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Non-Banking Financial Companies (NBFCs) are financial institutions which are involved in providing financial services similar to a bank but do not have a banking license. The concept of NBFC emerged in the early 1960s to meet the financial needs of the population as they were not being met by the traditional banks during that period.
NBFCs form an integral part of the Indian financial system. They promote the country’s economic growth by catering to the high-risk industries, or individuals like low-income farmers or MSMEs. NBFCs play a significant role in the development of the Indian economy by boosting employment generation. NBFCs have been improving themselves based on the needs of clients and providing better product lines at reasonable prices and have also succeeded in understanding the customer’s segments.
In this article, we will discuss the opportunities and challenges for NBFCs. But let’s start with the basics first.
A Non-Banking Financial Company (NBFC) is a financial institution that provides services that are similar to those offered by the banks. However, NBFCs do not hold a banking license to provide these services. As a result, these financial institutions are subject to different regulations than banks, and are less regulated than banks in many regards. NBFCs are also known as Non-bank financial institutions (NBFIs). NBFCs are regulated and supervised by the Reserve Bank of India (RBI).
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A wide range of financial services is offered by NBFCs which includes:
NBFCs come with a lot of opportunities. Let’s discuss them below.
NBFCs have their own unique way to assess the creditworthiness of the people and grant them loans with light paperwork. In case of micro, small, and medium enterprises, loans are granted to them based on their invoices due for payment. Nowadays, banks are very cautious about creditworthiness of the customers and do not easily provide loans due to the rise in Non Performing Assets (NPA). Due to this, NBFCs have seen a hike in the loan requests and they can charge higher interest rates while providing loan to the customers. In order to skip the complications of complying with the requisites banks put on the customers, they're ready to pay the additional interest charges to NBFCs for loans.
New credit customers are one of the biggest opportunities for NBFCs. New credit customers are those individuals who belong to the rural sector and have not borrowed from any financial institution previously. The ground presence of banks and other credit financial services are limited in the rural areas. The banks which are present in rural areas are regulated by legislation. Therefore, the individuals in rural areas have to rely on banking and credit history while applying for a loan. The banks cannot offer loan facilities to individuals who do not qualify for it. For such individuals, NBFCs are a blessing. The new credit customers have emerged as a lucrative segment for the NBFCs.
GOI has exempted NBFCs from the hard rules and regulations which are mandatory for the traditional banks, keeping in mind the financial needs of the people. NBFCs get to enjoy flexibility in the rules for paperwork and other restrictions due to which many entrepreneurs put their interest in these financial institutions. GOI has provided many opportunities for the establishment of NBFCs in the Indian market. The NBFCs are eligible for a foreign investment of up to 100%. The SARFAESI Act powers NBFCs to take the hypothecated assets in possession and sell them. If already sold, the third party has to surrender the hypothecated asset.
NBFCs are contributing to India’s GDP by facilitating credit access, supporting investment, and contributing to various sectors. The diverse range of services offered by NBFCs have contributed to the overall growth and resilience of the Indian economy. This is why the Indian Government has taken many initiatives to protect the interests of NBFCs and help them to emerge. NBFCs are in the business of profit. The contributions made by the NBFCs in the growth of the Indian economy highlights how well NBFCs have been functioning.
NBFC seems like a profitable business idea but setting it up isn’t easy. It can be really complicated. In addition to this, despite the opportunities and support received by the NBFCs, the challenges faced by these institutional organizations are numerous. Some of the problems faced by the NBFCs are mentioned below:
Many NBFCs face challenges when it comes to refinancing. Banks, capital markets and sometimes the competitors are the major sources of refinancing. Refinancing is an important element for an NBFCs efficient working as well as the sustainability of growth. But in the present scenario, refinancing is not a favorable option for the sustainability of growth for the NBFCs. Many banks are unwilling to fund NBFCs because they’re afraid that the funds will be used for refinancing the debt and not for business.
Another major challenge faced is the process for NBFC license. It is not an easy process to obtain this license and requires approvals and a lot of documents and paperwork. The required documentation differs for each kind of NBFC and the process of obtaining this license requires compliance with multiple regulations. Many restrictions and limitations have been put forth by RBI before this license can be obtained.
Even though GOI has shown its support for NBFCs on numerous occasions, the process for setting up an NBFC is complex since such a financial institution directly affects the general masses and so, the government cannot permit any imperfections and flaws in this field. The Board of Directors must contain experienced persons with financial background and not have a criminal record. Another criterion to obtain this license involves having a minimum owned fund of Rs. 2 crores which shouldn’t be borrowed.
There is no doubt that the new to credit customers provide opportunities for NBFCs. But they can also be a challenge for these financial institutions. There’s always risk associated with doing business with customers who are indulging in services for the first time. Also, manpower is necessary for NBFCs to educate and regulate these customers.
Another challenge faced by NBFCs is that there are no tools available for statutory recovery. Due to this, there is a negative impact on NBFCs functioning.
Small NBFCs do not have to maintain CRAR (Capital Adequacy Ratio) but they do have some restrictions upon them. They cannot exceed the leverage ratio beyond 7. Due to this, NBFCs have to depend on banks and other financial institutions to comply with the financial demand which creates a hassle to them. In lieu of this borrowed money, these financial institutions and banks carry out due diligence on the NBFCs which can be very challenging.
At present, NBFCs have many representative bodies. Since the NBFC sector is still in the stage of development, the presence of representative bodies poses a challenge for the NBFCs. It is necessary to ensure that all the segments of NBFCs are represented adequately in an apex body in a manner that promotes NBFCs’ balanced growth. The various segments of NBFC must be developed in a harmonized manner which can be achieved through the set up of a single representative body.
The business of NBFCs is a profitable business. The Government of India has shown its support for NBFCs through many initiatives. The rules and regulations for NBFCs are less strict compared to the traditional banks. However, setting up an NBFC isn’t that simple. Obtaining any NBFC license is one of the major challenges itself, and there are many key factors to be considered when applying for an NBFC license. But you do not need to worry about it. Registrationwala’s team leaders can help you in obtaining an NBFC license in a smooth and hassle free manner. So don’t wait any further and get in touch with our team now.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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