Banks and NBFCs: Types of Banks & NBFCs: Central Bank, Nationalized & Co Operative Banks, Regional Rural Banks, Scheduled Banks, Private Banks & Foreign Banks, Mudra Bank, Small Finance Banks, Specialized Banks, NBFCs. Types of Banking: Wholesale and Retail Banking, Investment Banking, Corporate Banking, Private Banking, Development Banking.

1. Unit 4 : Banks and NBFCs
Banks and NBFCs: Types of Banks & NBFCs:
Central Bank, Nationalized & Co Operative
Banks, Regional Rural Banks, Scheduled
Banks, Private Banks & Foreign Banks, Mudra
Bank, Small Finance Banks, Specialized Banks,
NBFCs.
Types of Banking: Wholesale and Retail
Banking, Investment Banking, Corporate
Banking, Private Banking, Development
Banking.

2. Specialized Banks, NBFCs.

3. In India, there are some specialized banks,
which cater to the requirements and provide
overall support for setting up business in
specific areas of activity.
They engage themselves in some specific area
or activity and thus, are called specialized
banks.
There are three important types of specialized
banks with different functions:
―Export Import Bank of India (EXIM Bank)
―Small Industries Development Bank of India
―National Bank for Agricultural and Rural
Development

4. EXPORT-IMPORT BANK OF INDIA (EXIM)
EXIM of India is the premier export finance
institution in India, established in 1982 under
Export-Import Bank of India Act 1981.
EXIM Bank is India’s leading export financing
institute that engages in integrating foreign
trade and investment with the country’s
economic growth.
EXIM Bank is a wholly-owned subsidiary of the
Indian Government.
EXIM Bank is an important government organisation
working in the field of exports. It plays a crucial
role in helping Indian companies do business
abroad and bring in foreign exchange.

5. Financial Products By EXIM
Buyer’s credit – it is a credit facility
programme that encourages Indian
exporters to explore new regions across
the globe. It also facilitates exports for
SMEs by offering credit to overseas
buyers to import goods from India.
Corporate banking – it offers a variety of
financing programmes to augment the
export-competitiveness of Indian
companies.

6. Financial Products By EXIM
Lines of credit – it offers extended a line of credit
to Indian exporters to help them expand to new
geographies and uses line of credit as an
effective market-entry tool.
Overseas investment finance – it offers term
loans to Indian companies for equity investments
in their overseas joint ventures or wholly-owned
subsidiaries.
Project exports – encourages project exports
from India and helps Indian companies secure
contracts abroad.

7. Services offered By EXIM
Marketing advisory services – helps Indian
exporters in their globalisation ventures by
assisting in locating overseas distributors/partners,
etc. Also, assists in identifying opportunities
abroad for setting up plants, projects or acquiring
companies.
Research and analysis – conducts research in the
field of international economics, trade and
investment, country profiles to identify risks, etc.
Export advisory services – it offers information,
advisory and support services enabling exporters
to evaluate international risks, exploit export
opportunities and improve competitiveness.

8. Small Industries Development Bank of India
This specialized bank grant loan to those who want
to establish a small-scale business unit or industry.
Small Industries Development Bank of India (SIDBI)
was established in October 1989 and commenced
its operation from April 1990 with its Head Office at
Lucknow as a development bank, exclusively for
the small scale industries.
It is a central government undertaking.
The prime aim of SIDBI is to promote and develop
small industries by providing them the valuable
factor of production finance.
Many institutions and commercial banks supply
finance, both long-term and short-term, to small
entrepreneurs. SIDBI coordinates the work of all of
them.

9. • SIDBI set up in 1990 under an Act of
Parliament, acts as the Principal Financial
Institution for Promotion, Financing and
Development of the MSME sector as well as
for coordination of functions of institutions
engaged in similar activities
• Shareholding in SIDBI– GOI (15.4%) + SBI
(16.73%) + LIC (14.25%) + NABARD (10%) +
Others (43.62)
• Initiatives by SIDBI – Udyog Aadhar
(MSME), Udyami Mitra portal, Guarantee
fund, Small Enterprises Development Fund
(SEDF).

