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NBFC vs MFI: Non-Banking Financial Company Vs Micro Finance Institutions

NBFC vs MFI
Monisha Chaudhary
| Updated: Nov 06, 2017 | Category: Microfinance Company, NBFC, RBI Advisory

India is a country with a huge population. Banks, in spite of having increased their presence, have certain limitations as they cannot open branches in remote and inaccessible places. This is why to meet banking requirements of the people, there are many NBFC operating mainly in rural parts of the country. Lets discuss about NBFC vs MFI – Non-Banking Financial Company Vs Micro Finance Institutions.

NBFC – in India

The Non-Banking Financial Companies are performing an exceptional role in the economy by providing numerous type of financial activities. NBFCs are actually a diverse group providing several services extending from microfinance to insurance. They provide insurance, gives MFI loans, chits etc.

In recent years, the RBI is levying high regulations on NBFCs. Some of the regulations are as hard as that of banks. Actually, there is a tendency of imposing almost all regulatory requirements of banks in the NBFC sector. This is because the failure of big NBFCs is dangerous to the economy as well. The NBFCs are also nicknamed as shadow banking sector.

NBFC and MFI are providing banking facilities, there are differences between the two entities.

Non-Banking Financial Company – A Financial Institution:

Non-Banking Financial Company is nothing but a financial institution to provide financial services to recognized as well as unrecognized sectors.

As defined by RBI, NBFC is a Company registered under Companies Act 1956/ Companies act 2013[1] , engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or other securities which is marketable of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

In above further principle business was explained as below:

Financial activity as principal business is when a company fulfills the following conditions:

  • Financial assets constitute more than 50 percent of the total assets.
  • Earnings from financial assets constitute more than 50 percent of the gross income.

The RBI has not defined the Principle business under the Act but for the purpose of the financial activity, it has set conditions to be fulfilled before taking License.

In layman’s language, it is the company providing financial services alike Banks. Though the functions NBFC looks similar to Banks there are some activities which cannot be carried by the NBFC:

  • Acceptance of Deposits;
  • An issue of cheques drawn and being a part of the payment and settlement system;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation;

RBI regulates the NBFC. RBI time to time issues the various regulation for the operation of NBFC. All NBFC shall take the license from RBI before commencing the Business.

The NBFCs is classified under various types such as Asset Finance Company, Investment Company, Loan Company, Infrastructure Finance Company, Micro Finance Institution etc.

Micro Finance Institution – A type of NBFC

Micro Finance Institution is nothing but a type of NBFC who generally provide loans and other financial services to poor sections of the society. Generally, they operate in rural areas and among low-income urban people by extending small loans.

Banks provide the fund to MFIs and thereafter MFIS lend to low-income households based on the group lending method.

The RBI has extended its regulation and supervision to some of the MFIs that qualify certain criteria. The main objective is too stable MFIs.

Conditions to be fulfilled by NBFC-MFI while applying for the license:

  • NBFC-MFI shall not take the deposit. It should be non-deposit taking NBFC.
  • Maintain NOF minimum of Rs.5 crore

In case of NBFC-MFIs registered in the North Eastern Region of the country, it shall maintain of Rs. 2 crores:

  • “Qualifying assets” shall not be less than 85% of its net assets.
  • Minimum fifty percent of loan should be given for productive purposes.

In above Qualifying assets means:

Loans provided by the NBFCs that meets specifications:

  • The loan must be given without any collateral.
  • NBFC-MFI can give loans to borrowers with a rural household annual income not exceeding Rs. 1,00,000
  • NBFC-MFI can give loans to borrowers with an urban and semi-urban household income not exceeding Rs. 1,60,000.
  • The total indebtedness of the borrower shall not exceed Rs.1,00,000. While calculating indebtedness of the borrower, Loan, if any availed towards meeting education and medical expenses shall be excluded.

NBFC vs MFI

  • In comparison between NBFC vs MFI, NBFC provides banking functions at a scale smaller than that of banks, MFI exists at a level that is smaller than that of NBFC.
  • NBFC means a non-banking financial company that performs functions similar to banks in the absence of banks in rural areas.
  • MFI means for microfinance institutions which operate at a further smaller level than NBFC.
  • MFI provides very small loans to the underprivileged sections of society.
  • NBFC aim is to provide big loans like 50,000 and upwards, target customers are middle-class people, businessmen etc.
  • The micro-finance main aim is to give small loans like 10-20000 rupees to poor people and self-help groups.

Also, Read: A Peek into the Future of NBFCs in India

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