What are the Types of NBFCs?

A Non-banking financial company (NBFC) is a company that facilitates alternative financial services other than accepting deposits from the public. NBFC DSA Codes specify that NBFCs are involved in the acquisition of bonds, stocks, debentures, or securities, lending, leasing, insurance, hire-purchase, and other financial transactions. In other words, NBFCs are companies registered under the Companies Act of 1956 that accept deposits or a large sum of money in installments or under a scheme but do not offer traditional banking facilities. 

NBFC DSA Code

Many lending institutions including NBFCs partner with loan agents to bring in more business. The NBFC DSA Code is a handbook that specifies the terms and conditions, duties and responsibilities, etiquette rules, and additional duties of a loan DSA agent. It is a written contract that protects the interests of both parties. 

If your profile is shortlisted and you are inducted formally into an organization, you will be given an NBFC DSA Code to sign. Loan facilitators base their NBFC DSA Code upon the Model Conduct of Conduct for DSAs issued by the Indian Bank’s Association, making them a reliable source of authority. 

How are NBFCs different from banks?

When a company’s financial assets comprise more than 50% of the total assets and the income from these financial assets is equal to more than 50% of the gross income, it can be said that their principal business is financial. While the primary function of NBFCs is financial activity, they do not have the same status as traditional banks. 

• NBFCs cannot issue cheques drawn to their name. 
• They are not a part of the payment and settlement system.
• NBFCs cannot accept demand deposits from their customers.
• Unlike banks, the deposit insurance securities guaranteed by the Credit Guarantee Corporation and Deposit Insurance are not available for NBFCs

Different types of NBFCs

NBFCs can be classified into eight types based on activity:

• Asset finance company

An asset finance company is a type of NBFC that helps individuals fund their assets and productive equipment to run their businesses. Businesses that require automobiles, heavy industrial equipment, large generators, powerful earth-shifting machines, and farming tools avail of loans from asset finance companies to fund their purchases. 

• Mortgage guarantee company

Mortgage guarantee companies are extremely beneficial for people with low credit scores who want to avail of home loans. A mortgage guarantee refers to a home loan that has been guaranteed by third-party companies, in case the borrower fails to pay the monthly settlements. Only companies whose 90% profit turnover comes from making mortgage guarantees are recognized as mortgage guarantee companies. A mortgage guarantee company must have a net worth of over INR 100 crores at the time of commencement of business. 

• Investment company

Investment companies are solely engaged in the pursuit of investing a pooled collection of investor funds into securities. They offer a variety of services from recordkeeping, portfolio management, accounting and tax management services, and so on. 

• Infrastructure finance company

Infrastructure finance companies are non-deposit-accepting financial institutions that have a minimum of 75% of their total net worth invested in infrastructure loans. These companies provide credit facilities or guarantees for project companies to undertake transport, energy, water, sanitation, social, and commercial construction. Infrastructure finance companies must have a total net worth of over INR 300 crores. 

• Loan company

Loan companies are primarily engaged in the task of making funds available to the public, whether by taking deposits from the public and lending or investing them, or using their pool of resources to give out loans for personal purposes, except for leasing industrial equipment. Loan companies are not responsible for asset management, however, they are an alternative option for people struggling to avail of loans from traditional banks. 

• Core investment company

Core investment companies are NBFCs that acquire and manage shares and securities and hold more than 90% of their total net worth in the form of investments made in equity shares, debentures, debts, and bonds in group companies. Their investment shares in debts and bonds of group companies must amount to at least 60% of their net worth. 

• Housing finance company

Housing finance companies are instrumental in financing houses for the public and housing boards. They are registered under the Companies Act. Anyone, from doctors to lawyers, and engineers can avail of housing finance loans. It is especially beneficial for individuals, who have low credit scores, cannot make a huge down payment, or have trouble financing their mortgage through bank loans. Housing finance companies follow the guidelines set by the National Housing Bank (NHB). 

• Microfinance company

Microfinance companies are entities that are designed for people with low income, or individuals with poor credit scores. Individuals from impoverished nations can act on their ideas and begin business ventures by taking small loans from these institutions. Microfinance companies have lower interest rates, better repayment terms, and provide immediate access to funds. These companies also impart financial knowledge to low-income households and better equip them to get jobs and make investments in the future. 

Additional Reading: 5 Easy Steps to Become a Loan DSA with Andromeda Loans

Are NBFCs safe?

NBFCs are in no way less secure than traditional banks. Nowadays, people are recognizing their importance in increasing competition, absorbing risks, and diversifying the finance sector. NBFCs with an overall valuation of over INR 500 crores and more are considered to be important assets, as they improve the financial stability of a nation to a great degree. 

The Department of Non-Banking Supervision (DNBS) of the Reserve Bank of India is responsible for regulating and supervising the NBFCs under regulatory provisions contained in chapters III, B, and C, and chapter V of the Reserve Bank of India Act of 1934. No NBFC can commence business without registering in the RBI and owning at least INR 2 crores in net funds since April 1999. 

However, some types of NBFCs like venture capital funds, stock broking companies, merchant banking companies registered with the SEBI, insurance companies registered under the IRDI, and Nidhi companies under section 620A of the Companies Act of 1956 are not placed under the supervision of the Reserve Bank of India. 

NBFC DSA Codes protect the interests of both the loan facilitators and the loan agents. Once a loan agent signs an NBFC DSA Code, they are bound to assist clients in the loan application process and devise marketing strategies to attract more customers. DSA agents must be available during office hours to resolve customer queries. The NBFC DSA Codes also discuss compensation at length. They specify what percentage of the loan amount would loan agents receive as commission after the loan is sanctioned. As a customer, always look for lenders who sign binding NBFC DSA Codes with their agents. DSA agreements add a layer of security and authenticity regarding the proceedings of an NBFC. 

Additional Reading :How much Commission does DSA get from Banks?

Wrapping up

NBFCs are known for their prompt responses, technological advancements, and partnerships with governments to bring upgraded loan schemes to the public. While they cannot replace traditional banks, they still play a major role in the economy. Another of their greatest benefits is the ability to customize loan products depending on their customer’s credit scores and assets. Click here to become an Andromeda DSA agent.