there exist certain fundamental distinctions, which are essential to understand for examination purposes.
First, an NBFC cannot accept demand deposits, that is, deposits withdrawable by cheque; it may accept only term deposits or other specified deposits, whereas commercial banks can accept both demand and time deposits. Second, NBFCs are not part of the payment and settlement system, and therefore cannot issue cheques drawn on themselves, unlike banks. Third, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance facility, which is available to depositors of banks, is not available to depositors of NBFCs. Fourth, NBFCs are not required to maintain the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) in the same manner as banks, though certain liquidity requirements do apply to specific categories of NBFCs. Fifth, unlike banks, NBFCs do not form part of the money creation process through the credit multiplier mechanism in the same direct way, since they cannot create demand deposits.