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Current Affairs

RBI creates single category of NBFCs by merging present 3 tier structure

Date: 23 February 2019 Tags: Financial Institutions, Banking Schemes & Policies, NBFC

Reserve Bank of India (RBI) has created single category non-banking financial companies (NBFCs) by merging their present three-tier structure. The new single category will be called as NBFC- investment and credit companies (NBFC-ICCs). It mergers existing three NBFCs categories viz. Asset Finance Companies (AFC), Loan Companies (LCs) and Investment Companies (ICs).

Key Facts

  • These three NBFCs were merged into single category to provide greater operational flexibility to non-banking lenders.
  • The harmonisation process of different categories will be carried out based on principle of regulation by activity rather than regulation by entity.
  • Deposit taking NBFC-ICC shall invest in unquoted shares of another company which is not subsidiary company or company in same group of NBFC, an amount not exceeding 20% of its owned fund.
  • RBI also has decided that exposures to all NBFCs, excluding core investment companies, will be risk weighted as per credit ratings.
  • The risk weight model will work in a manner similar to corporates. This has been done to facilitate flow of credit to well-rated NBFCs.

Non-banking financial companies (NBFC)

  • It is company is which provide banking services without meeting the legal definition of a bank. It loosely called as shadow bank.
  • It is incorporated under Companies Act and its regulatory provisions under RBI are defined under Section 45 I(a) of RBI Act, 1934.
  • It is engaged in business of loans and advances, acquisition of shares, bonds, stocks, debentures and securities issued by government or local authority or other marketable securities.
  • It can make investments and lend and hence, their activities are akin to that of banks. However, it cannot accept demand deposits.
  • It also not part of any payment and settlement system i.e. they cannot issue cheques drawn on itself.