UNIT

Non-Banking Financial Companies

Names of Sub-Units

Purpose of Introduction of NBFCs, Difference between NBFCs and Commercial Banks, Products and
Services Offered by NBFCs, Different Types of NBFCs in India, NBFCs Role in Economic Development,
Challenges and Opportunities in NBFC Space

Overview

The purpose of NBFCs is explained in this unit. Further, the unit describes the difference between NBFCs
and commercial banks, and products and services offered by NBFCs. Further, it discusses the different
types of NBFCs in India, NBFCs role in economic development, and challenges and opportunities in
NBFC space.

Learning Objectives

In this unit, you will learn to:

 Explain the purpose of introduction of NBFCs
 Define the difference between NBFCs and commercial banks
 Discuss the products and services offered by NBFCs
 Describe the different types of NBFCs in India
 Summarise the NBFCs role in economic development
 Analyse the challenges and opportunities in NBFC space
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Learning Outcomes

At the end of this unit, you would:

 Analyse the purpose of NBFCs
 Assess the difference between NBFCs and commercial banks
 Evaluate the products and services offered by NBFCs
 Appraise the different types of NBFCs in India
 Understand the role of NBFCs in economic development
 Summarise the challenges and opportunities in NBFC space

Pre-Unit Preparatory Material

 https://www.investopedia.com/terms/n/nbfcs.asp
 https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/nonbank-financial-
institution

15.1 INTRODUCTION
Non-Banking Financial Companies (NBFCs), sometimes known as Non-Banking Financial Institutions
(NBFIs), are financial institutions that provide a variety of banking services but lack a banking license. For
the most part, these establishments are not permitted to take conventional interest stores promptly
accessible assets, for example, those in checking or investment accounts from general society. This limit
keeps them outside the extent of traditional oversight from government and state financial controllers.

According to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Non-Banking Financial
Companies are “overwhelmingly involved with a financial action” if finance accounts for more than
85% of their combined annual gross earnings or consolidated resources. Instances of NBFCs incorporate
speculation banks, contract loan specialists, currency market reserves, insurance agency, flexible
investments, private value reserves and peer to peer(P2P) moneylenders.

Non-Banking Financial Companies (NBFCs), also known as Nonbank Financial Institutions (NBFIs), are
entities that provide particular financial services resembling those of banks but lack a banking license.

NBFCs are not expose to the banking guidelines and oversight by government and state specialists
complied with by customary banks.

Speculation banks, contract loan specialists, currency market reserves, insurance agency, multifaceted
investments, private value reserves and P2P moneylenders are largely instances of NBFCs.

Since the Great Recession, NBFCs have multiplied in number and type, assuming a key part in fulfilling
the credit need neglected by customary banks.

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Getting NBFCs

NBFCs can offer administrations, for example, advances and credit offices, cash trade, retirement
arranging, currency markets, endorsing, and consolidation exercises.

Dodd-Frank Act Three categories of Non-banking financial firms are defined by the Wall Street Reform
and Consumer Protection Act: foreign non-banking financial companies, domestic Non-banking
financial companies, and domestic Non-banking financial companies subject to Federal Reserve Board
of Governors regulation.

Unfamiliar Non-banking Financial Companies

Unfamiliar non-banking financial companies are joined or coordinated outside the United States.
Additionally, they are dominated by financial activities such as those recorded previously. Unfamiliar
nonbanks could conceivably have branches in the United States.

U.S. Non-banking Financial Companies

Similar to their foreign non-banking partners, the U.S. non-banking financial enterprises are primarily
engaged in non-banking financial activities, although they have been combined or coordinated in the
United States. The ability of the U.S. non-banks to act as Farm Credit System organisations, public
protections trades or any of a few other types of financial foundations is restricted.

U.S. Non-banking Financial Companies Regulated by the Board of Governors

These non-banking financial institutions are fundamentally different from others in that they are
governed by the Federal Reserve Board of Governors. Whether financial hardship or the “nature, extent,
size, scale, focus, interconnectivity or blend of exercises” at certain businesses could jeopardise the
financial stability of the United States depends on the Board’s assurance.

