Ans: Non-Banking Financial Institutions (NBFI’s): NBFI’s include such institution such as life-insurance companies, mutual savings bank, pension funds, building societies etc. which are doing diverse business. These financial institutions are thus a heterogeneous group of financial institutions other than commercial banks and co-operative societies. They include a wide variety of financial institutions, which raise funds from the public, directly or indirectly, to lend them to ultimate spenders. The growth of NBFI’s has been much faster than that of commercial banks. The main reason for this is that, in comparison to commercial banks, NBFI’s pay higher interest ratio to the depositors and change lower interest rate from the borrowers. Thus, they are competing with the commercial bank for public savings and as sources of Loanable funds.
Characteristics of Non-Banking financial institutions:
1. Non-Banking Financial institution is a specialised financial institution which provides medium and long term finance to business units.
2. It is a multi-purpose financial institution and not just a term-lending institution.
3. NBFI accept deposits repayable on the expiry of specified time and certain NBFI receive funds from government.
4. The liabilities of NBFI are not accepted as money as a means of payment of debt.
5. NBFIs deal with medium and long-term funds in the capital market.
6. NBFIs are heterogeneous group doing diverse business in the financial system of the economy.
7. People invest their surplus fund with NBFI for earning income rather than safety and liquidity.
8. NBFIs supply term finance for acquiring fixed assets.
9. Mobilisation of savings by the NBFIs is highly affected by the interest rate. NBFI are regulated by their special statutes.
10. Financial assistance is provided by a NBFI not only to the private sector but also to the public sector undertakings.
11. One of its major aims is to promote the saving and investment habit in the community.
12. Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
13. Its motive is to serve the public interest. It works in the general interest of the nation rather than to make profits. A development bank is motivated by social profits.
