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What are Non-Banking Financial Institution

Non-banking Financial Institutions are the institutions that provide banking services without meeting the legal definition of a bank such as holding a bank license. There are a number of non-banking financial institutions which include investment banks, leasing companies, insurance companies, investment funds, financial firms, etc. A non-banking financial institution offers a range of financial services. Investment banks for services to corporations which include the underwriting of debt and share issues, securities trading, investment, corporate advisory services, derivate transactions,

non banking financial institutions

Financial Institutions insurance companies offer protection against specific uses for which an insurance premium is paid. Mutual Funds Act at having institutions in which investors are able to invest their funds in a collective investment and receive interest income in return. Financial Institutions act as brokers or dealers in facilitating the transactions in financial assets. Likewise, leasing companies facility the purchase of equipment, real estate financing companies make capital available for real estate.

Following are the business in which Non-Banking Financial institutions are engaged:

  1. Loans and advances
  2. Acquisition shares/stocks/bonds/debentures/Securities.
  3. Leasing
  4. Hire-purchase
  5. Insurance business

Importance of non-banking financial institutions

NBFIs provide liquidity and safety of financial assistance and help in transferring from unlimited lenders to ultimate borrowers for productive purposes. The importance of NBFIs can be explained under the following points:

1. Reduce Hoarding

NBFIs how to reduce hoardings. By bringing the ultimate lenders ( or savers) and ultimate borrowers together, NBFIs reduced the hoarding of cash by the people.

2. Help to the Household sector

The household Sector release on NBFIs for making profitable use of its surplus funds and also to provide customers credit loans, Mortgage loans, etc. Thus department saving and investment habits among ordinary people.

3. Help the business sector

NBFIs also help the non-financial business sector by financing it through loans, Mortgages, purchase of bonds, shares, etc.

4. Provide liquidity

NBFIs provide liquidity when they convert an asset into cash easily and quickly without loss of value in terms of money. When NBFIs issue claims against themselves and supply funds they always try to maintain their liquidity.

5. Brokers of loanable funds

NBFIs play an important role as brokers of loanable funds. They act as intermediaries between the ultimate saver and the ultimate investors. They sell indirect securities to savers and purchase primary securities from investors. Indirect securities are the short-term liabilities of financial intermediaries.

6. Reduce Risks

When the non-bank financial intermediaries convert debt into credit they reduce the risk to the ultimate lenders. First, the credit liabilities on themselves by selling indirect securities to the lenders. Then they buy primary securities from borrowers of funds. So by acting as intermediaries between the lenders and borrowers of funds. So by acting as intermediaries between the lenders and borrowers of funds, NBFIs take the risk on themselves and reduce it on the ultimate lenders.

7. Investment of funds

NBFIs exit because they want to earn profit by investing the mobilized savings. Different financial intermediaries follow different investment policies. For instance, mutual savings banks invest in mortgages, and insurance companies invest in bonds and securities. Thus mobilize public savings, invest them, and thereby help in capital formation and economic growth.

8. Economic of scale

NBFIs specialized in trading large financial assets and thus have lower costs in buying and selling securities. The employee export staff inefficient machinery and equipment, thereby increasing productivity in the transfer of funds.

9. Bring stability to the capital market

NBFIs deal in a variety of assets and liabilities. If there were no NBFIs, there would be frequent changes in the demand and supply of financial assets and their relative yields, thereby bringing instability in the capital market. As NBFIs function within a legal framework and set rules, they provide stability capital market and benefit and frames throat diversified Financial Services.

10. Help in the growth process of the economy

NBFIs help in the growth process of the economy. The Intermediate between ultimate lenders who are savers and ultimate borrowers Who are investors. By performing this function, they discourage holding by the people, mobilize their Savings and lend them to investors.

What are the differences between banks and non-banking financial institutions?

The distinction between banks and non Banking Finance institutions

Banking Financial Institutions and non-banking Financial Institutions. A bank is known as a financial intermediary that acts as a middleman between depositors or suppliers of funds and lenders who are the uses of funds.

2. The main tax of a banking financial institution is to accept deposits and then to use those funds to offer loans to its customers. A non-banking financial institution offers a range of financial services.

3. Main difference between the two types of Financial Institutions is that banking Financial Institutions can accept deposits into various Savings and demand deposit accounts, which cannot be done by a non-banking financial institution.

4. The primary purpose of depositing funds in banks is convenience interest income and safety. whereas the primary purpose of investing funds in non-banking Financial Institutions is to gain additional income.
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