Non-Banking Financial Companies (NBFCs) play a significant role in the Indian economy by providing financial services and bridging the gap between the formal banking sector and the unbanked or underserved sections of society. NBFCs are financial institutions that are engaged in activities similar to banks but do not hold a banking license. They are regulated by the Reserve Bank of India (RBI) under the RBI Act, of 1934.
NBFCs are regulated by the Reserve Bank Of India (RBI) and the Securities and Exchange Board of India (SEBI) in India. NBFCs are essential as they fulfill the financial needs of individuals and businesses. They play a crucial role in the financial sector. They help in the loan process.
What Is The Role Of NBFCs In The Indian Economy
It includes non-banking financial institutions (NBFCs) as well as commercial banks. These businesses are distinct from banks and provide various financial services, including loans and chit funds. NBFCs are frequently small players who receive little attention. Even in a developing nation like India, they are still vital to the economy.
NBFCs are financial intermediaries that play a vital role in developing the Indian economy. It offers credit facilities to remote areas and supports those individuals who are often overlooked by the banks. Non-Banking Financial Companies underpin the weaker sections of society, thereby bringing equilibrium to the nation.
What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the 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 but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods or providing any services and sale/purchase/construction of the immovable property.
NBFCs are financial institutions that provide various financial services and products, including loans, insurance, and asset management but do not have a banking license. Unlike banks, NBFCs do not have the authority to accept deposits from the public. However, they can accept deposits from a select group of individuals, such as directors, shareholders, and relatives.
Why NBFCs are a Critical Part of the Indian Economy?
The NBFCs are the companies that provide loans to the ones in need and similar services to their customers. They basically deal with the business of loans and funds along with the business of financial services, namely the acquisition of shares, stock, bonds, and debentures. that of agriculture activity, industrial activity, purchase or sale of any goods or providing any services, and sale/purchase/construction of the immovable property.
The condition is so bad that it brought down economies in a few months! People are not able to earn, companies are not able to function, the employees are not getting any work, and the whole economy is suffering in the grand scheme of things. In this grave and dire situation, the NBFCs are the ones who are rising to support and boost the economies in the right direction and allow the markets to stand in a better condition. This makes NBFC registration in India a profitable prospect.
Importance of Non-Banking Financial Companies
India’s financial services sector is huge. It is not just comprised of commercial banks, but also non-banking financial companies (NBFCs). These firms offer a wide array of financial services like loans, and chit-funds, and are different from banks. NBFCs are often small players that largely go unnoticed. However, they are still important to the economy, especially in a developing country like India where 70% of the population lives in rural areas.
NBFCs are incorporated under the Companies Act, 2013, and cater to a wide range of financial services like the acquisition of stocks, bonds, securities, debentures, shares, loans, and advances. Non-Banking Financial Companies value customers and emphasize the creation of innovative products. The role of NBFC in economic development is beyond assessment due to its credibility in supporting infrastructural & manufacturing development.
How are NBFCs a Game-Changer in the Financial Sector?
Reserve Bank of India acclaims NBFCs to bring revolution in the financial sector. Here are some factors that Non-Banking Financial Companies contribute to the Indian economy:
Size of the sector: The NBFC sector has grown considerably in the last few years despite the slowdown in the economy.
Profitability Ratio: Since one requires less capital to set up NBFC than a bank, thereby it turns out to be a more profitable business model due to lower costs. NBFC offers loans to customers at a cheaper interest which results in credit growth.
Growth: In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On average, it grew 22% every year. This shows it is contributing more to the economy every year.
Promotes inclusive growth: NBFCs serve credit facilities to a broad spectrum of customers both in rural and urban areas. Non-Banking Financial Companies finance micro and small-scale Companies, which fosters progression in rural areas.
The Most Recent Changes And Trends In NBFCs That Aid In Economic Development
NBFCs help in the faster development of our Indian economy.
Products Innovation
Indian NBFCs have been providing innovative solutions to meet the changing needs of their clients. They also provide loans against securities, loans for education, and loans for consumer goods. The innovation has aided NBFCs in expanding their customer base and diversifying their loan portfolio, which has led to a growth rate that is sustainable.
Robotic Process Automation
NBFCs that use robotic process automation are renowned for their quick operations. It is one of their key benefits over traditional banks, in fact. It enables NBFCs to automatically collect data from application forms, Instantaneously validate KYCs, determine eligibility, and expeditiously pay loans in the event applications are approved.
Credit and Finance for MSMEs
The Confederation of Indian Industry, an industry organization, hosted an NBFC summit at which the Union Minister spoke. He said that NBFCs were helping small and medium-sized businesses (SMEs) access funding and turned into the growth engines of the Indian economy. NBFCs have aided MSME companies in expanding their operations and adding employment to the nation.
What is a Non-Banking Financial Company (NBFC)
Role of NBFCs in the Indian Financial System
NBFC’s role in the Indian financial system by catering to the diverse credit needs of various sectors of the economy. Their ability to provide customized financial products and services tailored to the specific needs of different segments of society makes them a vital component of the financial system.
The role of NBFCs can be summarized as follows:
Mobilizing Savings: NBFCs mobilize savings from different sources, such as retail investors, high-net-worth individuals (HNIs), and institutional investors, and they use these savings to finance various activities.
Providing Payment Services: NBFCs also provide payment services such as issuing debit and credit cards, electronic fund transfers, and mobile banking. NBFCs also play a key role in supporting infrastructure development by providing long-term finance to infrastructure projects.
Providing Credit: NBFCs credit various population segments, including individuals, small and medium enterprises (SMEs), and large corporations. NBFCs are generally more flexible than banks in terms of lending criteria.
FAQ
What is NBFC?
NBFC or Non-Banking Financial Company is a financial institution that provides banking services without requiring to hold a bank license. NBFC is a company registered under the Companies Act, and regulated by RBI. The principal business of NBFCs includes activities related to investments, giving loans and advances, and Government which are marketable.
