The Role of NBFCs in India’s Financial Market

You must have sometimes encountered the word "NBFC" and wondered what that is. You may have read it in some news article or heard somebody mention it but not know what it is. The fact is that financial jargon can be confusing, and it especially gets confusing when people start throwing such acronyms around. However, here's the thing: understanding what NBFCs are and what they do is way more important than one may think. These financial entities are essential to understanding how money moves around in India, and they may even impact your life without realising it.

What are NBFCs?

NBFCs, or Non-Banking Financial Companies, are institutions that provide most of the services offered by banks but aren't classified as banks. Imagine you want to purchase a car or start a small business and need a loan. You may want to go to a bank for that loan. But what if you need help getting a loan from banks because you cannot meet their strict requirements? That is where NBFCs fit in. They can lend you money, help finance a car, and offer investment options. Unlike banks, however, they do not have a banking license and, therefore, cannot provide certain services in the line of savings or current accounts. It should be remembered that though NBFCs are not banks, they are still supervised by the Reserve Bank of India. The Reserve Bank closely monitors NBFCs to ensure they function safely and do not fleece the people. Therefore, though they cannot be viewed precisely as banks, they are a valid and integral part of the financial system.

NBFCs vs Banks

Deposits: Banks can accept deposits from people, meaning you can open a savings account or fixed deposit with them. Generally, NBFCs do not take deposits from the public. There may be a few exceptions, but usually, NBFCs are mostly money lenders who provide credit to people rather than handle deposit accounts.

Payment Services: Banks provide payment and transaction services, such as issuing debit cards and allowing access to their ATMs. These facilities are also made available through online services. An NBFC does not offer these services, so you will not get a debit card or use the NBFC's ATM.

Regulation: Although both banks and NBFCs are regulated, banks are subject to more strict regulations since they deal with public money through deposits. NBFCs are also regulated, but their regulations differ since they deal primarily with lending and other financial activities. The Reserve Bank of India regulates them and ensures they work by the book so as not to undermine economic stability.

Financial Inclusion: NBFCs typically fill gaps that banks are not in a position to fill. For example, NBFCs may lend money to people or businesses that banks find too risky. This makes NBFCs crucial in financial inclusion, ensuring access to financial services for all.

Why NBFCs are Important

They make a significant contribution to the Indian financial market, especially by reaching out to people who do not have easy access to banks. According to a report by the Reserve Bank of India, NBFCs account for nearly 25% of the total assets in the Indian financial system.

They are essential for:

SMEs: NBFCs lend money to small businesses, which the banks and financial institutions may reject. Hence, they help them grow, generate employment, and contribute to the economy. 

Rural Areas: NBFCs offer financial services to many rural areas where banks do not have branches. Therefore, they become essential for financial inclusion, ensuring everyone can access financial products and services. NBFCs mainly deal with people outside the reach of traditional banks and offer them credit and other associated financial services.

Microfinance: Some NBFCs specialise in microfinance, meaning they lend small sums of money to people in dire need, often without requiring much collateral. This is vital to low-income people who need a small sum to start a business or cover essential expenses.

How NBFCs Affect You

Personal Loans: If you or any family member has taken a personal loan, the chances are that it was from an NBFC. NBFCs have made a name for fast, hassle-free loans with fewer comparative requirements than banks. Hence, they have become the hot favourite for people in dire need of money who cannot meet the strict criteria set by banks.

Vehicle Financing: How many people can afford cars or bikes? Many of them get loans from NBFCs that specialise in vehicle financing. NBFCs often work with dealerships to offer financing options directly to buyers.

Education Loans: Some NBFCs offer education loans to students who may not be eligible for a bank loan. This may make a big difference for students who want to continue their studies but need more funds since no other funding options exist for these students.

Role of the RBI

The Reserve Bank of India regulates NBFCs and ensures their safe and sound operation. Like banks, NBFCs must follow some rules set by the RBI. Such rules are in place to protect the consumer from risks that an NBFC might take on. For example, monitoring how much money NBFCs can lend, how they manage money, and how they treat customers.

Over the past few years, the RBI has tightened the noose on NBFCs following some shocking cases of such entities running into financial trouble. This has included increasing supervision and putting them in risk categories to ensure they maintain specific capital levels to absorb losses. These measures help secure the stability of these NBFCs and play a critical role in the financial market without posing threats to the whole economy.

Conclusion:

Though less well-known than banks, NBFCs are essential in India's financial market. They help small businesses grow, facilitate inclusions at the rural level, and have made life easier for many with loans and financing options. Whether assisting a farmer in purchasing seeds, financing a student's education, or enabling someone to buy his first car, NBFCs are doing their bit behind the scenes to keep India moving.