Non-Banking Financial Company Vs Micro Finance Institution

What are NBFCs?

The term NBFC (Non-Banking Financial Company) refers to a company which is registered under the Companies Act and is regulated by the Reserve Bank of India under the RBI Act,1934. The activities are related to lending and other activities that it includes are providing loans and advances, credit facility, savings and investment products, trading at the money market, managing portfolios of stocks, transfer of money, etc. All NBFCs are engaged in hire purchase, leasing, infrastructure finance, venture capital finance, housing finance, etc. NBFCs are allowed to accepts deposits but only term deposits. But deposits which are repayable on demand are not accepted by NBFC.

Categories of NBFCs

There are mainly three kinds of companies under Non- Banking Financial institutions which are the following:

  1. Asset companies
  2. Loan Companies
  3. Investment Companies

As NBFCs can not issue cheques drawn on itself as well as it cannot accept saving deposits in the manner that a bank does so there is a difference between NBFCs and Banks. Apart from this, Money deposited in any NBFC does not have any guarantee like Banks. Moreover, it performs banking functions at a smaller scale in comparison to banks. Read here for Annual Compliance of NBFCs in India.

What is Microfinance Companies?

Microfinance Company or Institution (MFI) exists at a smaller level in comparison to NBFC. It is serving a similar motive as NBFC to the underprivileged and impoverished sections of the society that do not have access to banking facilities. MFI provides small funds that can vary from Rs. 1000-20000 to the poor people for starting a business. There are also some complaints of MFIs regarding irregularities in the functioning as it charges higher interest rates from the poor. Besides, it mainly indulges in providing loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation. In some instances, it has been noted that when MFIs get the sanction of credit facility after this there is no review of the functioning of MFI.

The state government has taken some necessary steps to convert MFI into NBFC which are better regulated by RBI. Rather MFIs want to get NBFC status because they will get access to wide-scale funding from banks.

Difference between NBFC and Microfinance Companies

Both NBFC and Microfinance Companies play an important role in rural areas. When there is an absence of banks in the rural areas then Non-banking financial institution performs similar functions as banks perform. Although, Non-Banking Financial company cannot issue checks drawn on itself. On the other hand, MFI stands for Microfinance institutions that are established to operate at a smaller level than NBFC and provide small loans facilities to the underprivileged sections of the society.

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