As of December 2021, Statista reported that NBFCs constituted 36% of
India's lending landscape. This implies that NBFCs play a significant
role in the country's digital transformation, especially as India
stands as the world's second-largest internet-using nation.
The
increasing adoption of embedded finance and digital lending suggests
that NBFCs are poised to revolutionise the financial ecosystem in the
coming years. Let us delve into what NBFC is and its pivotal role in
this evolving landscape.
What are NBFCs?
NBFCs provide banking and other financial services without
holding a banking licence and are registered under the Company's Act
of 1956. These companies engage in loans and advances, credit
facilities, savings and investment products. NBFCs offer credit to
many sectors of the Indian economy, covering a wide range of
unbanked sections of society and budding businesses.
In today’s
financial landscape, NBFCs are playing an integral role by providing
loans at affordable rates. The NBFC sector has also introduced new
credit disbursal procedures to micro,
small and medium enterprises (MSMEs). This contributes largely
to the Indian economy and the overall financial system.
What is the Full Form of NBFC?
The full form of NBFC is Non-banking Financial Companies. At present, India is brimming with new-age NBFCs that offer a plethora of financial services and products.
What are the Functions of an NBFC?
The different functions of NBFCs are listed below:
- Meeting Credit Needs: NBFCs play a crucial role in the Indian financial system by providing credit to sectors overlooked by traditional banks, promoting financial inclusion for neglected segments.
- Addressing the Needs of Overlooked Sectors: NBFCs are vital in serving the requirements of low-income households, and other underserved markets, bridging the gaps left by traditional banks and addressing the needs of unorganised sectors.
- Fulfilling Funding Requirements: Non-banking Financial Companies significantly contribute to economic growth by meeting the fund requirements for various investment and infrastructure projects.
- Offering Diverse Financial Products: NBFCs in India have a broad and rapidly expanding role, catering to the increasing demand for credit and financial services. They provide a range of financial products and services, including loans and other credit facilities, benefiting the general public.
ALSO READ :- Top 5 Challenges for MSME Business Loans…!
What are the Different Types of Non-banking Financial Companies (NBFC)?
NBFCs can be classified into two broader categories based on their activity and the deposits they hold. Let’s explore them further:
- Asset Finance Company: An asset finance company provides funds for procuring assets to companies that are involved in manufacturing, or other economic activities. These assets include tractors, industrial machines, automobiles, and more.
- Investment Company: These companies solely deal in investments by investing funds on behalf of their clients. The clients are expected to share the total profit or loss with the investment company
- Infrastructure Finance Company: These companies provide loans for infrastructural development of projects such as energy, transport, communication, water & sanitation, and other social and commercial infrastructure.
- Loan Company: These companies offer loans in the form of financial products, such as Personal Loan, Business Loan, and Working Capital Loans.
- Micro-Finance Company: These companies provide small-scale financial services in the form of credit or savings to the unbanked population in rural and semi-urban areas.
What is the Difference Between NBFCs and Banks?
The following table highlights the difference between NBFCs and Banks:
| Parameters | NBFCs | Banks |
| Definition |
It is a company that provides financial services to the public and does not have a banking licence. | It is a government-authorised company that provides banking services to the public. |
| Regulatory Act | Incorporated under the Banking Regulations Act of 1956. |
Incorporated under the Banking Regulations Act of 1949. |
| Functions |
Provides lending and investment activities. | Provides a wide range of banking services. |
| Deposit Acceptance |
Does not accept deposits from the general public. | Accepts deposits from the general public. |
|
Risk Assessment | Relatively lenient risk assessment. | Strict risk assessment. |
What is the Role & Scope of Non-banking Financial Companies (NBFC)?
Digital lending has become one of the most promising financial
services across India. High demand for comparatively smaller loans
with easy, digital application processes by individuals and small and
medium enterprises has widened the scope for NBFCs.
NBFCs have the
business agility to serve various small and medium businesses faster
as compared to traditional banks. Flexible payment plans, low-cost
EMIs, and competitive interest rates are some of the top USPs of loan
products offered by new-age NBFCs.
In addition to this, the rising
adoption of artificial intelligence (AI) and blockchain-based
financial services will further enhance the product portfolios of
NBFCs in the future. The growing availability of internet and telecom
services across villages, rural areas, and semi-urban areas is also
creating a conducive environment for NBFCs.
What are the Guidelines for NBFC Functioning?
The RBI has issued certain guidelines that NBFCs have to follow, which are as follows:
- NBFCs need to have a minimum Net Owned Funds to maintain a barrier against losses and absorb financial shocks.
- They need to maintain a certain Capital Adequacy Ratio to ensure that they have enough funds to cover sudden losses.
- NBFCs have to maintain a minimum level of assets like government securities and cash to meet their short-term liabilities to avoid liquidity crunches.
- NBFCs must not have exposure to a group of borrowers as it may lead to concentration risk.
To Conclude
After understanding what NBFC is, its role and its significance, you can now go ahead and explore the various financial products and services offered by these financial establishments. Find tailored loans for specific financial requirements at competitive interest rates, with simplified documentation and swift disbursal, ensuring a seamless process.
Frequently Asked Questions About NBFC
1. Who regulates NBFCs in India?
The Reserve Bank of India regulates Non-Banking Financial
Companies (NBFCs) in India.
2. How can NBFCs
contribute to India's economy?
NBFCs play a
crucial role in the economic growth of India by providing a wide
range of financial services to the public, especially the
underserved communities.
3. What are the different
types of NBFCs?
Asset Finance Companies (AFC), Loan
Companies (LC), Investment Companies (IC), and Infrastructure
Finance Companies (IFC) are the different types of NBFCs available
in India.