Non - Banking Financial Institutions (NBFCs)

Mains Marks Booster 5th August 2023

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Introduction

NBFCs are company registered under the Companies Act and provide various financial services and products, including loans, insurance, and asset management, but do not have a banking license.
Business areas: Business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business
Does not include: Institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
Regulator: By RBI under RBI Act, 1934.

Types of Non-banking financial institutions

1. Non-banking financial company

2. Mutual Benefit financial companies, ex.-Nidhi Companies
3. Miscellaneous Non-banking companies, ex.-Chit funds

Significance of NBFCs

Financial Inclusion: By providing lending and financial services to under-represented population segments, NBFCs promote financial inclusion.
Engine of Growth: NBFCs are key financer to MSMEs, infrastructure projects and are driven by significant growth in rural, small scale and unbanked sectors.
Credit access: Provide credit to various population segments, including individuals, small and medium enterprises (SMEs), and large corporations. They are more flexible than banks in terms of lending criteria, and they can provide credit to those who may not meet the stringent requirements of traditional banks.
Mobilize Savings from different sources, such as retail investors, high-net-worth individuals (HNIs), and institutional investors, and these savings are utilised to finance various activities.
Provide investment services: Such as portfolio management, investment advisory, and distribution of financial products.
Provide payment services: Issuing debit and credit cards, electronic fund transfers, and mobile banking.

Issues with NBFCs

Multiple regulatory bodies: regulatory bodies differ according to the type of NBFCs. Ex- NHB, SEBI, IRDAI etc.
Asset- liability mismatch: funds borrowed for short term and lending takes place for long tenures like 10-15 yrs → liquidity crunch in the short term.
IL&FS crisis: crisis led to decreased reliability on NBFCs→ investors reluctant to lend to NBFCs > Liquidity squeeze for the entire NBFC segment.
Less cautious credit habit: NBFCs have grown their portfolio of small and micro loans where there are risks of high NPAs and also unsecured loan segment is on a rise.
Delayed projects: due to delayed statutory approvals, land acquisition delays, environmental clearance delays etc.
Unsecured deposits of the lenders unlike banks.

Way Ahead

FSLRC recommendations: creating a body to monitor risk cutting across the sector.
Timely project clearance: reducing bureaucratic hurdles in infrastructural projects, plug and play facilities, infrastructure clusters, corridors etc.
Allowing large NBFCs to seamlessly become banks by bringing consistency in regulations like similar CAR requirements.
A coordinated and consultative approach to address infrastructural credit issues.
RBI has proposed

Creation of a 4 layers regulatory framework. The degree of regulation depends on the perception of risk in every layer.
Classification of NPAs of base NBFCs from 180 days to 90 days overdue.

Conclusion

The need of the hour is the holistic reboot of the oversight mechanism of banks and NBFCs to retain public confidence and financial stability.