What is a Non-Banking Financial Corporation ?
- An NBFC is a company registered under the Companies Act, 1956, and undertakes activities similar to that of a bank like accepting deposits and lending loans and advances.
- Borrowers prefer them over banks due to their faster decision-making ability, prompt provision of services and expertise in niche segments like truck finance, consumer durables or gold loans.
However, they cannot do the following:
- NBFCs cannot accept demand deposits
- NBFCs cannot issue cheques drawn on itself
- NBFC deposits are not insured by Deposit Insurance and Credit Guarantee Corporation.
Categorisation of NBFCs :
- Deposit taking NBFCs : It is important to note that RBI has not given any license to any deposit taking NBFC started after 1997 keeping in mind the security of the money deposited by the people.
- Non-Deposit taking NBFCs.
Non-Banking Financial Banks in India :
- The industry continues to get the major share of credit, though NBFCs have been increasing the exposure to the retail sector in the last couple of years.
- A recent Crisil report says that NBFCs’ share in total credit in India will go up to 19%, from the existing 16%, by 2019, due to the growth of infrastructure sector and construction of highways.
- A recent development also is that NBFCs have also been giving working capital loans to small and medium enterprises.
Non Performing Assets and NBFCs :
There has been a steady deterioration in asset quality of NBFCs in recent years. Gross non-performing assets (GNPA) ratio for NBFCs increased to 4.5% at end-March 2016.
The increase in NPAs was partly due to the change in NPA recognition norms.
Prior to the issuance of the revised framework in 2016, NBFCs had to mark a loan as bad loan, if the interest was not paid for six months, while for banks it is three months.
Now NBFCs have to mark a loan as bad loan, if the interest has not been paid for 90 days or three months. The new guideline will however kick in only by March 2018.
Future of NBFCs ?
- NBFCs have brought efficiency in their operations by embracing technology and have been using algorithms and analytics in assessing the credit needs of the borrowers and providing them online lending platforms.
- NBFCs have been competing with and complementing banks in the growth of the economy over the past few decades. No wonder that they have been regarded as ‘Shadow Banks’ by the financial stability board (FSB).
- Though regulated by the RBI, they do not enjoy the comfort of going to the central bank “as the lender of last resort” in times of crisis unlike banks
- To conclude, there is no denying the fact that NBFCs will play a key role in the growth of our economy in the coming years.