Chit Funds...

1. Group Savings:
• Chit funds involve a group of people saving together, and the accumulated fund is utilized for investments to generate returns.
2. Borrowing from the Fund:
• Members of the chit fund who need funds can borrow from the accumulated pool.
3. Popularity:
• Chit funds are popular, especially in tier II and III towns and rural areas, where banking services may be underpenetrated.
4. Regulation:
• Chit funds are governed by state or central laws, including the Central Chit Funds Act of 1982 and various state chit fund Acts.
5. Regulatory Powers:
• The Securities Laws (Amendment) Act, 2014 grants SEBI new powers to pursue fraudulent investment schemes, including chit funds, and provides guidelines for the formation of special fast-track trial courts.

Both private equity and chit funds represent alternative forms of financing and investment, each with its unique characteristics and regulatory considerations.

Non-Banking Financial Company (NBFC):

1. Definition:
• An NBFC, or Non-Banking Financial Company, is a company registered under the Companies Act, 1956. It engages in various financial activities, including loans and advances, housing finance, acquisition of securities, chit business, etc. However, NBFCs do not accept demand deposits like traditional banks.
2. Exclusions:
• Institutions primarily involved in agriculture and industrial activities are not categorized as NBFCs.
3. Microfinance Companies:
• Some microfinance companies operate as NBFCs, regulated by the RBI. Others may be registered as money lenders or societies. The RBI has introduced a special category for microfinance-focused NBFCs, known as Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI).
4. Non-Banking Financial Company-Factors:
• The RBI introduced a new category called NBFC-Factors. Factoring involves selling invoices (receivables) to a factoring company at a discount. This provides quick cash to the selling corporate while transferring the risk of collecting debt to the factoring company.
5. Forfaiting:
• Forfaiting is a type of factoring specifically related to export-oriented businesses. It involves the purchase of an exporter's receivables at a discount, providing immediate cash to the exporter. The forfaiter, or purchaser of receivables, assumes the responsibility for collecting debt from the importer.
6. Merger of NBFC Categories:
• In 2019, the RBI merged three categories of NBFCs — asset finance, loan companies, and investment companies — into a new category called NBFC-Investment and Credit Company (NBFC-ICC). This move aimed to enhance operational flexibility by transitioning from entity-based regulations to activity-based regulations.

NBFCs play a crucial role in the financial sector by providing diverse financial services, and their regulatory framework is designed to ensure their stability and sound functioning.