Shadow Banks and the 2008 Financial Crisis

NBFCs existed some time before the Dodd-Frank Act. The growing lattice of organisations adding to
the then-current pain free income loaning climate which thus prompted the subprime contract total
implosion and the resulting 2008 financial emergency.

Albeit the term sounds to some degree vile, some notable businesses and venture companies were
participating in shadow-banking action. One of the main NBFCs at the centre of the 2008 crisis were the
venture banks Lehman Brothers and Bear Stearns.

Because of the resulting financial emergency, conventional banks wound up under nearer administrative
investigation, which prompted a drawn out withdrawal in their loaning exercises. As the specialists
straightened out on the banks, the banks, thus, straightened out borrowed or credit candidates.

The more tough prerequisites brought about more individuals requiring other financing sources-and
subsequently, the development of non-banking foundations that had the option to work outside the
limitations of banking guidelines. To put it plainly, soon after the financial emergency of 2007-08, NBFCs
have grown widely and taken on several forms, playing a crucial role in filling the credit gap left by
traditional banks.

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NBFC Controversy

Supporters of NBFCs contend that these organisations assume a significant part in satisfying the rising
need for credit, advances, and other financial administrations. Clients incorporate the two organisations
and people particularly the individuals who could experience difficulty qualifying under the more tough
norms set by conventional banks.

In addition to the fact that NBFCs provide substitute wellsprings of credit, advocates say, they likewise
offer more effective ones. NBFCs cut out the mediator the job banks frequently play to allow clients
to manage them straightforwardly, bringing down expenses, charges and rates, in a cycle called
disintermediation. Giving supporting and credit is essential to keep the cash supply fluid and theeconomy
functioning admirably.

Pros:
 Substitute wellspring of subsidising and credit
 Direct contact with clients, disposing of go-betweens
 Significant returns for financial backers
 Liquidity for the financial framework

Cons:
 Non-controlled, not expose to oversight
 Non-straightforward tasks
 Foundational hazard to financial framework, economy

All things considered, pundits are pained by NBFCs’ absence of responsibility to controllers and their
capacity to work outside the standard banking rules and guidelines. In some cases, we may be overseen
by other experts, the Securities and Exchange Commission (SEC) if we are not a publicly traded company,
or the Financial Industry Regulatory Authority (FINRA) if we believe we are a company.

In some cases, though, there may be opportunities to work without candor. All of this can put an
increasing strain on your financial framework. NBFC was at the center of the financial troubles of 2008
that triggered the Great Recession. Experts point out that their numbers have increased since that time,
dealing with some of the most serious gambling in recent memory.

True Example of NBFCs

Goods sent by contract supplier Quicken Loans to financial management firm Fidelity Investments are
qualified as NBFC. In any case, the fastest evolving part of the non-bank lending space is decentralised
(P2P) lending.

The growth of P2P lending has been fueled by the power of informal communication, bringing together
a like-minded individuals from around the world. P2P lending sites such as Lending Club (LC) Corp.
Street Shares and Prosper are designed to connect potential borrowers with lenders willing to invest in
loans that can generate significant returns.

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P2P borrowers will quite often be people who could not in any case fit the bill for a conventional bank
advance or who want to work with non-banks. Financial backers have the potential chance to assemble
a differentiated arrangement of advances by contributing little totals across a scope of borrowers.

In spite of the fact that P2P loaning just addresses a little part of the all out credits gave in the United
States, a report from IBIS World recommends that $938.6 million is held in P2P Lending Platforms in the
U.S. in 2022 and that this has expanded 7.9% throughout the most recent year.

15.2 DIFFERENCE BETWEEN NBFCS AND COMMERCIAL BANKS

With the emotional ascent in globalisation, organisations are turning out to be more intricate. To
represent these intricacies, financial foundations have begun giving a scope of financial items and
administrations.

