Non-Banking Financial Institutions (NBFCs) started out as an alternative method of investments and borrowing in India, but the industry has since then grew to be a multi-billion dollar business. Basically, NBFCs cater to the needs to corporations and government. Like people go banks to get loans for buying cars and houses, corporations go to NBFCs to buy factories, or islands. You know, normal corporation things. Let’s get into it!
What are NBFCs?
NBFCs, as the name suggests, entails to finance based companies, which are not banks.
A financial company is a company whose primary activities comprise advancing of loans, accepting deposits dealing in securities (stocks, bonds, the works), hire-purchase (installment based services), insurance business, etc.
What’s common? Let’s look at it from the other way, a company who does not engage in activities like agricultural business, industrial activities, purchase and sale of goods or immovable properties.
The above definition includes banks, NBFCs, Insurance companies, Housing and Infrastructure finance companies, chit-fund companies, Nidhi Companies.
Banks vs. NBFCs: What’s the Difference?
Again, as the name suggests, they are indeed different. You know, because one says banking and other, well, non-banking. But let’s dive a little deep, mostly because we researched a lot to discuss the key differences.
The most prominent difference is in the fact that NBFCs cannot accept demand deposits like Current Accounts and Savings Account (CASA), but they do accept term deposits. That basically means you can’t just waltz in an NBFC building and withdraw your money deposited with them because you saw a cute dress or new PS5 in a shop. Also, if the shop takes debit card or cheques, NBFCs cannot issue any of those.
But NBFCs can be financed 100% with Foreign investments.
Both banks (and more importantly, Scheduled Banks) and NBFCs have to be registered with Reserve Bank of India, which is not much of a difference. But, in terms of regulation, a bunch of different bodies regulate NBFCs, whereas only Reserve Bank of India regulates banks.
This is because of functional difference between the two, because while banks mainly do banking business (accepting deposits, giving out loans, chasing the spread!), NBFCs are a broad category of business.
Now, let’s get to our next query…
Who regulates NBFCs? Non-Banking Financial Companies
NBFCs are regulated by Reserve Bank of India (RBI).
This means Non-banking financial companies get covered under regulations that have been set up by RBI. However, some companies like stock broking, insurance, housing, chit fund, etc. have been given certain exemption and are regulated by other regulators as discussed below.
But, there’s more to it…
The minimum requirement to be classified as an NBFC are two things, a minimum capital of 2 crore rupees and a registration with the RBI. But to get registered with RBI, the company should also be registered under Companies Act, 2013. So really, three things.
Types of NBFCs
- Asset finance company (AFC)
- Investment company (IC)
- Loan company (LC)
- Infrastructure finance company (IFC)
- Systematically important core investment company (CIC-ND*-SI)
- Micro finance institution (NBFC-MFI)
- Infrastructure debt fund (IDF-NBFC)
- NBFC factors
- Mortgage guarantee companies (MGC) and
- Non-operating financial holding companies (NOFHC).
If you actually read through all those, it is pretty evident that NBFCs have a bunch of businesses which cannot be possibly regulated by one organization. Also, there are issues of conflict of interests.
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NBFCs are regulated by:
So, let’s have a broad classification of regulating bodies for these different types of NBFCs:
- Housing Finance Companies are regulated by National Housing Bank.
- The Securities and Exchange Board of India is the chief regulating body for Merchant Bankers, Venture Capital Fund Company, stock-exchanges in India. Not only this, SEBI monitors and regulates the stock brokers and sub-brokers in India.
- Talking of Insurance companies, these are regulated by Insurance Regulatory and Development Authority.
- The respective State Governments regulate the Chit Fund Companies.
- The Ministry of Corporate Affairs, Government of India regulates Nidhi Companies.
Besides, the companies that are into financial business but are regulated by different regulators are provided specific exemption by the RBI from its regulatory requirements to avoid any duality of regulation.
*Systematically important bodies are the ones whose asset size is more than 500 crore. A “too big to fail” scenario, if you will.
Top 10 NBFCs in India: Biggest Non-Banking Financial Companies
Note that while there are different bodies regulating different aspects, a single brand of NBFC can have multiple businesses through its subsidiaries. For example, HDFC ltd., Housing Development Finance Corporation ltd. is regulated by National Housing Bank, but HDFC Bank ltd. Is regulated by RBI.
Now following this Q/A format, following are few of the top NBFCs in India, based on market capitalization (as on 24th June, 2020). All numbers in crore rupees.
1. HDB Financial Services
HDB Financial Services, HDFC’s NBFC arm provides finance to individuals, corporates and developers for the purchase, construction, development and repair of houses, apartments and commercial properties in India. (Source: 2019-03 Annual Report Page No: 241)
Market Cap: 311434.57 cr
P/E : 14.53
Sales Last Quarter: 16600.08 cr
Net Profit Last Quarter: 4115.20
2. Bajaj Finance
Bajaj Finance is involved in lending business. Bajaj Finance Ltd. is an NBFC who has a lending portfolio that includes retail, SME and commercial customers with a strong presence in both urban and rural India. It accepts public and corporate deposits and offers variety of financial services products to its customers.
