A Study on NBFC and its role in Indian Economy

WHAT IS NBFC ?
 Sec 45I (c) of the RBI Act defines “financial institution’’.
 A non-banking company carrying business of financial
institution will be an NBFC.
 Activities included in the definition:
a) Financing b) Acquisition of shares, stock and
Securities c) Hire purchase d) Management of Chit
funds etc.

EVOLUTION OF NBFC

Although NBFCs have a legacy in India, they came into the

limelight in the late 1980s. Liberalization and fresh avenues
of operations in areas such as housing and investment
spurred growth of NBFCs in the country. NBFCs have become
an integral part of India‘s financial system. In recent times,
NBFCs have emerged as lenders to both companies and
individuals. When it comes to lending, NBFCs are generally
regarded to be complementary to banks and are often able
to offer better services and products to their customers.
Initially intended to cater to the needs of the small investors
and savers, NBFCs have developed into institutions that can
provide services similar to those of commercial banks.
SEGMENTS OF THE FINANCIAL SERVICES IN INDIA
 NBFC VS BANKS

 You can open a Savings or Current Account at

banks. NBFCs are not licensed to open Savings or
Current Accounts.
 All loans given by banks are subject to interest
rates fixed by RBI. Loans from NBFCs also comply
with RBI laws but have the autonomy to charge
higher or lower.

FEATURES BANKS NBFC

Regulated By RBI-Banking Act Companies Act
Demand Deposit Accepted Not Accepted
Maintenance of Compulsory Not required
reserve ratios
Foreign upto 74% for Allowed upto
Investment private sector bank 100%
Transaction Provided by Banks Not provided by
Services NBFC
Payment & Integral part of the Not a part of the
settlement system system system
 Factors that lead to growth of NBFCs
 NBFCs are believed to be the more ‘customer-oriented’
version of the commercial banks, which are primarily
seen as ‘profit-making machines’ even if it comes at the
cost of the customer‘s interest.
 Due to the relatively lower degree of regulation over
NBFCs as compared to banks, there is less
documentation and uncomplicated terms while
processing the loan.
 They fulfill the need of all customers for ‘financial
inclusion’ by providing them a source of funds beyond
the traditional money-lender.
 Product innovation in the form of used vehicles
financing, small ticket personal loans, three wheeler
financing, etc. has given a competitive edge to most
NBFCs.

Role of Micro Finance – NBFCs in Financial Inclusion

Inadequacies in rural access to formal finance and the

usurious terms of informal finance for the poor provide a
strong need and ample space for innovative approaches to
serve the financial needs of India’s rural poor. The efforts have
been made by the government, financial institutions like MF-
NBFCs, and Non-government Organizations (NGOs), often in
co-partnership, to develop new financial delivery approaches.
These microfinance approaches have been designed to
combine the safety and reliability of formal finance with the
convenience and flexibility that are typically associated with
informal finance. They typically involve providing thrift, credit
and other financial services and products of very small
amounts to the poor, with the aim to raise income levels and
improve living standards. Micro Finance (MF) - NBFCs could
play a significant role in facilitating inclusion, as they are
uniquely positioned in reaching out to the rural poor.

NBFC: GROWING IN PROMINENCE

 NBFCs are rapidly gaining prominence as intermediaries

in the retail finance space
 NBFCs finance more than 80 per cent of equipment
leasing and hire purchase activities in India
 The public deposit of NBFCs increased from US$ 293.78
million in FY09 to US$ 6,089.52 million in FY17,
registering a compound annual growth rate (CAGR) of
46.10 per cent.
 The gross loans of India’s Non- Banking Finance
Company-Microfinance Institutions (NBFC-MFIs)
increased 24 per cent year-on-year in Q2 FY18 to Rs
38,288 Crore (US$ 5.89 billion).
Classification of NBFCs based on activities undertaken: FY17
 Credit growth of NBFCs, Banks and HFCs: FY17

Sectoral distribution of credit – NBFCs and Banks : FY17