10. • SIDBI is one of the four AIFI regulated and
supervised by the RBI (other three are
EXIM Bank, NABARD and NHB)
• The Small Industries Development Bank of
India – SIDBI announced that the SIDBI
Assistance to Facilitate Emergency response
against COVID-19 pandemic (SAFE PLUS)
will be offered collateral free and disbursed
within 48 hours.
• The loans will be offered at an interest rate of
five percent. The limit of SAFE loans has
been enhanced from 50 lakh rupees to two
crore rupees.

11. The scheme was launched to provide
financial assistance to MSMEs engaged in
manufacturing of hand sanitizers, masks,
gloves, head gear, bodysuits, shoe-covers,
ventilators and goggles used in dealing
with COVID-19 pandemic.

12. Functions of Small Industries Development Bank
of India (SIDBI):
―Initiates steps for technology adoption, technology
exchange, transfer and upgradation and
modernisation of existing units.
―SIDBI participates in the equity type of loans on
soft terms, term loan, working capital both in rupee
and foreign currencies, venture capital support,
and different forms of resource support to banks
and other institutions.
―SIDBI facilitates timely flow of credit for both term
loans and working capital to SSI in collaboration
with commercial banks.

13. Functions of Small Industries Development
Bank of India (SIDBI):
―SIDBI enlarges marketing capabilities of the
products of SSIs in both domestic and
international markets.
―SIDB1 directly discounts and rediscounts
bills with a view to encourage bills culture and
helping the SSI units to realise their sale
proceeds of capital goods / equipments and
components etc.
―SIDBI promotes employment oriented
industries especially in semi-urban areas to
create more employment opportunities so
that rural-urban migration of people can be
checked.

14. NABARD
National Bank for Agriculture and Rural
Development (NABARD) is an apex development
financial institution in India to provide finance for
agriculture and rural development. Established in
1982 on the recommendations of Sivaraman
Committee. It is a statutory bodyestablished in 1982
under Parliamentary act – NABARD Act, 1981.Its
headquarter is located in Mumbai.
NABARD today is fully owned by the Government of
India. The authorized share capital is about 30,000
crore.
It is responsible for the development of the small
industries, cottage industries, and any other such
village or rural projects.
NABARD operates Rural Infra. Development fund
(RIDF) from PSL shortfalls from SCBs.

15. NABARD
The Bank has been entrusted with “matters concerning policy,
planning and operations in the field of credit for agriculture
and other economic activities in rural areas in India”.
NABARD also has a portfolio of Natural Resource
Management Programmes involving diverse fields like
Watershed Development, Tribal Development and Farm
Innovation through dedicated funds set up for the purpose.
It is one of the premier agencies providing developmental
credit in rural areas. It does not grant Direct credit to Rural
Households.
NABARD is active in developing financial inclusion policy
and is a member of the Alliance for Financial Inclusion
(global network of financial inclusion policymakers, Founded
in 2008)
NABARD is also known for its “SHG Bank Linkage
Programme” (1992) which encourages India’s banks to lend
to SHGs.

16. Refinance facility by NABARD is
available to
• State co-operative agriculture and rural
development banks (SCARDBs),
• State co-operative banks (SCBs),
• Regional rural banks (RRBs),
• Commercial banks (CBs) and
• Other financial institutions approved by
RBI.

17. FUNCTIONS OF NABARD
The major functions of NABARD include
promotion and development, refinancing,
financing, planning, monitoring and
supervision.
Promotional and developmental initiatives
in the areas of farm, off-farm, micro finance,
financial inclusion, Convergence with Govt
sponsored programmes.
Supporting the financial inclusion efforts of
RRBs and Cooperative Banks
Loans to State Governments for developing
rural infrastructure and strengthening of the
Cooperative Credit Structure

18. FUNCTIONS OF NABARD
Refinance to Rural Financial Institutions
for investment credit (long term loan) and
production and marketing credit (short
term loan) purposes for farm and off-farm
activities in rural areas.
Assist in policy formulation of GoI, RBI
and State Governments on matters related
to agricultural credit and rural development
Credit Planning and Monitoring,
Coordination with various agencies and
institutions.