Market Cap: 176562.65 cr
P/E : 36.17
Sales Last Quarter: 6511.09 cr
Net Profit Last Quarter: 891.57
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3. Bajaj Finserv
Bajaj Finserv is an NBFC who offers promotion financial services such as finance, insurance, wealth management, etc. through its investments in subsidiaries and joint ventures as its primary activities. Bajaj Finserv is also involved in power generation through wind turbines, a renewable source of energy.
Market Cap: 96,215 Cr.
P/E : 28.56
Sales Last Quarter: 13,294 Cr.
Net Profit Last Quarter: 194.43 Cr.
4. SBI Cards & Payment Services Ltd
SBI Cards & Payment Services handles payment solutions, and it is the first listed pure play credit card service in India, owned jointly by SBI and Carlyle Group.
Market Cap: 62,389 Cr.
P/E : 72.32
Sales Last Quarter: 2,433 Cr.
Net Profit Last Quarter: 83.54 Cr.
5. HDFC Asset Management Company Ltd
SEBI approved HDFC Asset Management company to handle the asset management of HDFC Mutual Fund. HDFC Trustee Company Limited (the Trustee) has appointed the Company to act as the investment manager of HDFC Mutual Fund. (Source : 201903 Annual Report Page No: 91)
Market Cap: 52,082 Cr.
P/E : 41.26
Sales Last Quarter: 476.13 Cr.
Net Profit Last Quarter: 249.83 Cr.
6. Muthoot Finance Ltd
Muthoot Finance is an NBFC which operates under the brand name of The Muthoot Group, which has diversified interests in the areas of financial Services, healthcare, education, plantations, real Estate, foreign Exchange, information technology, insurance distribution, Hospitality etc.
Market Cap: 44,625 Cr.
P/E : 14.78
Sales Last Quarter: 2,400 Cr.
Net Profit Last Quarter: 815.15 Cr.
7. Bajaj Holdings & Investment Ltd
BHIL is an NBFC which has been registered as a Non-Banking Financial Company NBFC) under the Registration No. N-13.01952 dated 29 October 2009 with Reserve Bank of India (RBI). The Company is classified as a Systemically Important Non-deposit taking NBFC as per RBI Regulations.
Market Cap: 31,592 Cr.
P/E : 10.56
Sales Last Quarter: 110.46 Cr.
Net Profit Last Quarter: 361.41 Cr.
8. Power Finance Corporation Ltd
Power Finance Corporation is engaged in extending financial assistance to power sector and is a Systemically Important (Non-Deposit Accepting or Holding) Non Banking Finance Company (NBFC) registered with Reserve Bank of India (RBI) as an Infrastructure Finance Company (IFC).(Source : 201903 Annual Report Page No: 75)
Market Cap: 23,220 Cr.
P/E : 3.26
Sales Last Quarter: 16,193 Cr.
Net Profit Last Quarter: 469.20 Cr.
9. Rural Electrification Corporation Limited
Rural Electrification Corporation Limited provides finance to power sector. It helps rural electrification projects by financing and promoting them, throughout the nation. Also, it provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives.
Market Cap: 22,297 Cr.
P/E : 4.48
Sales Last Quarter: 7,841 Cr.
Net Profit Last Quarter: 473.99 Cr.
10. Cholamandalam Investment & Finance Company Ltd
Cholamandalam Investment & Fin. Co. is engaged in providing vehicle finance, home loans and corporate mortgage loans. Â Through its subsidiaries, it is also involved in the business of broking, distribution of financial products and freight data solutions.
Market Cap: 16,130 Cr.
P/E : 15.31
Sales Last Quarter: 2,165 Cr.
Net Profit Last Quarter: 42.45 Cr.
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NBFCs in India:Â
Conclusively, while NBFCs sound secure from a regulation point of view, it should be factored in that no regulation is a 100% effective. There have been several cases of Non-banking financial companies getting down in the dirt, and it is plain obvious that there will continue to be such cases.
This can be little concerning, since NBFCs are huge financial bodies whose actions have ripples felt through the entire economy, a fact even recognized by bodies that are regulating them. Needless to say, if you’re looking to invest in a NBFC, do your homework about its businesses and management, and follow the Warren Buffett rule, “Never test the depth of water with both feet”.
Non-banking Financial Companies play a crucial role extending their services in the urban as well as rural parts of India. A significant component of our country’s Gross Domestic Product (GDP), their quick and efficient assistance is frequently attracting more and more consumers. Additionally, you get to choose from a vast range of products and services. Isn’t it? What do you think?