SHADOW BANKING---
- Financial Institutions that function like Banks but are not governed by the Banking Regulations eg Hedge Funds, Non-bank financial companies, Special Investment Vehicles.
- Some of these NBFCs do form one type of “Shadow banking” in India, because they’re outside the traditional regulatory rules for Banks.
Non-bank financial companies (NBFCs):
- Those Financial Institutions that provide banking services without meeting the legal definition of a bank as they do not hold a banking license.
- The specific banking products offered by NBFCs depends on the jurisdiction,and may include services such as loans and credit facilities, savings products, investments and money transfer services.
- Some of the well known NFC’s are Housing Development Finance Corporation Limited, Power Finance Corporation Limited, Rural Electrification Corporation Limited, National Bank of Agricultural and Rural Development and Infrastructure Development Finance Company Limited.
NBFCs vs Scheduled Commercial Banks:
- NBFC cannot accept demand deposits.
- NBFCs do not form part of the payment and settlement system and hence cannot issue cheques drawn on itself;
- Deposit Insurance Facility is not available to depositors of NBFCs, unlike in case of banks.
- NBFC's are under Indian Companies act 1956 while banks are regulated under The banking regulations act 1949.
Non-bank financial companies & Prompt Corrective Action (PCA) framework:
- Non-bank financial companies (NBFCs) have been brought under the ambit of the Prompt Corrective Action (PCA) framework.
- Under the framework, NBFCs will face restrictions when certain parameters like non-performing assets, Capital Adequacy Ratio and Tier 1 capital fall below the stipulated levels.
- The PCA framework for NBFCs came into effect on October 1, 2022.
- The RBI decision has come after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds and collapsed despite the tight monitoring in the financial sector.