These financial organisations are amazingly significant: they have been the soul of organisations all
over the planet, particularly during the vacillations of the market. Besides the fact that they add to
monetary thriving during seasons of financial upswings, yet additionally become a vital wellspring of
subsidising when the economy is struggling.

However, as the quantity of financial organisations builds, there is expanded rivalry among them, which
has brought about an assortment of items being proposed to banking as well as non-banking clients at
serious costs. This makes a hard decision for every one of the financial backers and borrowers who are
searching for financial open doors.

Prior to picking any item, it is smarter to contrast it and different items in the market by taking a
gander at the highlights it offers. In addition, audits of these items help in evaluating the unwavering
quality of the item. The standing of a foundation likewise counts.

Foundations with great market standing regularly charge a generally more exorbitant cost for their
item. Subsequently, a potential client needs to assess not just whether the person in question needs
a financial or non-financial foundation, yet in addition the standing of the establishment and the
administrations it gives.

Banks have been one of the most widely recognised financial establishments all over the planet. Yet,
there are likewise Non-Banking Financial Companies (NBFCs) that do loaning and other financial
exercises. Despite the fact that there are similitudes among NBFCs and banks, they likewise vary in
numerous viewpoints.

Bank

Banks, then again, are financial organisations that go under the power of an administration. They do
banking exercises, for example, allowing credits, tolerating stores, overseeing withdrawals, offering
utility types of assistance and clearing checks.

Banks are the apex organisations in some random economy; they control a country’s financial
framework. Their job as financial mediators, among investors and borrowers, makes it feasible for an
economy to easily work.

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There are various kinds of banks, for instance, there are public area banks, unfamiliar banks, and private
area banks. Their obligations incorporate making credit items, loaning advances, overseeing stores,
getting cash moves, and offering public utility types of assistance. In any case, banks are extensively
ordered into national banks and business banks. Each nation has just a single national bank, yet there
is no restriction to the quantity of business banks.

Shareholders are the genuine proprietors of banking establishments, and banks work fully intent on
creating gain to expand shareholders’ riches.

Contrasts among NFBCs and Banks

There are various contrasts among banks and NBFCs:

Approval

The first and key contrast between them is their degree of approval. NBFCs are not expected to hold a
bank permit to give banking administrations to the general population. In actuality, banks are approved
by state run administrations and their definitive objective is to serve the overall population.

Consolidation

As currently examined, NBFCs were framed under the Companies Act of 1956. Banks, then again, were
enrolled under the Banking Regulation Act of 1949. Hence, the establishments keep various guidelines
and guidelines for the arrangement of administrations.

Request Deposit

Request store or DD is an asset from which an individual can pull out a store whenever from the financial
establishment. NBFCs do not acknowledge DDs for any financial exchange. In any case, these records are
broadly utilised in banks for making installments.

Support of Reserve Ratio

The Reserve proportion is a piece of the investor’s equilibrium that should be kept by a bank as money as
directed by the national bank in many nations. There is no necessity for NBFCs to keep a save proportion
to work in the economy, yet it is required for banks to do so in light of the fact that it influences the
stockpile of cash in a country at a specific time span.

Unfamiliar Investment

NBFCs are permitted to make a financial speculation of up to 100%, which is significantly higher than
the rate permitted to banks, i.e., 74%.

Arrangement of Payment and Settlements

NBFCs don’t shape a piece of the installment and settlement framework, while banks are viewed as the
center of that framework.

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Store Insurance Facility

The office of store protection presented by the Deposit Insurance and Credit Guarantee Corporation is
not accessible for NBFCs, however, banks can unquestionably involve this office to shield their clients’
cash.

Different Functions

There are various different contrasts between the capacities given by the two kinds of organisations.
For instance, dissimilar to banks, NBFCs are not permitted to gather stores nor would they be able to
give checks. Also, NBFCs cannot be associated with modern or horticultural exercises, nor would they be
able to take an interest in property development. Additionally, banks can give request drafts, yet NBFCs
cannot.

