No Cheque Facility in NBFCs

Non-Banking Financial Companies (NBFCs) form an integral part of the Indian financial system by supplementing banks in providing credit, investment, and financial services. However, a fundamental distinction between banks and NBFCs is that NBFCs do not have cheque-issuing facilities. This structural restriction has important implications for banking operations, financial intermediation, regulatory oversight, and the overall functioning of the Indian economy.

Conceptual Understanding of NBFCs

NBFCs are financial institutions registered under the Companies Act and regulated by the Reserve Bank of India. They are engaged in activities such as loans and advances, asset financing, leasing, hire-purchase, investment in securities, and infrastructure financing. Unlike banks, NBFCs cannot accept demand deposits and are not part of the payment and settlement system.
The absence of cheque facility directly follows from this classification. Since NBFCs do not maintain current accounts or savings accounts that are payable on demand, they are legally prohibited from issuing cheques drawn on themselves.

Meaning of Cheque Facility in Banking

A cheque is a negotiable instrument drawn by a customer on a bank, directing the bank to pay a specified amount to the bearer or a named person. The cheque facility is closely linked to:

• Acceptance of demand deposits
• Participation in the clearing house mechanism
• Provision of payment and settlement services

Commercial banks, by virtue of their role in deposit mobilisation and payments, are authorised to issue cheque books to their customers. NBFCs, in contrast, operate primarily as credit intermediaries rather than payment intermediaries.

Regulatory Basis for Absence of Cheque Facility in NBFCs

The regulatory framework governing NBFCs explicitly restricts them from providing cheque facilities. The rationale lies in prudential regulation and financial stability considerations.
Key regulatory reasons include:

• No demand deposits: NBFCs are not permitted to accept deposits payable on demand, which are essential for cheque-based transactions.
• Limited role in payments system: NBFCs are excluded from the clearing and settlement infrastructure operated under the supervision of the central bank.
• Risk containment: Allowing NBFCs to issue cheques could expose the financial system to liquidity and settlement risks, given their different balance sheet structures.

These restrictions ensure a clear demarcation between banking and non-banking financial activities.

Differences Between Banks and NBFCs in This Context

The absence of cheque facility highlights broader structural differences between banks and NBFCs.

• Banks can accept demand deposits, issue cheques, and create money through credit creation.
• NBFCs cannot accept demand deposits and therefore cannot issue cheques or participate directly in the payments system.
• Banks are integral to monetary policy transmission, while NBFCs primarily support credit delivery to specific sectors.

This distinction preserves the stability and efficiency of the financial system by assigning specialised roles to different institutions.

Implications for the Banking System

The non-availability of cheque facilities in NBFCs reinforces the central role of banks in India’s payment infrastructure. It ensures that banks remain the primary custodians of transactional deposits and settlement mechanisms.
From a systemic perspective:

• Banks retain control over payment flows, which aids effective monetary management.
• The clearing and settlement process remains concentrated within well-regulated institutions.
• Risks associated with payment failures are minimised due to stringent banking regulations.

Thus, the restriction supports the sound functioning of the banking system.

Impact on NBFC Operations and Business Model

NBFCs operate with a different business model that focuses on niche markets and specialised lending. The absence of cheque facility shapes their operational strategies.
Key operational implications include:

• Reliance on electronic transfers, auto-debit mandates, and digital payment modes for fund collection and disbursement.
• Greater emphasis on credit appraisal, risk pricing, and asset-liability management rather than transaction services.
• Strong dependence on banks for settlement accounts and liquidity management.

Rather than being a limitation, this structure allows NBFCs to concentrate on credit delivery and financial innovation.

Role in Financial Inclusion and Credit Expansion

Despite not offering cheque facilities, NBFCs play a crucial role in expanding financial access. They cater to segments often underserved by banks, such as small businesses, informal sector workers, rural borrowers, and first-time credit users.
In the Indian economy:

• NBFCs complement banks by extending credit where traditional banking penetration is limited.
• They support consumption, housing, infrastructure, and micro-enterprises.
• Digital payment systems have reduced dependence on cheques, making this restriction less significant in practical terms.

As digital finance expands, the absence of cheque facilities becomes less of a constraint.

Implications for the Indian Economy

At a macroeconomic level, the prohibition on cheque facilities for NBFCs helps maintain financial discipline and systemic clarity. It ensures that payment creation and settlement remain under tight regulatory oversight.
Economic implications include:

• Clear institutional boundaries that enhance financial stability
• Reduced systemic risk from unchecked deposit-taking
• Efficient allocation of roles between banks and NBFCs

This framework enables balanced growth of the financial sector while safeguarding depositor interests.

Relationship with Digital Payments and Modern Banking

With the rapid adoption of electronic payment systems, the relevance of cheques in everyday transactions has declined. NBFCs actively use digital platforms, payment gateways, and automated clearing systems through banking channels.
This shift has:

• Reduced the operational disadvantage of not having cheque facilities
• Enhanced transaction speed and transparency
• Supported India’s transition towards a digital economy