Non-Banking Financial Institutions

The non-banking financial institutions are the organizations that facilitate bank-related financial services but does not have banking licenses. This article will help UPSC civil service exam aspirants understand the various types of non-banking financial institutions and their respective functions in this article.

Candidates would find this topic to be of importance while preparing for the IAS Exam.

Non-Banking Financial Companies – Latest Updates 

Recently, the Reserve Bank of India has proposed a tighter regulatory framework for Non-Banking Financial Institutions by creating a four-tier structure with a progressive increase in the intensity of regulation. Further information about the Reserve Bank of India is available in detail on the linked page.

  • It has also proposed the classification of Non-Performing Assets of base layer NBFCs from 180 days to 90 days overdue. Read more on Non Performing Assets – NPA in detail on the linked page.
  • Earlier in 2020, the RBI announced a host of measures to provide liquidity support to NBFCs.

The share of NBFC-MFIs (microfinance institutions) in the overall microfinance sector has come down to a little more than 30% as several large MFIs had converted into Small Finance Banks. Read in detail, What is Micro Finance on the given link.

Non-Banking Financial Institutions (UPSC Notes):- Download PDF Here

Aspirants should enhance their preparation by solving UPSC Previous Year Question Papers now!!

To complement your preparation for the upcoming exam, check the following links:

Non- Banking Financial Institutions – Types

Mutual Funds

  1. Mediators between people and stock exchange
  2. Money collected from people by selling their units is called the corpus
  3. Oldest Mutual Fund company in India is UTI ( Unit Trust of India)
  4. Mutual Funds nearly provides all the considerations

Insurance Companies

  1. Collect money from the public through the sale of insurance policies
  2. There are two types of Insurance – Life Insurance and General Insurance
    • General Insurance includes Loss of property, car, house etc.
    • It also includes Health Insurance

IRDA Act, 1999

As per the Insurance Regulatory and Development Authority Act, Insurance companies were opened up for private companies. The objective was to promote competition FDI was allowed up to 26% (Recently increased to 49%) IRDA was established as the regulator of the insurance sector

  1. LIC – Life Insurance Corporation
  • Set up in 1956 by the government by nationalising all the existing private sector life insurance companies
  • This was done due to large scale defaults

2. GIC – General Insurance Corporation

  • It was established in 1973
  • Subsidiaries of GIC are:-
    • NICL – National Insurance Company of India Limited
    • United India Insurance Company Limited
    • Oriental Insurance Company of India Limited
    • New India Insurance Company of India Limited
  1. ULIP – Unit Linked Insurance Plans
  • A mixture of Insurance and Mutual Funds

Aspirants can go through the List of Insurance Companies in India on the linked page.

Hedge Funds

  1. These are mutual funds for rich investors
  2. Funds are raised through the sale of their unit to High net worth Individuals and Institutional Investors
  3. Units of these are usually sold in chunks/groups
  4. There is a lock-in period for Hedge funds before which funds cannot be withdrawn
  5. Corpus is an investment in risky instruments with a long term perspective

Venture Capital Firms/ Companies

  1. They provide finance and technical assistance to firms which undertake a business project based on innovative ventures
  2. They provide finance for the commercial application of new technology

Merchant banks ( Investment Banks)

  1. Merchant banks provide financial consultancy services
  2. They advise firms on fundraising, manage IPO of firms, underwrite new issues and facilitate demat trading.

Finance Companies (Loan Companies)

  1. Financial Institutions raise funds from the public for lending purpose
  2. e.g. – Muthoot Finance, Cholamandalam

Micro Finance Institutions (MFI)

  1. Raise funds from the public for lending to weaker sections
  2. In India, they mainly raise funds from banks
  3. e.g. – Basix, Bandhan, SKS Micro Finance.

Vulture Funds

  1. These funds buy stocks of companies which are nearing bankruptcy at a very low price.
  2. After purchasing such stocks they initiate the recovery process to increase the price of shares and sell it at a later point of time

Islamic Banks

  1. These banks provide loans on the basis of Islamic laws called Sharia.
  2. In the law of Sharia Interest cannot be charged on the loans

Leasing Companies

  1. They purchase equipment and machinery and provide the same to companies on a lease.
  2. These companies charge rent on these machineries which is similar to EMI

Go through the given link to know in detail about various Types of Funds in India.

Non-Banking Financial Institutions (UPSC Notes):- Download PDF Here

Aspirants can check out the video to know about various other Financial institutions –

The above details would help candidates prepare for UPSC 2022.

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