19. THE NABARD (AMENDMENT) BILL, 2017
(PASSED IN 2018)
Amendment in Act enabled Union Government
to increase the authorized capital of
NABARDfrom Rs. 5,000 crore to Rs.
30,000 crore.
Transfer of the RBI’s share to the central
government – Under the 1981 Act, the
central government and the RBI together
must hold at least 51% of the share capital of
NABARD. The Bill provides that the central
government alone must hold at least 51%
of the share capital of NABARD.

20. THE NABARD (AMENDMENT) BILL, 2017
(PASSED IN 2018)
Micro, small and medium enterprises (MSME) –
Under the 1981 Act, NABARD was responsible for
providing credit and other facilities to industries
having an investment of upto Rs 20 lakh in
machinery and plant. The Bill extends this to
apply to enterprises with investment upto Rs 10
crore in the manufacturing sector and Rs five
crore in the services sector.
Further, banks providing loans to small-scale, tiny
and decentralised sector industries are eligible to
receive financial assistance from NABARD. The
Bill extends these provisions to the MSME.

21. CONTRIBUTION OF THE NABARD IN
INDIAN GROWTH
Refinance – Short term and long term Loans –
Crop loans are extended to farmers for crop
production by financial institutions.
Rural Infrastructure Development Fund- for
supporting rural infrastructure projects.
Long-Term Irrigation Fund (LTIF)
NABARD Infrastructure Development
Assistance (NIDA) to complement RIDF.
Warehouse Infrastructure Fund (WIF)

22. CONTRIBUTION OF THE NABARD IN
INDIAN GROWTH
Direct Lending to Cooperative Banks
Kisan Credit Card Scheme for Farmers –
designed by NABARD in association with the
RBI in 1998 for providing crop loans.
Tribal Development – the Tribal Development
Programme
Umbrella Programme on Natural Resource
Management (UPNRM) in 2007, works
at enhancing investments in rural
areas, creating business opportunities and
enabling rural communities to
sustainably utilise their natural resources.

23. CONTRIBUTION OF THE NABARD IN INDIAN
GROWTH
Microfinance Sector – NABARD had launched
the SHG-Bank Linkage Programme in 1992. Over 23
lakh SHGs were credit-linked during 2017-18 financial
year.
E-Shakti – launched in 2015 in a bid to digitize SHGs
Skill Development – Promoting an entrepreneurial
culture among the rural youth and encouraging them
to start enterprises in the rural off-farm sector has
been NABARD’s strategy for over three decades.
Marketing Initiatives – For providing marketing
opportunities to rural artisans and producers,
NABARD has traditionally facilitated their participation
in exhibitions across the country.
Producer Organizations Development Fund (PODF)
for POs & PACS

24. PRODUCER ORGANISATION (PO) – It is a legal
entity formed by primary producers, viz. farmers,
milk producers, fishermen, weavers, rural artisans,
craftsmen. A PO can be a producer company, a
cooperative society or any other legal form which
provides for sharing of profits/benefits among the
members.
PRIMARY AGRICULTURAL CREDIT SOCIETY
(PACS) – It is a basic unit and smallest co-
operative credit institution in India. It works on
the grassroots level (gram panchayat and village
level). It provides credit to farmers in the form of
term loans and recovers the amount after
harvesting of crop from the cultivator.

25. CHALLENGES TO THE NABARD
• Cost of financing by NABARDhas gone
up since market borrowings of NABARD
add up to 80 per cent of its resources.
• The north-eastern stateshave been
getting little share of the NABARD’s
credit funds. The northeast gets 1% of the
credit, leading to farmers trapping in the
net of money-lenders.
• The penetration of banks in insurgency-
hit statesand areas is less and it should
ramp

27. NON-BANKING FINANCIAL INSTITUTIONS
(NBFIs)
A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act,
1956 engaged in the business of loans and
advances, acquisition
ofshares/stocks/bonds/debentures/securities
issued by Government or local authority or other
marketable securities of a like nature.
NBFI
Primary Dealers
AIFI
EXIM
NABARD
SIDBI
NHB
NBFC

28. NON-BANKING FINANCIAL COMPANIES (NBFCs)
A NBFC is a company registered under the
Companies Act, 1956 engaged in the business of
loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued
by Government or local authority or other
marketable securities of a like nature.
NBFC does not include any institution whose
principal business is that of agriculture activity,
industrial activity, purchase or sale of any goods
(other than securities) or providing any services and
sale/purchase/construction of immovable property.

