Generally considered an alternative to the mainstream banking system, non-banking financial companies (NBFCs) play an important role in an economy like India, with the growing financial needs of the urban middle class, and a predominantly rural population. NBFCs are companies registered under the Companies Act of 1956 that provide banking services without holding a bank license. They offer a variety of services such as loans and advances, saving and investment plans, credit facilities, insurance, acquisition of shares, and more.
To commence their business, the NBFCs require registration with India’s apex bank, the Reserve Bank of India (RBI). However, certain NBFCs (which are regulated by other regulators) such as insurance, stock broking, and chit fund companies, venture capital funds, and a few others are exempted from registration requirements. Investment companies, asset finance, loan companies, and infrastructure finance are common examples of NBFCs based on activity.
Situating NBFCs in the Indian financial landscape
NBFCs are at the forefront of financial inclusion in India, facilitating credit to key and niche sectors of the Indian economy ranging from infrastructure to unbanked sections of the society. They play an integral role in the diversification of the Indian financial sector by mobilizing resources and providing loans at payable costs. They provide various kinds of credit such as consumer loans, mortgage loans, auto loans, gold loans, etc.
The banking sector with its stringent lending process finds it difficult to cater to an extensive customer spread. Most customers seek NBFCs on account of their quick decision-making, minimal requirements for documents, and prompt services. Additionally, government schemes like ‘Make in India’ gave a boost to the country’s manufacturing sector fostering credit demand from heavy industries. The credit-hungry micro, small and medium enterprises (MSME) sector also increasingly seeks NBFC funding.
NBFCs are increasingly focusing on digitization including the usage of chatbots to improve customer service, providing digital solutions, and increasing partnerships with fintechs. With the help of tools such as eKYC (Electronic Know Your Customer), e-signature, and Aadhaar-based verification, NBFCs have furthered the process of financial inclusion among the diverse Indian population. However, certain pitfalls stand in the way of the NBFC sector.
The prevalence of large-scale NBFCs has prevented certain smaller players from surviving in the sector. Additionally, the spike in annual cancellations of NBFCs by RBI can be attributed to irregular lending practices. RBI has also proposed a scale-based regulatory framework for NBFCs to be effective from October 2022, to promote better governance and structural strengthening of the sector, with a long-term goal of bridging the gap between banks and NBFCs.
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