Non-banking Institutions: Definition, Structure, and Types

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What are Non-banking Institutions?

On-banking financial institutions (NBFIs) also mobilize financial resources directly or indirectly from people. They lend funds but do not create credit. Companies such as LIC, GIC, UTI, Development Financial Institutions, Organization of Pension and Provident Funds fall into this category.

Non-banking financial institutions can be categorized as investment companies, housing companies, leasing companies, hire purchase companies, specialized financial institutions (EXIM Bank, etc.), investment institutions, state level institutions, etc.

Non-banking Institutions

The regulations governing these institutions are relatively lighter as compared to those of banks. Secondly, they are not subject to certain regulatory prescriptions applicable to banks.

Some of the NBFIs are as discussed below:

  1. Tourism Finance Corporation of India Ltd. (TFCI )
  2. General Insurance Corporation (GIC)
  3. Export-Import Bank of India (EXIM)
  4. National Bank for Agriculture and Rural Development (NABARD)
  5. National Housing Bank (NHB)

Tourism Finance Corporation of India Ltd. (TFCI )

The GoI had, pursuant to the recommendations of the National Committee on Tourism (i.e. the Yunus Committee set up under the aegis of Planning Commission), decided in 1988, to promote a separate All-India Financial Institution for providing financial assistance to tourism-related activities/projects.

Established as a premier tourism financing institution, TFCI has acted as a catalyst in creation of infrastructure in hospitality segment in over 3 decades of its existence.

TFCI has also enabled various businesses to channelize their investments into different segments and locations of the tourism industry. Set-up by a group of government organizations like. IFCI, LIC, OIC, SBI, BOI, Canara Bank, etc.

TFCI has assisted a third of the total capacity of branded hotels in India till date. It has been associated with major domestic as well as international hotel operating brands like ITC, Leela, Taj, Lalit, Lemon Tree, Hyatt, Marriott, Hilton, Radisson, Holiday Inn, Ramada, etc.

With a view to augment tourist influx, TFCI has also acted as an advisor to central government, multiple state governments/ its affiliated agencies and has also assisted in interalia charting master tourism plan, promotional activities, market potential assessment, tourism flow surveys, market feasibility studies, etc.

General Insurance Corporation (GIC)

The entire general insurance business in India was nationalised by General Insurance Business (Nationalisation) Act, 1972 (GIBNA). The General Insurance Corporation of India (GIC) was formed in pursuance of Section 9(1) of GIBNA .

It was incorporated on 22 November 1972 under the Companies Act, 1956, as a private company limited by shares. GIC s formed for the purpose of superintending, controlling, and carrying on the business of general insurance.

Export-Import Bank of India (EXIM)

Exim Bank was established by the Government of India, under the Export-Import Bank of India Act, 1981 as a purveyor of export credit, mirroring global Export Credit Agencies. The Government of India launched the institution with a mandate, not only to enhance exports from India but also to integrate the country’s foreign trade and investment with the overall economic growth.

For financing overseas investments, EXIM has put in place a Technology and Innovation Enhancement and Infrastructure Development (TIEID) for MSMEs by partnering with Banks/FIs.

National Bank for Agriculture and Rural Development (NABARD)

The National Bank  for Agriculture and Rural Development (NABARD) was setup in July 1982.This is the apex institution in the country and it looks after the development of the cottage industry, small industry and village industry, and other rural industries.

NABARD also reaches out to allied economies and supports and promotes integrated development. Against the backdrop of the massive credit needs of rural development and the need to uplift the weaker sections in rural areas.

National Housing Bank (NHB)

This was set up on 9 July 1988 under the National Housing Bank Act, 1987. It is wholly owned by the Reserve Bank of India, which contributed the entire paid-up capital. The Head Office of the NHB is in New Delhi.

The NHB has been established to promote a sound, healthy, viable and cost-effective housing finance system to cater to all segments of the population and to integrate the housing finance system with the overall financial system.

Structure of Non-banking Institutions

Non-banking financial institutions (NBFIs) are a group of diverse financial intermediaries which, in a bank-dominated financial system like India, serve as an alternative channel of credit flow to the commercial sector.

Among the various institutions that perform this function, those regulated by the Reserve Bank are all-India financial institutions (AIFIs), non-banking financial companies (NBFCs), primary dealers (PDs), and the most recent addition, housing finance companies.

  1. All-India Financial Institutions (AIFIS)
  2. Non-Banking Financial Companies (NBFCS)
  3. Primary Dealers (PDS)

All-India Financial Institutions (AIFIS)

The Indian banking structure has a wide and comprehensive form. Apex institutions in the form of banking institutions are playing important role in the country. The chief regulator of banking system in our country is the Reserve bank of India.

Non-Banking Financial Companies (NBFCS)

Non-Banking Finance Companies (NBFCs) have played an important role in the Indian financial system by complementing and competing with banks, and by bringing in efficiency and diversity into financial intermediation. NBFCs have evolved considerably in terms of operations, heterogeneity, asset quality and profitability, and regulatory architecture.

Going forward, the growing systemic importance and interconnectedness of this sector calls for regulatory vigil.

Types of Non-Banking Finance Companies (NBFCs) are:

  1. Asset Finance Company (AFC)
  2. Loan Company
  3. Investment Company
  4. Infrastructure Finance Company (NBFC-IFC
  5. Systemically Important Core Investment Company (CIC-ND-SI)
  6. Infrastructure Debt Fund (NBFC-IDF)
  7. Micro Finance Institution (NBFC-MFI)
  8. Factor (NBFC-Factor)
  9. NBFC- Non-Operative Financial Holding Company (NOFHC)
  10. Mortgage Guarantee Company (MGC)
  11. Account Aggregator (NBFC-AA)
  12. Non-Banking Financial Company – Peer to Peer Lending Platform (NBFC-P2P)

Primary Dealers (PDS)

Primary Dealers are the licensed dealers who deal in buying and selling these Government securities. There are two types of primary dealers, viz. Standalone Primary Dealers and Bank Primary Dealers.

Standalone Primary Dealers: Most of these PDs are subsidiaries of scheduled commercial banks established as NBFCs. The other standalone PDs are subsidiaries/joint ventures entities incorporated abroad or the companies incorporated in India.

These PDs are registered as NBFCs and got license from RBI to deal in government securities. Operations of the PDs are subject to prudential and regulatory guidelines issued by RBI from time to time.

Bank Primary Dealers: In addition to standalone PDs, banks which do not have a partly or wholly owned subsidiary may also departmentally undertake PD business with the RBI license.

Licenses are issued to banks to departmentally undertake PD business subject to prudential and regulatory guidelines issued by RBI. This type of departmentally undertaken PD business by the banks is known as bank PDs.

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