Before talking about NBFC, Do you remember the economic crisis of 2009? If you do not know, then know that businesses worldwide were stuck due to a lack of finance in this financial crisis. And even the banks that financed these businessmen had to struggle to save themselves.
We know that banks cannot go to every customer and inquire about their financial requirements, thus creating problems for those who don’t know how banks work. And one of the reasons for this is that there has been a massive gap in credit availability in India. And this is where the role of a non-banking financial company (NBFC) comes into play. NBFCs played an essential role in meeting the financial needs of customers who did not have access to banks and their services.
What is NBFC (Non-Banking Financial Company)?
NBFC acts as an intermediary in the finance business. In simple words, NBFCs are those companies which are registered under the Companies Act 1950-2013. The Reserve Bank of India (RBI) gives licenses to NBFCs.
For example, on TV or in the newspaper, you will hear the names of companies like Muthoot Finance, Mahindra & Mahindra Finance, and Bajaj Finance. While taking a phone, buying any electronic item, or buying a car, you must have often heard that these companies can provide loans to you. But these are not banking companies. So these companies, which work like banks in some ways, are called NBFCs.
NBFC company gives the loan and gets you to deposit money in insurance or SIP. It also works to provide loans to small businesses in the organized or unorganized sectors and caters to the growing financial needs in the corporate world.
But at the same time, NBFCs also have some limitations. They cannot finance any industrial activity, agricultural activity, purchase or manufacture, and sale of immovable property.
History of NBFCs
In India late 1950s and early 1960s, various banks failed due to which a large number of ordinary depositors lost their deposits. At present, it has been noted by the Reserve Bank of India that deposit acceptance activities are being carried out by NBFCs. Although they were not as systemically important as banks, their regulation was initiated by the Reserve Bank of India as they were likely to cause harm to their depositors. Thus, after 1963 these institutions were regulated by the Reserve Bank of India.
In the early times, NBFCs were small organizations and did not exert much influence in the financial industry. But as their scope gradually increased, in December 1964, the Reserve Bank of India amended the RBI Act 1934 and introduced a new chapter to take NBFCs into effect.
The role of NBFCs was at its peak in 1992 after globalization and liberalization. These companies performed well even in the heavy recession of 2009 and today the revenue of NBFCs is more than the revenue of many banks.
Types of NBFCs?
In India, they are categorized by various criteria such as:
Based on liability:
- Non-deposit acceptance (type 1): These NBFCs do not accept cash deposits. Which can further be divided into systemically important NBFCs and other NBFCs.
- Deposit accepting NBFCs: These types of NBFCs do accept cash deposits.
Based on their business activities:
- Credit and investment companies (such as loan companies, asset companies, and investment companies.)
- Microfinance companies.
- Mortgage guarantee company.
- NBFC-NOFHC (Non-operative financial holding company)
- Infrastructure debt fund.
- Housing Finance companies.
What are the functions of Non-Banking Financial Companies (NBFCs)?
India’s financial sector is enormous. It comprises commercial banks. And the NBFCs offer various banking services without banking licenses, such as:
- To give a loan or advance.
- To lease or trade financing.
- Asset management.
- Trading money in market instruments.
- Managing stock portfolios.
- Investing in products.
- retail finance
- Hiring or Purchasing.
- Investing money in insurance or chat business.
- To make acquisitions in securities such as shares, bonds, mutual funds, debentures, and many more such instruments.
Role & Growth of NBFCs.
India’s capital market has seen significant ups and downs over the past few decades. As the trend of the people in the capital market has grown, the volume of transactions has also increased tremendously.
In such a situation, financial institutions like merchant banks, mutual funds and venture capital companies are the most important institutions that have grown very fast.
In addition, NBFCs often play a leading role in providing innovative financial services to the medium, small and micro industries that we know as MSMEs, best suited for their business needs.
We know that more than 60 per cent of India’s population comes from rural areas and people are not in direct contact with the bank due to a lack of education. NBFCs fill this gap. He takes all the facilities to the people’s homes and provides them with the necessary financial assistance.
Even if the bank cannot give loans to everyone, there may be some reasons behind this. The role of NBFCs also cannot be overlooked in providing assistance and guidance during emergencies which is why NBFCs can be the best option for you after the bank.
Impact of NBFCs on the Indian economy.
India’s economy has taken a long time to emerge since Corona. India’s development is founded on five pillars: economy, infrastructure, a technology-based system, vibrant demography, and demand.
We recognize the importance of NBFCs in the Indian economy. In the economy, NBFCs play a critical role in infrastructure, wealth management, and job creation while focusing on the poorest members of society.
Since the beginning of 2019, the NBFC sector has encountered numerous hurdles. The RBI recently introduced adjustments to the rules governing NBFC consumer loans. Some NBFCs’ licenses have also been revoked. This means that the Reserve Bank of India and the Indian Finance Ministry closely monitor NBFCs. However, considering the importance of NBFCs to the Indian economy, positivity must be maintained. With the future of NBFCs in mind, you may recall that it was decided to make India a $5 trillion economy by 2024.
The restrictions for NBFCs have recently been strengthened. NBFCs use cutting-edge technology to develop the most excellent and innovative goods.
In India, there are approximately 10,000 NBFCs, with thousands more being registered each year. In such a scenario, NBFCs are prepared to deploy artificial intelligence and machine learning techniques to assist lenders in assessing client sentiment and maintaining alternate credit rating models.
It can be concluded that NBFCs play a crucial role in the economy of India. Be it the banking sector, financial services or the insurance industry.
Also, if we talk about the function of NBFC, it can be called the growth base for Indian Manufacturing and Infrastructure Development. Hope you got to learn something new from this article.