29. NON-BANKING FINANCIAL COMPANIES
(NBFCs)
NBFCs provides financial services without
meeting the legal definition of a bank.
NBFCs have broadened and diversified the
range of products and services offered by a
financial sector.
The RBI has decided to merge three categories
of NBFCs into a single category to provide
greater operational flexibility to non-banking
lenders.

30. Systemically Important NBFCs NBFC
whose asset size is of Rs. 500 cr or more
are considered as systemically important
NBFCs. Example. Power Finance
Corporation Limited (PFCL), Rural
Electrification Corporation Limited (RECL),
IL&FS, etc.
NBFC Classified into
Asset Finance Companies
Investment Companies
Loan Companies

31. HOW NBFCS ARE DIFFERENT FROM BANKS
They can only accept time deposits and not
demand deposits.
NBFCs do not form part of the payment &
settlement system & cannot issue cheques to its
customers.
No deposit insurance facility of Deposit Insurance
and Credit Guarantee Corporation of India is
available to depositors of NBFCs, unlike in case of
banks.
In general, an NBFC is not required to maintain
Reserve Ratios. However, deposit taking
NBFCs are required to maintain at least 15% of
its public deposits as liquid assets.
NBFCs can deposit depositors’ money in the
share market unlike banks.

32. SIGNIFICANCE OF NBFCs
Mobilization of funds/resources
Capital formation
Employment generation
Development of financial market
Provision of long term credit
Attracting foreign grants

33. Parameters Commercial bank NBFCs
Registration
Banking Regulation Act
1949
Companies act 1956
Supervision
RBI
Varies: Mutual funds-
SEBI, Insurance
Company – IRDAI etc
Entry capital INR 500 cr.
INR 5cr for Micro-
Finance, 2 cr for others;
200 cr. For reinsurer etc.
Investment
They can keep depositor’s
money in RBI approved
securities but not in
shares directly.
Can invest client’s money
in the share market. E.g.
Mutual Funds, Insurance
Companies.
NBFCs ARE DIFFERENT FROM BANKS IN FOLLOWING MANNER –

34. Parameters Commercial bank NBFCs
Loan Rate
Decided as per RBI’s
methodology from time to
time (BPLR, MCLR and now
External Benchmark
Lending rate)
Varies & depends on nature
of business
Recovery
Loan recovery powers
under SARFAESI Act.
Only Housing Finance
Companies have
SARFAESI powers. Gold
Loan company can auction
gold
Consumer
Complaints
Redressal
RBI’s Ombudsman, Bank’s
Internal Ombudsman
RBI’s separate
Ombudsman for NBFCs
starting the NBFC-D in
2018.
NBFCs ARE DIFFERENT FROM BANKS IN FOLLOWING MANNER –

35. Parameters Commercial bank NBFCs
Payment and
Settlement system
of the RBI
Integral part of system. Not a part of the system.
Foreign Investment
Allowed up to 74% for
private sector banks
Allowed up to 100%
Prudential Norms CRR, SLR, applicable
NBFC-D: SLR required but
RBI can prescribe different
slabs / norms. CRR not
applicable on any NBFC.
Deposit Insurance
Facility
Available Not available
NBFCs ARE DIFFERENT FROM BANKS IN FOLLOWING MANNER –

36. CIC – ND – SI is a NBFC
With asset size of Rs 100 cr & above.
Holds not less than 90% of its net assets in the form of
investment in equity shares, preference shares,
bonds, debentures, debt or loans in group companies.
It does not trade in its investments in shares, bonds,
debentures, debt or loans in group companies.
It accepts public funds.
Systemically important NBFCs (NBFCs-SI) are those
with an asset size of Rs 500 crore or more.
NBFCs-ND are categorized into two broad categories
viz.,
NBFCs-ND (those with assets of less than Rs. 500 crore)
and
NBFCs-ND-SI (those with assets of Rs. 500 crore and
above).