It is vital to become familiar with the distinctions between these establishments on the grounds that the
right foundation can assist you with pursuing better choices as per your financial objectives. With the
quickly changing business sector drifts, each penny counts, thus, picking an establishment is one of the
key choices you need to make. This won’t just permit you to design really, yet will likewise empower you
to make changes in your arrangement on the off chance that any change happens that is not in your
control.

Its very name shows that NBFCs are various entities from banks. NBFCs are enrolled under the
Companies Act,1956, and give banking administrations to individuals - without holding a banking
permit.

All non-banks financial entities are delegated NBFCs. This incorporates venture banks, contract loan
specialists, currency market reserves, insurance agency, speculative stock investments, private value
reserves, P2P moneylenders, and so on. Administrations given by NBFCs incorporate home advances,
instruction credits, gold advances, and vehicle advances. NBFCs can not offer essential banking
administrations such as investment funds/current records, draw keeps an eye on itself or issue request
drafts.

Banks, by definition, are financial middle people that give banking administrations to general society.
They are enrolled under the Banking Regulation Act, 1949. They can incorporate business banks, booked
banks, and retail banks.

Notwithstanding, both NBFCs and banks are directed by Reserve Bank of India (RBI)

The distinction among NBFC and bank can be drawn plainly on the accompanying grounds:
 An administration approved financial middle person that targets giving banking administrations
to the overall population is known as the bank. A NBFC is an organisation that gives banking
administrations to individuals without holding a bank permit.
 A NBFC is consolidated under the Indian Companies Act, 1956, though a bank is enrolled under
Banking Regulation Act, 1949.
 NBFC is not permitted to acknowledge such stores which are repayable on request. Not at all banks,
which acknowledges request stores.

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 Unfamiliar Investments up to 100 per cent is permitted in NBFC. Then again, just banks of the private
area are qualified for unfamiliar speculation, and that would be not over 74%.
 Banks are a vital piece of installment and settlement cycle while NBFC, isn’t a piece of the framework.
 It is compulsory for bank keep up with reserve proportions such as CRR or SLR. Instead of NBFC,
which does not need to keep up with reserve proportions.
 The store protection office is permitted to the contributors of banks by Deposit Insurance and Credit
Guarantee Corporation (DICGC). Such office is inaccessible on account of NBFC.
 Banks make credit, while NBFC is not engaged with the formation of credit.
 Banks give exchange administrations to the clients, for example, giving overdraft office, the issue of
secured check, move of assets, and so forth.

15.3 PRODUCTS AND SERVICES OFFERED BY NBFCS

NBFCs offer the following products and services:

Competitive Interest Rates

Pace of interest is one of the main aspects of a wide range of loans. Non-Banking Financial Companies
have started to focus on this region in the new decades and have cut down the interest rates to either
equivalent to bank lending rates or on occasion even lower to bank rates. With the wide range of various
benefits when the pace of interest is also brought down, borrowers viewed this as more easy and
reasonable. Based on the income, credit scoring and reimbursement, the pace of interest is charged on
the borrowers. However, it is at competitive rates.

Speedy Processing
For banks, candidates must meet eligibility criteria, but NBFC is lenient in this regard. This makes pre-
approval easier, smoother and faster. Most of the time, individuals apply for loans when they urgently need
cash. NBFC has taken a step towards meeting the need by expediting the loan processing at a competitive
interest rate pace. Now and again, borrowers are even prepared to compromise on the interest rates
assuming the advance sum is gigantic and in the event that they could get it approved rapidly.

Less Rules and Regulations

As NBFCs are incorporated under the Companies Act (although they are administered by the Reserve
Bank of India), the rules and regulations governing lending are less stringent than banks. This makes
it easier for borrowers to obtain loans. Borrowers are very happy with less cluttered loan processing
requirements. Of course, due to the high risk of default with NBFC, interest rates and other fees will
be assessed accordingly by NBFC. The approved prepayment is also well below the guaranteed value.
The reason is the high risk of default. NBFCs have no legal reserve requirements and are free to open
branches on a voluntary basis.

