STATUS OF NON-BANKING FINANCIAL COMPANY (NBFC)

Last Updated on 26th November, 2024
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Context:

According to rating agency ICRA, a combination of factors such as rising interest rates, regulatory action, and funding scarcity may slow growth in the non-banking financial company (NBFC) sector from 18% in 2024 to 13-15% in the coming year.

What are Non-Banking Financial Companies (NBFCs)?

They are financial institutions that offer similar services to banks, such as loans, credit facilities, investments, and other financial products, but lack a banking license.

They are registered under the Companies Act 1956, and are governed by the Reserve Bank of India (RBI) under the RBI Act of 1934.

Key features of NBFCs

NBFCs do not accept demand deposits, such as savings or current accounts.

They offer loans, leases, hire-purchase financing, and other financial products.

They focus on niche markets like microfinance, vehicle loans, housing finance, and infrastructure development.

They serve rural and semi-urban areas, small and medium-sized businesses, and individuals without formal credit.

NBFCs contribute to financial inclusion

NBFCs fill the credit gap in rural and unbanked areas by offering financial services to underserved sectors such as small businesses, farmers, and individuals without access to traditional banks.

They have played an important role in increasing financial inclusion and promoting the growth of micro, small, and medium-sized businesses (MSMEs).

Market share of NBFCs

The market share of NBFCs has increased over the years and assets under management (AUM) are expected to exceed Rs 50 lakh crore in FY25.

Priority Sector Lending

NBFCs play an important role in priority sector lending, mainly in sectors with limited credit access, such as agriculture and microfinance. They assist in providing loans to underserved sectors, which contributes to the economy's overall growth and development.

What challenges do NBFCs face in the Indian market?

Unlike banks, NBFCs do not have access to low-cost deposits, so they need to borrow from banks or issue bonds. This raises borrowing costs and makes it difficult to compete with banks on interest rates.

Rising credit costs, which are predicted to rise from 2.6% in 2024 to 4% in 2025, are expected to affect their business operations.

NBFCs face complex regulations from various authorities (including RBI, SEBI), which make compliance difficult, especially for those operating in multiple regions.

Regulatory interventions such as increased risk weights for loans and higher compliance requirements contributed to operational challenges.

The limited liquidity in the Indian bond market makes it difficult for NBFCs to raise funds effectively.

Co-lending partnerships with banks support NBFCs in reducing costs and improving credit access for underserved sectors such as agriculture and microenterprises. It creates mutually beneficial models in which risks and rewards are shared.

Way Forward

The government has implemented liquidity support, partial credit guarantee schemes, and efforts to develop a vibrant bond market.

The sector must overcome obstacles like funding shortages and regulatory complexity. Strengthening co-lending frameworks and encouraging collaboration among industry stakeholders, academia, and research institutions are important strategies for long-term growth.

Their long-term success will depend on the growth of digital platforms, a growing bond market, and co-lending relationships.

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NON- BANK FINANCE COMPANIES(NBFCs)

Source:

The Hindu

PRACTICE QUESTION

Q.Consider the following statements in the context of the Non-Banking Financial Companies (NBFCs):

1. They cannot provide loans and credit facilities to individuals.

2. They cannot invest in financial instruments.

Which of the above statements is/are correct?

A) 1 only

B) 2 only

C) Both 1 and 2

D) Neither 1 nor 2

Answer: D

Explanation:

Statement 1 is incorrect:

Non-banking financial companies (NBFCs) provide loans and credit to individuals and businesses. They can provide various kinds of loans, including personal, vehicle, housing, business, and more.

Statement 2 is incorrect:

Many non-banking financial companies (NBFCs) provide investment advisory, portfolio management, and risk assessment services. They may also help with investments in securities, mutual funds, and other financial instruments.

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