UNIT-III

Non-banking financial institutions

 Evolution, control by RBI and SEBI.
 A perspective on future role,
 Unit Trust of India and Mutual Funds,
 Reserve bank of India Framework for/Regulation of Bank Credit .
 Commercial paper: Features and advantages, Framework of Indian CP
Market, effective cost/interest yield

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Introduction to Non-Banking
Financial Institutions (NBFIs)

• Non-Banking Financial Institutions

(NBFIs) provide financial services
without a banking licence.

• They fill gaps left by banks, offering

services in housing finance,
microfinance, and asset financing.

• NBFIs play a key role in economic

development by offering credit to
underserved sectors.

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Key Functions of NBFIs

● Credit Provision: ● Microfinance: NBFIs ● Leasing and Hire- ● Investment

NBFIs offer credit Purchase Services: Services: Certain
to individuals and play an essential role Many NBFIs NBFIs also offer
businesses, in providing specialise in investment
particularly in microfinance to low- providing asset products, including
sectors where financing through mutual funds,
traditional banks income individuals leasing and hire- insurance, and
may have limited and rural areas. purchase wealth
presence. agreements. management.

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Regulatory Framework for NBFIs in India

• Regulated by the Reserve Bank of

India (RBI) and the Securities and
Exchange Board of India (SEBI).

• Ensures financial stability and

consumer protection.

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 SEBI Control Over NBFIs
Entities/Activities
Regulatory Aspect Details Purpose Impact
Covered
SEBI regulates NBFIs that - Ensure investor
- Prevent misuse of
operate CIS, pooling - CIS Operators protection and
investor funds
Collective Investment funds from investors transparency
Schemes (CIS) - Mandated registration
- Maintain control over - Reduction in fraudulent
and compliance with - Financial Asset Investors
collective investments schemes
SEBI’s CIS regulations
SEBI regulates mutual
funds and asset - Safeguard investors’ - Enhanced investor
- Mutual Fund Companies
management companies interests confidence
(AMCs)
- Compliance with SEBI
Mutual Funds and - Asset Management - Transparency in - Stronger governance of
(Mutual Funds)
AMCs Companies (AMCs) operations mutual funds
Regulations, 1996
- Covers aspects like
investor protection, - Ensure responsible fund - Mitigated risk through
transparency, and risk management strict norms
management
SEBI regulates venture - Ensure fair management - Encourages start-up and
capital firms and AIFs that - Venture Capital Funds of investment and exit SME funding through
provide equity funding strategies equity
- Compliance with SEBI
Venture Capital and
regulations regarding - Alternative Investment - Transparency and - Increases formal funding
Alternative Investment
disclosure and fund Funds (AIFs) accountability channels
Funds (AIFs)
management
- Investment limits and
- Protection of investors - Strengthens venture
diversification
and fund credibility capital ecosystem
requirements enforced
SEBI mandates stringent
compliance and disclosure - All NBFIs involved in - Maintain transparency in - Periodic reporting
for NBFIs engaged in capital markets financials, fund utilisation ensures better governance
Compliance and capital market activities
Disclosure Norms - Periodic reporting on
- Ensure accurate and
financials, investment - Increased market
timely investor
strategies, and fund integrity
information
management
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SEBI ensures investor - Improved investor
Investor Education and - All entities in capital - Educate investors on
education through various awareness and decision-
Protection markets risks and rights
initiatives making
 The Future Role of Unit Trust of India (UTI) and Mutual
Funds

 UTI and Mutual Funds (MFs) play a critical role in India's financial
market by offering diverse investment avenues for retail and
institutional investors.

 Looking ahead, these entities will evolve with advancements in

technology, financial literacy, regulatory reforms, and a focus on
sustainable investments.

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Increased Financial Inclusion

• UTI and mutual funds can

significantly contribute to financial
inclusion by targeting underserved
segments.
• They will focus on rural populations
and low-income groups with simple,
affordable investment products.

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Digital Transformation

• The expansion of digital platforms

and fintech innovations will
transform UTI and mutual funds.
• They will leverage mobile apps, robo-
advisors, and blockchain for efficient
transactions and personalised
portfolios.

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Sustainability and ESG (Environmental,
Social, Governance)

● The global trend towards responsible investing will

push UTI and mutual funds to offer more ESG-
compliant funds.
● Sustainability and ethical business practices will
become a core focus.

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Enhanced Regulatory Framework

• SEBI’s evolving regulations will

continue to enhance transparency,
governance, and investor protection.
• UTI and mutual funds will prioritize
compliance to ensure secure
investments.

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Education and Awareness

● Investor education will be a key future focus for UTI

and mutual funds.
● They will invest in financial literacy programs to help
individuals make informed investment decisions.

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Tabular Representation: UTI and Mutual Funds - Meaning, Features, and
Future Prospects
Aspect Unit Trust of India (UTI) Mutual Funds (MFs) Future Prospects

UTI is India's first mutual fund, MFs pool money from multiple investors
Both are expected to contribute to greater
Meaning established in 1963 by the Government to to invest in securities such as stocks,
financial inclusion.
mobilise small savings. bonds, and money market instruments.

- Diverse fund categories (equity, debt,

- Government-backed entity - Increased product diversification
hybrid)
Features - Focus on retail investors - Digital platform integration for easier
- Professionally managed
- High market trust due to legacy access
- Investor-friendly

- Growth in ESG funds

UTI Equity Fund, UTI Banking & PSU HDFC Mutual Fund, ICICI Prudential
Examples - Expansion into international and
Debt Fund MF, SBI Mutual Fund
alternative asset classes
- Stricter regulatory framework to
Regulated by SEBI after the UTI Act Regulated by SEBI under the SEBI
Regulation enhance investor confidence and market
2002 was repealed (Mutual Funds) Regulations, 1996
transparency
- Targeting underserved populations
Target Investors Primarily retail investors Retail and institutional investors through financial literacy and low-cost
products

- Equity funds
- New financial products leveraging
- Primarily debt and equity funds - Debt funds
Product Range fintech advancements (e.g., robo-
- Government securities - Hybrid funds
advisory, AI-driven funds)
- Index funds

- Continued innovation in risk

Varies by fund type (equity: high risk,
Risk Profile Moderate risk management tools and real-time advisory
debt: low risk)
services
Role in Indian Played a crucial role in developing Major contributor to household savings - Deepened role in sustainable
Economy India’s capital markets and capital formation development and wealth creation

Initially lacked protection, leading to Governed by strong SEBI norms - Further improvements in governance
Investor Protection
reforms under SEBI ensuring transparency and disclosure and compliance measures
- Keeping up with technological
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Future Challenges
need to modernise operations preferences, regulatory compliance - Meeting growing demand for ethical
investments