What’s The Role of Non banks in Consumer & Business Credit?

Non Bank Financial companies or NBFCs are one kind of financial institution that provide banking services but do not hold a banking license because they need to meet the exact legal definition of banking. They work under certain restrictions unlike their peers, i.e., commercial banks, for example:

(i)            They are not allowed to take demand deposits from the public which can be withdrawn at short notice (except an Asset Finance Company complying with prudential norms and having CRAR of 15%),

(ii)           (ii) They do not form part of the payment and settlement system and cannot issue cheques drawn on itself.

Their banking operations include offering loans and advances to businesses and consumers, leasing of hard assets like automobiles, acquisition of marketable securities, insurance business and hire-purchase.

NBFC are fast emerging as an important fragment of Indian financial system. Small credit market controlled by NBFC in the financial year 2012 stood at Rs. 7,203 crore. The recent analysis of Frost & Sullivan has estimated that this amount will grow by 23.3% every year on an average and will reach at Rs.38, 417 crore in the year 2020.

In India, Reserve Bank of India has been empowered to regulate and supervise the function of NBFCs within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) with the following objectives:

  • Ensure healthy growth of the financial companies;
  • They work as per rules and regulation within the policy framework;
  • Quality of surveillance and supervision can be conducted by RBI as per the changing financial system.

The non-banking companies function by performing as financial intermediaries in various ways, some of which include making loans and advances, leasing, hire purchase, loans and advances, etc. They raise funds from public and lent them to ultimate spenders. They have wide spectrum of products. The Act specifies that NBFC must get registered with RBI as a deposit taking company. If any company desirous to act as a non banking company, registered under the Companies Act 1956, must have a net owned fund of Rs 200 lakhs (before April 21, 1999, it was Rs 25 lakhs only). Net owned fund is the total of paid up capital, free reserves excluding deferred revenue expenditure, accumulated losses and intangible assets.

Advantages of Nonbank Credit or Reasons for Increasing Role of Nonbanks in Consumer & Business Credit

  • They often specialize in certain business models or industry types, such as, franchises or high growth start ups.
  • They tend to facilitate certain type of high risk loans that seem to risky to other lenders including banks.
  • Compared to normal banks, nonbanks often offer flexible terms on evaluating cash flow or collateral security.
  • Their rates tend to be more competitive on easier terms than other bank loans.
  • They facilitate access to rural or semi rural area where the reach of traditional banks has remained poor.
  • They have strong impact in developing small business in remote area through local presence and strong customer relationships and informal understanding.

There are three main categories of NBFC. They are:

  1. Asset Financing Companies
  2. Loan Companies
  3. Investment Companies

Micro Finance Institution is another form of nonbank finance. It is one of financial service for small businesses and entrepreneurs lacking banking and its related access. These NBFC specialize on offering loan to individuals or for people from low income group.

In most of the countries, there are many non-bank companies beyond the circle of traditional banking institutions like leasing companies, insurance companies, mutual funds, housing finance companies, and other different types of financial service providers. Their services in many ways differ from the services rendered by the banking institutions to meet the heterogeneous requirement of the consumers and business owners in a diversified financial system and they also enhance the flexibility of the economies and make it stronger. The fourth Micro, Small, And Medium loan credit market (MSMES) annual census revealed that it provides employment to about 60 crore people in India and accounts for 45% of country’s manufacturing total output and 40% of India’s export. Despite their important role only around 10% of the registered MSME and 5% of the unregistered MSME have access to bank and other financial institution.

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