37. NBFC Characteristics
Investment and
Credit Company
New category in 2019 – by merging
previous NBFC categories viz. Asset
Finance Companies, Loan
Companies, Investment Companies.
E.g. SREI Equipment Finance
Core Investment
Company (CIC)
They do long term investment in
Companies. E.g. Tata / Birla /
Reliance Capital & Infrastructure
Leasing & Financial Services
Limited(IL&FS).
IL&FS is owned by SBI, LIC and
Corporates from Japan and Abu
Dhabi. 2018- In controversy because

38. NBFC Characteristics
Asset Reconstruction
Companies (ARC)
They buy bad loans / NPA from Banks &
other NBFCs, and try to salvage value from
the underlying assets.
E.g. Anil Ambani’s Reliance ARC.
Infrastructure Finance
Company (IFC) Infrastructure
Debt Fund (IDF)
Give loans for infrastructure projects.
E.g. Rural Electrification Company ltd.
(REC): PSU under Power Ministry.
L&T IDF, Kotak IDF, IDFC IDF (“IDFC First”
has separate license for Bank).

39. NBFC Characteristics
Factoring
Companies
They lend short term money to
clients against their invoices /
accounts receivable. E.g. IFCI
Factors, Siemens Factoring.
Gold Loan
Companies
e.g. Muthoot gold loan,
Manappuram Gold. RBI
decides their Loan to Value
ratio.
Micro Finance
Institutions
MFI regulated by RBI and
Ministry of Corporate Affairs

40. NBFC Characteristics
MUDRA (2015)
A non-deposit taking NBFC owned
by SIDBI. It gives indirect loans to
Micro enterprises through PM Mudra
Yojana.
Fintech
Companies-
P2P Lenders
Similar to Olx and Quikr connecting
sellers of second hand goods with
buyers, the P2P lending websites
connect borrowers and lenders. E.g.
Faircent.com, Cashkumar.com

41. NBFC Characteristics
Fintech
Companies-
Account
Aggregators (AA)
They manage information
about a customer’s financial
assets & display it to him or
to a third party (like loan
giver, credit rating company,
App like Google play etc.)
Residuary NBFCs
Any NBFC that is not
regulated by any other
regulator- falls under RBI’s
purview

42. Mutual Funds (MF)
They pool clients’ money and MF-
manager invests it in shares/bonds
using his own discretion & expertise.
E.g. SBI’s Shariah Equity Mutual
Fund
Stock Broker
They help clients buy – sell shares
and bonds (debentures) depending
on his instructions E.g. India bulls,
Karvy etc.
Real estate investment
trusts (REITs) and
Infrastructure
investment trusts
(InvITs)
Pool & invest money in real estate /
infra projects e.g. IRB.
NBFCs REGULATED BY SEBI

43. Investment Banks:
(US term) &
Merchant Banking
Companies: (UK
term)
Merger & Acquisition, Wealth
Management of rich people:
E.g. Kotak Mahindra,
Citigroup, Bank of America,
DSP Merrill Lynch, Morgan
Stanley, SBI capital (separate
license)
Venture Capital Fund
VCF
Help start-up companies via
equity finance e.g. IFCI.
NBFCs REGULATED BY SEBI

44. IRDAI
Insurance Regulatory and Development Authority (IRDAI) regulates:
1) Life Insurance companies e.g. LIC, HDFC Standard Life Insurance
2) General (Non-Life) insurance companies e.g. IFFCO-Tokio General
Insurance.
PFRDA
Pension Fund Regulatory and Development Authority (PFRDA)
regulates all Pension Funds, except EPF & other statutory funds.
National Housing
Bank (NHB)
Housing Finance Companies such as DHFL, Muthoot Housing finance
etc. (endowed SARFAESI Powers). They were regulated by NHB but
after Budget-2019, this category was handed over to RBI for
regulation.
Ministry of
Corporate Affairs
1.NIDHI Companies: Mutual benefit club, only members can borrow.
2. Microfinance Companies
State Registrar of
Chit Funds
Chit fund is a type of collective investment scheme with monthly
contributions & borrowing by contributing members e.g. Shriram Chits.
(Detailed in financial inclusion)
NBFCs REGULATED BY OTHERS

