What is FI?
Based on their Liability Structure, NBFIs have been divided into two categories. 1. Category ‘A’ companies (NBFIs accepting public deposits or NBFIs-D), and 2. Category ‘B’ companies (NBFIs not raising public deposits or NBFIs-ND).
NBFIs-D are subject to requirements of Capital adequacy, Liquid assets maintenance, Exposure norms (including restrictions on exposure to investments in land, building and unquoted shares), ALM discipline and reporting requirements; In contrast, until 2006 NBFIs-ND were subject to minimal regulation. Since April 1, 2007, non-deposit taking NBFIs with assets of `1 billion and above are being classified as Systemically Important Non-Deposit taking NBFIs (NBFIs-ND-SI), and prudential regulations, such as capital adequacy requirements and exposure norms along with reporting requirements, have been made applicable to them. The asset liability management (ALM) reporting and disclosure norms have also been made applicable to them at different points of time.
The major funding sources of FIs are capital, term deposits, credit facilities from banks and other FIs, call money borrowing, and securitization.
FIs are allowed to mobilize term deposits only, with a tenor of at least 3 months. Banks also invest in bonds and debentures issued by FIs, which is another source of funds. In 2015, the borrowings and deposits of FIs increased by 3.5 per cent and 29.5 per cent respectively, while capital decreased by 2.0 per cent, compared with those of the previous year.
Deposit Safety Net
The deposit insurance system helps FIs to minimize the risk of losses of depositors’ funds with FIs. At present, there is no deposit insurance coverage for the depositors of FIs. However, the proposal to bring the FIs’ depositors, under the umbrella of insurance coverage, is under process of approval with the Ministry of Finance.
Types of NBFIs
Depending upon their nature of activities, non- banking finance companies can be classified into the following categories:
- 1.Development finance institutions
- 2.Leasing companies
- 3.Investment companies
- 4.Modaraba companies
- 5.House finance companies
- 6.Venture capital companies
- 7.Discount & guarantee houses
- 8.Corporate development companies
- Do not take deposits
- Can offer similar services to commercial banks,
- Can compliment them or compete with them.
- Provide financing to high end clients
- Make investments
- Facilitate bank related services such as investment risk pooling, contractual savings and market brokering.