NBFCs Raise Fixed Deposit Rates

Non-banking financial companies (NBFCs) are increasing their fixed deposit (FD) rates to mop up funds that can make up for lower bank borrowings.

1. Depositors seeking to invest in high-rated corporate bonds can opt for longer tenures.
2. And those seeking to earn higher yield from low-rated issuers should opt for shorter tenures to contain the risk.

What is a Non-Banking Financial Company (NBFC)?

1. Definition: An NBFC is a company registered under the Companies Act, 1956, primarily engaged in financial activities, such as loans and advances, acquiring shares/securities, leasing, hire-purchase, insurance, and chit business.
2. Exclusions: NBFCs do not include institutions primarily engaged in agriculture, industrial activities, sale/purchase of goods (other than securities), provision of services, or real estate transactions.
3. Deposit-Taking NBFCs: Institutions that accept deposits from the public under any scheme or arrangement are also considered NBFCs (Residuary non-banking companies).

Characteristics and Limitations of NBFCs:

1. Deposit Restrictions: NBFCs cannot accept demand deposits but can only offer time deposits, with a minimum deposit period of 12 months and a maximum period of 60 months.
2. Interest Rate Ceiling: NBFCs have to adhere to the interest rate limit set by the Reserve Bank of India (RBI), which is currently set at 12.5 percent per annum.
3. Monetary Services: NBFCs provide a range of monetary services, including chit schemes, advances, lending, and investments.
4. Differences from Banks: Unlike banks, NBFCs do not have banking licenses, cannot accept demand deposits, are not part of the payment and settlement system, and are not subject to the same stringent regulations as banks.

Regulation of NBFCs:

1. Regulatory Authorities: The functions of NBFCs are supervised by both the Ministry of Corporate Affairs and the RBI.
2. RBI's Role: The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure compliance with established norms and regulations.

Categorization of NBFCs:

1. By Liabilities: NBFCs are categorized into Deposit-accepting NBFCs and Non-Deposit accepting NBFCs.
2. By Size: Non-deposit accepting NBFCs are further classified into systemically important NBFCs (NBFCs with assets of ₹500 crore or more) and other non-deposit holding companies.
3. By Activity: NBFCs are also categorized based on the type of activity they conduct, such as mortgage lenders, investment banks, and equipment leasing companies.

Systemically Important NBFCs:

1. Definition: NBFCs whose asset size is ₹500 crore or more are considered systemically important, as their activities can impact the overall financial stability of the economy.
2. Rationale: This classification ensures that such NBFCs are subject to more strict regulations and oversight.

Conclusion:

Non-banking financial companies (NBFCs) play a role in the financial system by providing a wide range of financial services to individuals and businesses. While NBFCs have certain limitations compared to banks, they are subject to regulations to ensure the protection of depositors and the overall stability of the financial system.

 

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