Advance Available for Individuals with Poor Credit Rating

In most cases, people with poor credit ratings do not get loans from banks. This is because banks
consider borrowers with low credit scores to be high-risk individuals. Unless the FICO rating he is above

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600-650, it is very difficult to get a bank-approved loan. On the other hand, NBFC provides loans to
individuals with a lower FICO rating than her, but interest rates for such borrowers are almost always
higher than market rates. Most of his NBFCs grow due to these aforementioned advantages. In terms
of credit offerings, banks and NBFCs offer commercial, personal and retail credits. This also depends
on the borrower’s redemption limit. Most of the corporate sector prefers banks. However, retailers are
choosing his NBFC over banks. Easy loans such as auto finance loans, gold loans, home loans and hard
loans are provided by his NBFC with high customer satisfaction. The NBFC sector will also expand
further in the coming days.

15.4 DIFFERENT TYPES OF NBFCS IN INDIA

A wide range of categories are used to classify NBFCs.

Non-deposit holding companies with a significant size and systematically significant.

Henceforth, there are ten distinct types of NBFCs companies that are discussed underneath:
1. Asset Management Company (AMC): Financial institutions facilitate the financing of a wide
variety of assets for individuals and businesses, including machinery, heavy industrial hardware,
manufacturing and agricultural equipment and giant generators. Income derived from this point
shall not be less than his 60% of his absolute assets. UTI AMC, ICICI AMC and Birla Sun Life AMC are
not many examples of major corporate assets.
2. Investment Company: It is a financial organisation whose main activity is buying securities. Simply
said, these businesses accept money from the general public and invest it in different stocks and
financial products.
The corporation then divides the remaining acquired profit among its shareholders after deducting
its functioning cost. Some investment businesses are Bajaj Allianz General Insurance Company,
IDFC, and HDFC Shared Reserve.
3. Loan Company: As its name implies, Advance Company is a financial organisation that provides
advances for a variety of reasons in addition to those of the AMC, which also includes housing
finance companies.
4. Infrastructure Finance Company: It is a non-banking finance company if it meets the following
criteria:
 It invests three-fourths of its total assets in infrastructure loans,
 It must have a minimum Net Owned Fund of $300 million,
 It must have a minimum credit rating of “A” or equivalent and
 It has few examples, such as GMR Infrastructure Ltd. and Hindustan Construction Company.
5. Systemically Important Core Investment Company: It is a non-banking financial institution:
 90% of its total assets are invested in the form of shares, stocks, obligations, or advance gathering
companies.
 60% of the 90% should be placed in value shares or shares that will eventually be forced into
value shares.

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 Conveys none of the activities mentioned under Sections 45(c) and 45(f) of the RBI Act of 1934.
 That takes government fund
6. Infrastructure Debt Fund: IDFs fund long-term infrastructure projects by issuing bonds. To
guarantee a five-year development for investors, the bonds are issued in various currencies.
7. Microfinance Company: People in India’s metropolitan, semi-metropolitan, and rural areas demand
money to start their businesses and fulfil other obligations, but they are reluctant to ask banks for
help because of the formalities they must go through in order to obtain the funds they need.
Currently, the microfinance organisation steps forward and helps these disadvantaged people
financially. Not many instances include Bandhan Financial Service Ltd. and Ujjivan Financial Service.
8. NBFC (Factor): There are not many of these NBFCs in India. These businesses typically buy debts
from lenders at a significant discount, and from that point on, they change the debtor’s repayment
schedule to assure an easy settlement and a little profit.
9. Mortgage Company: It is a financial establishment where:
 Approximately 90% of the business’s revenue comes from home loan insurance, or
 Approximately 90% of the total revenue comes from contract assurance business, or
 Fund net of claims is 100 crores.
10. Non-operative Financial Holding Company: It is a distinct category of NBFCs that is a fully
owned non-operative financial holding company that is permitted to establish or hold a bank as
well as another financial service with the authorisation of the RBI in accordance with relevant
administrative guidelines.

