NBFC the Non-Banking financial companies have grown considerably in the India financial system alongside with mainstream Banks and leading organizations. This has happened over time with efficiency and diversity in terms of products, services, asset quality and strong regulatory regime.
NBFC’s growing systemic importance and interconnectedness came with channelizing major capital resources required by corporate sector and other business requirements and this way NBFC has been supplementing the Banks which plays as a major contributor to financial requirements.
Focus area of Operation in NBFC
NBFCs are required to provide finances, loans, and make investments. This includes acquisition of shares, stock, bonds, and debentures, securities issued by government or local authority or other securities. The securities that NBFC promotes are of marketable nature, leasing, hire-purchase, insurance business and chit business funds.
In this regard, one can say that activities of NBFC’s are more or less same as banks. However, there are a few differences between the two entities:
- NBFCs cannot accept deposits repayable on demand
- They do not form part of the payment and settlement system
- They cannot issue cheques drawn on itself
NBFC the Non-Banking financial companies have grown considerably in the India financial system alongside with mainstream Banks and leading organizations. This has happened over time with efficiency and diversity in terms of products, services, asset quality and strong regulatory regime.
The regulatory changes NBFC has made in recent times made them an alternative in the financial Ecosystem.
Meeting the Growing Credit demand
To be more precise NBFC was formed to guide and empower the financially weaker section of society and bringing them in forefront of national economy by assisting them with required financial support.
NBFC’s growing systemic importance and interconnectedness came with channelizing major capital resources required by corporate sector and other business requirements.
NBFC has been supplementing the Banks which plays as a major contributor to financial requirements with ease of cost that came as a game changer for small and medium scale businesses.
NBFC’s wide spread of services aiding the economic growth
NBFCs play a critical role in participating in the development of Indian economy mainly in the
- Transportation sector
- Employment generation
- Wealth creation
- Credit Requirements in rural segments
- Home financing
- Infrastructure financing
Other than this we can see NBFCs aid economic development in the following ways
Mobilization of Resources – It converts savings into investments
Capital Formation – Aids to increase capital stock of a company
Provision of Long-term Credit and specialized Credit · Aid in Employment Generation · Help in development of Financial Markets
Helps in Attracting Foreign Grants · Helps in Breaking Vicious Circle of Poverty by serving as government’s instrument
Emergency services like financial assistance and guidance is also provided to the customers in the matters pertaining to insurance.
NBFC’s growth has been remarkable in recent years and the benefit was mainly received by the financially weaker sections of the society. Banks were not accessible till few years back due to lots rules and regulations.
Now things have changed but back when Banks were unable to fill the gaps, it was who NBFC played a bigger role to meet the credit requirements, both for small and medium business as well as individual’s financial requirement to planning. NBFC now has emerged as strong and integral part of Indian financial system and have commendable contributions towards Government’s agenda of financial Inclusion.
Information technology support for NBFC by the government
The government of India also supporting the NBFC seeing their increasing presence the Indian Economy.
The Reserve Bank of India has issued the notification i.e. ‘Master Direction’ and created the Information Technology Framework for the NBFC Sector in the year 2020.
The directions on IT Framework for the NBFC sector was made to enhance safety, security, efficiency in processes leading to benefits for NBFCs and their customers.
NBFCs with asset size above 500 cores are expected to adhere to the new “recommendations” by 30th September 2018. Recommendations for smaller NBFCs include developing basic IT systems mainly for maintaining the database.
Regulatory requirements forms a Challenge for NBFC
Although regulatory framework has been revised for NBFC but the Reserve Bank of India (RBI) regulates NBFCs, and they have to comply with several regulations and guidelines issued by the RBI.
Small and medium sized business who operates on small amount of finance and less resources are not equipped enough to fulfil all regulatory requirements.
This can be time-consuming and costly for NBFCs, especially for small and mid-sized players who may not have the resources to comply with regulatory requirements.
To compete with Banks NBFC also face operational challenges which impacts their profitability as size is small compared to big nationalized banks and private sector lending organizations.
Types of NBFC’s in India
NBFCs can be broadly classified under two categories:
The Deposit Accepting NBFC (Type -1)
Non-Deposit accepting NBFC (Type -2)
Deposit Accepting NBFC Meaning
Deposit Accepting NBFCs must get themselves registered with RBI as per the provisions in the RBI Act, 1934. They need a Certificate of Registration (CoR) from the RBI. And there are additional guidelines and specific regulations prescribed by RBI for them.
Non-Deposit Accepting NBFC Meaning
Non-Deposit Accepting NBFCs also need to get registered themselves. The only difference is additional guidelines do not apply to them.
Further classifications of NBFC’s
Asset Finance Company (AFC): The financial institution (FI) with the primary business of financing physical assets.
Investment Company (IC): An FI engaged in the acquisition of securities, as its principal business.
Loan Company (LC): An FI providing finance, as its principal business. The business activity is to make loans or advances or otherwise for any ventures other than its own but does not include an Asset Finance Company.
Infrastructure Finance Company (IFC): An NBFC-IFC meaning is the company which:
Extends at least 75% of its total assets in infrastructure loans
Has minimum Rs.300 crores as NOF (Net Owned Funds)
Credit rating of not less than “A”, and CRAR of 15%
Company registration under NBFC
The applicant company is required to apply for online for NBFC registration to the RBI. On successful submission of the application form and relevant documents, a CARN number is generated. This number is to be used for reference during all future conversations and enquiries. Subsequently the company is required to submit the hard copies of the online application, and the supporting documents uploaded, to the nearest regional office of the RBI.
Verification of documents is done and then the regional office forwards the application to the head office of the RBI. There, a more thorough examination is conducted. If all legal conditions are being met, the company will be registered as an NBFC. And the NBFC license will be issued.
NBFC’s support for Govt scheme’s
NBFC’s being a rich potential for financing and a participant in the growing Indian economy also attracting investments from institutions and foreign participants. Also NBFC’s are supporting various government projects and because of this the schemes that are launched gaining popularity amongst the larger population who look up to various govt. schemes as a pillar of support.
In 2014 when the government launched the National Mission for Financial Inclusion (NMFI), namely, Pradhan Mantri Jan Dhan Yojana (PMJDY) to provide universal banking services for every unbaked household, based on the guiding principles of banking the unbanked, securing the unsecured, funding the unfunded and serving unserved and underserved areas.
It was the NBFC which came as front runner to support and full fill the credit gaps which in turn solidified NBFC’s presence in the growing economy and balanced the credit requirement both in urban and rural Indian.
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