45. NBFC-D NBFC-ND
Deposit accepting NBFC
Incorporated under Companies act,
2013
Allowed to accept/renew public
deposits for a minimum period of 12
months and maximum period of 60
months.
Examples: Loan companies,
Investment companies, Asset
Finance Companies
Non-Deposit taking NBFCs
Permitted only to lend and
not take any public deposits.
E.g.: NBFC-MFI: NBFC
Micro Finance Institutions
NBFCs CLASSIFIED INTO TWO CATEGORIES:
On the basis of deposits :

46. REGULATIONS RELATING TO DEPOSIT
TAKING NBFCs
―Allowed to accept and/or renew public
deposits for a minimum period of 12
months and maximum period of 60
months.
―Cannot accept demand deposits (i.e., the
saving and current accounts).
―Cannot offer interest rates higher than the
ceiling rate prescribed by the RBI.
―Cannot offer gifts, incentives or any other
additional benefit to the depositors.

47. REGULATIONS RELATING TO DEPOSIT TAKING
NBFCs
―Should have minimum investment grade
credit
―Their deposits are not insured.
―The repayment of deposits by NBFCs
is not guaranteed by RBI.
―Need to maintain Capital Adequacy
Ratio (CAR) norm as prescribed by the
RBI.

48. EXEMPTED NBFCs TO ELIMINATE DUAL
REGULATION
Venture capital fund, merchant bank, stock
broking firms (SEBI registers and regulates
them);
Insurance company (registered and regulated
by the IRDA);
Housing finance company (regulated by the
National Housing Bank);
Nidhi company (regulated by the Ministry of
Corporate Affairs under the Companies Act,
1956);
Chit fund company (by respective state)

49. CATEGORIES OF NBFCs
Asset Finance Company – Principal business
is financing physical assets such as
automobiles, tractors, housing etc.
Investment Company –Principal business is
acquisition of securities.
Loan Company –Principal business of
providing loans
Infrastructure Finance Company –NBFC that
deploys at least 75% of its total assets in
infrastructure loans
Infrastructure Debt Fund –NBFC to facilitate
the flow of long term debt into infrastructure
projects
NBFC-MFI – Provides Microfinance

50. CONTEMPORARY PROBLEMS WITH NBFCs
Multiple regulatory bodies – RBI doesn’t regulate
all the NBFC. Other institutions such as NHB, SEBI,
IRDAI, etc. are also involved depending on the type of
NBFC.
Difficulties in access to credit – There is a reversal of
interest rate cycle as interest rates are now going up
both domestically and also in the international market.
Asset-liability mismatch – in the operations of NBFCs
as these firms borrow funds from the market for short
term and lend it for long term.
It has led to a situation where the NBFCs are facing a
severe liquidity crunch in the short term.
Mutual fund among the biggest fund providers to NBFCs
via commercial papers and debentures. Now these
investors are getting reluctant to lend post the IL&FS
crisis.

51. CONTEMPORARY PROBLEMS WITH NBFCs
Riskier Lending Pattern – NBFCs are less cautious
while lending. For instance, NBFCs have grown their
portfolio of small and micro loans in a big way where
there are risks of lack of credit history, scale and
historically high NPAs.
The unsecured loan segment is also on the rise in the
NBFC segment.
Cascading effect of IL&FS default – Default followed
by downgrade of IL&FS recently has created a
liquidity squeeze for the entire non-banking financial
company (NBFC) sector.
Delayed Projects – Many infrastructure projects
financed by NBFCs are stalled due to various reasons
like delayed statutory approvals, problems of land
acquisition, environmental clearance, etc. which has
impacted their financial health.