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Indian Financial System

Notes 7. They have to achieve a minimum credit rating from any one of the three existing credit
rating agencies.

8. A ceiling of 15 per cent interest as also the ceiling on the quantum of deposits for NBFCs
(other than nidhis) have been removed, subjected to compliance with the RBI directives
and guidelines.

8.5.4 Major NBFCs in India

Having talked about the regulation it is important to discuss some of the major NBFCs in India
that operate across the length and breadth of the country in various forms.

Loan Companies (LCs)

The LCs constitute the major part of the NBFC sector, accounting for about 50 per cent of the total
deposits of this sector till now. They are mostly partnership concerns, and their operators are
generally confined to a few places in India like Gujarat and Karnataka. They accept manly fixed
deposits but sometimes, accept call deposits too. Most of these deposits are not insured and are
unsecured, which make it uninteresting for the common depositors. To attract deposits they
sometime offer attractive prizes and provide a higher interest rate which can be as high as 7 to
8 per cent higher than the bank deposits. Since their lending practices are not governed by
scientific principles they bear disproportionate risk to the capital employed. These institutions
also provide other services such as discounting facilities and purchasing of "hundis".

Investment Companies (ICs)

Investment companies are numerically the largest and the most important of the NBFCs. Their
function covers narrow and specialized areas like giving commercial loans, personal loans, etc.
They provide mostly domestic loans and the share of industrial loans is negligible. Most of
these companies have close links and puts them in better position for the task of decentralization
of the financial structure of the country. They charge higher rate of interest than the commercial
banks for the borrowing and also provide higher interest rate for borrowing. They attract
customers due to simple and non-cumbersome procedure as against the banking industry.
These institutions get business because they create liabilities and assets which satisfy in a great
measure non-financial preferences of the lenders and borrowers. As these institutions do not
accept demand deposits they do not compete with the banks in that field.

Hire Purchase Finance Companies (HPFCs)

Hire purchase credit is defined as a system under which term loans for purchase of goods and
services are advanced to be fractionally liquidated through a contractual obligation. The goods
whose purchases are thus financed may be consumer goods or producer goods or they may be
simply services such as air travel, etc. Hire purchase finance in India is provided by large
segment of the market, which includes the seller of the goods and services from their capital, the
banks and specialized institutions. The terms of credit purchase vary from product to product
and on geographical location too. However, the banks follow a common method and they get
these hire purchases secured by covering it with insurance all the time. The volumes of HPFCs
has declined as is recorded in the table 8.2 below:

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