15.5 NBFCS ROLE IN ECONOMIC DEVELOPMENT

The role of NBFCs in economic development is as follows:
1. More noteworthy employment opportunities and standard of living: NBFCs assist with
accomplishing the target of macroeconomic strategies of making more positions in the nation
by advancing SMEs and private businesses through loaning them loans. This expansion in new
organisations thus raises the interest for manpower and makes work. Moreover, the Purchasing
Power Parity (PPP) of individuals rises thus does their way of life.

2. Fortifying of financial market: The monetary market depends vigorously on Non-banking monetary
establishments for raising capital. The new companies and little measured organisations are reliant
upon funds presented by NBFCs and furthermore to keep up with liquidity. For a viable working and
equilibrium in the monetary market, NBFCs assume a critical part.

3. Providing long haul credits: Dissimilar to the customary banks, NBFCs stretch out long haul credits
to framework, business and exchange organisations. The conventional banks expect ideal timetables
and momentary reimbursement of loans that may not necessarily in every case suit the prerequisites
of these enterprises. NBFCs, then again, reserve enormous undertakings thus advancing monetary
development. They likewise permit ventures to take part in value.

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4. Preparation of funds: Non-banking monetary organisations help in revolution of assets, resource

conveyance and guideline of income to shape the financial turn of events. They empower changing
over saving into speculations and in this way helps in the assembly of funds/assets in the economy.

5. Development of national income: As NBFCs expect to fabricate capital for a long time - private and
in any case - they help in aggregating a capital stock for the country. This straightforwardly adds on
to the national income and results in the movement of Gross Domestic Product (GDP).

15.6 CHALLENGES AND OPPORTUNITIES IN NBFCS ROLE

The opportunities and challenges of the NBFCS role are as follows:

Challenges
In spite of the numerous prospects for growth and advancement provided to NBFCs, there are still some
challenges that NBFCs in India must deal with.

The default risk must be increased at a tolerable level of investment. It becomes very difficult to verify
NBFCs’ financial certifications because the borrowers who profit from their loans have no records. It
becomes difficult to maintain this component of the business since NBFCs must use additional resources
for on-the-ground visits, reference checks, and other activities.

Furthermore, as new credit customers have no idea how to obtain financial services, they are unlikely to
persuade the NBFC to provide them extra time for their business or personal requirements. In order to
attract customers, NBFCs must invest more resources in teaching, financial education, and mindfulness.
However, there is a fantastic chance to convert the lead into actual business when these customers are
made aware of the benefits of obtaining credit from an NBFC.
Non-performing resources have been a test the banks as well as well concerning the NBFCs. With the
new credit clients, the gamble stays higher when contrasted with those clients who have a record as a
consumer. In this way, NBFCs ceaselessly chip away at checking and adjusting to ensure that the EMIs
are on schedule and records of the clients stays modern and any issues are informed right away.

Opportunities

There are a portion of the opportunities for the eventual fate of NBFC in India which would help them
to develop and arise and contribute to the economy. Perhaps the greatest chance for NBFC is crediting
speculation customers. Such clients are those individuals who have a place from the rustic region and
have never acquired credits or loans from any monetary establishment previously. Individuals from
provincial regions have restricted admittance to banks and other credit monetary organisations and
administrations and they need to depend upon the NBFCs for profiting credits. In this manner, NBFCs are
a shelter for the rustic area. NBFCs have turned into a beneficial fragment for such purposes. Further,
NBFCs include less desk work. The NBFCs are acting in a special manner, by which it can get to the
reliability of individuals and furnish them loans with less desk work. For instance, the NBFC gives loans to
MSME’s making base of their solicitations due for the installment. Such credit individuals are the best
open door for NBFC as there are no contests because of likely gamble and the new to credit section gives
a gigantic open door to NBFCs to extend their market base in towns and level 2 and 3 towns the nation
over. Larger part of the populace in India lives in regions where banks would not give loans and monetary

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administrations in light of the shortfall of imperative desk work. Furthermore, such individuals search
for monetary assistance and are fit for returning the credit yet deal with the issue because of desk work
and are denied loans. There NBFCs, turns into a wellspring of help to give monetary guidance as it
includes less administrative work. Thinking about the ascent in non-performing resources (NPA), banks
are being mindful of the credit value of the clients and deny loans for something similar. Because of this,
a credit hole is made. Notwithstanding, on account of NBFCs, they charge a high pace of revenue, inside
the rules of the public authority. The clients acknowledge to pay extra financing cost in advance to the
NBFCs to skirt any intricacies of following the imperatives of the banks that are placed on them.
Additionally, keeping in respect the monetary necessities of individuals and the design of the banks, for
the premium individuals the public authority has absolved NBFC from brutal standards and guidelines
that are forced on the other monetary establishments, for example, on account of banks. The NBFCs
partake in the adaptability in rules connecting with limitations, paper work, accordingly making it
appropriate for the business visionaries to show their advantage in NBFC. One such model wherethe
public authority has given the opportunities to the NBFC to lay out their spot in the market is the
unfamiliar venture that is allowed to NBFCs up to 100 per cent. There are proceeding with benefits
for the NBFCs, and the government steps up and executes rules to help in the development of NBFC.
Further, NBFC plays had a significant influence in contributing towards India’s GDP to the degree that the
public authority is additionally approaching now and will do as such in future to safeguard the interests
and help the NBFCs to develop and arise as they have been furnishing monetary assistance and
administrations with simple method to individuals of the country. The matter of NBFC is of benefit and
their commitment in the development of India’s GDP shows that NBFCs are working for a superior in
these previous years.

Conclusion 15.7 CONCLUSION

 Non-banking Financial Companies (NBFCs), sometimes known as Non-banking Financial Institutions

(NBFIs), are financial institutions that provide a variety of banking services but lack a banking
license.
 Non-banking Financial Companies (NBFCs), also known as Non-banking Financial Establishments
(NBFIs), are entities that provide particular financial services resembling those of banks but lack a
banking license.
 Unfamiliar non-banking financial companies are joined or coordinated outside the U.S.
 Supporters of NBFCs contend that these organisations assume a significant part in satisfying the
rising need for credit, advances, and other financial administrations.
 Goods sent by contract supplier Quicken Loans to financial management firm Fidelity Investments
are qualified as NBFC.
 With the emotional ascent in globalisation, organisations are turning out to be more intricate. To
represent these intricacies, financial foundations have begun giving a scope of financial items and
administrations.
 Banks, then again, are financial organisations that go under the power of an administration.
 Request store or DD is an asset from which an individual can pull out a store whenever from the
financial establishment.
 Pace of interest is one of the main aspects of a wide range of loans.

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 For banks, candidates must meet eligibility criteria, but NBFC is lenient in this regard. This makes
pre-approval easier, smoother and faster.
 As NBFCs are incorporated under the Companies Act (although they are administered by the Reserve
Bank of India), the rules and regulations governing lending are less stringent than banks.

15.8 GLOSSARY

 DD: Transferring funds from one bank account to another is a method of making payments
 NBFCs: Registered under the Companies Act, 1956, an insurance company provides loans and
advances, acquires shares/stocks/bonds/debentures/securities issued by local authorities or
government agencies, leases, and hire-purchases
 RBI: Reserve Bank of India
 Microfinance Companies: Companies that provide funds for micro fund needs

15.9 CASE STUDY: NBFCS IN INDIA

Case Objective

This case study discusses the introduction of the position of NBFCs in India.

In a rising country such as India, continued private sector investment is a key economic driver. Stable
financing availability is important for both starting and maintaining investments. Credit has always
increased in the Indian economy more quickly than GDP. Between 1962 and 2019, the ratio of the increase
in bank credit to the increase in nominal GDP fluctuated from 1 to 2, with an average of 1.42. Bond
markets and nonbank lenders provided for a comparatively lesser portion of credit during most of this
time, while banks were the main source of credit in the formal sector.

Since 2014, the banking sector’s lending growth has been weak, in large part due to the rise of Non-
Performing Assets (NPAs) on banks’ balance sheets, particularly those of Public Sector Banks (PSBs). Up
until 2018, credit flows from Non-banking Financial Companies (NBFCs) partially offset the shortfall in
credit from the banking sector. Infrastructure Leasing & Financial Services Limited (IL&FS), a well-known
NBFC, missed its debt payments in September 2018. This incident sparked a crisis that affected the whole
NBFC industry. Consequently, there was a dramatic decrease in incremental loan from both commercial
banks and NBFCs in the first half of fiscal year 2020 (FY2020, which concluded in March 2020).
Source: https://www.adb.org/sites/default/files/publication/746261/sawp-083-nonbanking-financial-companies-india.pdf

Questions

1. What is the average fluctuation rate of increase in credit in respect to GDP of India?
(Hint: The credit had increased from 1 to 2 with an average fluctuation rate of 1.42.)
2. What is the reason for slow or weak growth of banking sector’s lending since 2014?
(Hint: The reason was increasing non-performing assets on bank’s balance sheet.)

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 JGI JAIN
DEEMED-TO-BE UNI VE RSI TY
Financial Markets and Instruments

15.10 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain the concept of commercial banks.
2. How do you explain competitive interest rates?
3. Describe the concept of Asset Management Company.
4. What arte the challenges for NBFCs?
5. What are the opportunities for NBFCs?

15.11 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A.Hints for Essay Type Questions

1. Banks, then again, are financial organisations that go under the power of an administration. They
do banking exercises, for example, allowing credits, tolerating stores, overseeing withdrawals,
offering utility types of assistance, and clearing checks. Banks are the apex organisations in some
random economy; they control a country’s financial framework. Their job as financial mediators,
among investors and borrowers, makes it feasible for an economy to easily work. Refer to Section
Difference Between NBFCs and Commercial Banks
2. Pace of interest is one of the main aspects of a wide range of loans. Non-Banking Financial Companies
have started to focus on this region in the new decades and have cut down the interest rates to either
equivalent to bank lending rates or on occasion even lower to bank rates. With the wide range of
various benefits when the pace of interest is also brought down, borrowers viewed this as more easy
and reasonable. Based on the income, credit scoring, and reimbursement, the pace of interest is
charged on the borrowers However it is at competitive rates. Refer to Section Products and Services
Offered by NBFCs
3. Financial institutions facilitate the financing of a wide variety of assets for individuals and
businesses, including machinery, heavy industrial hardware, manufacturing and agricultural
equipment, and giant generators. Income derived from this point shall not be less than his 60% of
his absolute assets. UTI AMC, ICICI AMC and Birla Sun Life AMC are not many examples of major
corporate assets.
4. In spite of the numerous prospects for growth and advancement provided to NBFCs, there are still
some challenges that NBFCs in India must deal with.
The default risk must be increased at a tolerable level of investment. It becomes very difficult to verify
NBFCs’ financial certifications because the borrowers who profit from their loans have no records.
Refer to Section Challenges and Opportunities in NBFCs Role
5. There are a portion of the opportunities for the eventual fate of NBFC in India which would help them
to develop and arise and contribute to the economy. Perhaps the greatest chance for NBFC is
crediting speculation customers. Refer to the section Challenges and Opportunities in NBFCs Role

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UNIT 15: Non-Banking Financial Companies JGI JAIN
DEEMED-TO-BE UNI VE RSI TY

@ 15.12 POST-UNIT READING MATERIAL

 https://www.nelito.com/blog/the-role-nbfcs-in-indian-economy.html
 https://bbamantra.com/non-banking-financial-company/

15.13 TOPICS FOR DISCUSSION FORUMS

 Talk with your friends about the establishment and primary clients of the different NBFCs operating
in India.

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