Introduction to NBFCs
NBFCs are financial institutions that are not banks. They provide a range of financial services to individuals and businesses, including loans, deposits and credit cards. The term NBFC is an acronym for Non-Banking Financial Company.
The history of NBFCs dates back to the 1960s when it was first introduced by the Reserve Bank of India (RBI) as an alternative channel for funding small businesses in India. Since then they have grown exponentially over time with an increasing number of companies entering this space every year as they look to expand their operations without having to rely on banks alone for their capital requirements.
Growth of NBFCs in India
The growth of NBFCs in India has been phenomenal over the past few years. In fact, it is estimated that the total assets under management by these institutions have grown from Rs 5 lakh crore in 2008 to Rs 30 lakh crore in 2017. This represents an increase of more than 1,000% in just 9 years! The reason for this phenomenal growth can be attributed to several factors.
The first factor is increased awareness among Indians about personal finance and investment opportunities available to them. With better education facilities today than ever before, people are better informed about how their money works for them and how they can make it grow faster through investments such as mutual funds or fixed deposits (FDs).
This has led many Indians who previously did not invest at all into becoming active investors who look at various options before deciding what kind of investment suits their needs best based on their risk appetite level and time horizon.
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Role of NBFCs in Banking Financial Services and Insurance (BFSI)
The banking, financial services and insurance (BFSI) sector is one of the most important pillars of any economy. It has been playing a vital role in transforming India’s economy into an industrial powerhouse, which is evident from the fact that it contributes almost 18% to India’s GDP.
The role played by NBFCs in BFSI can be broadly classified into three categories:
- Providing credit facilities to individuals and businesses;
- Providing risk management solutions through insurance products;
- Offering investment opportunities through mutual funds, securities etc.,
Regulatory Framework for NBFCs in India
NBFCs are regulated by the Reserve Bank of India (RBI), which is responsible for formulating and implementing monetary policy and regulating banks and other financial institutions in India. The RBI also acts as an administrator of a number of insurance companies, non-banking finance companies (NBFCs) and chit-fund companies.
The National Housing Bank (NHB) was created in 1987 as an apex institution for housing finance institutions in India to promote home ownership for all segments of society through its various subsidiaries or associate members such as HDFC Ltd., LIC Housing Finance Ltd., IREDA Ltd., etc.
Advantages of NBFCs
- Ease of Access
- Flexible and Innovative Products
- Lower Cost of Funds
Disadvantages of NBFCs
While NBFCs have been able to play a vital role in empowering India’s economy, they also face several challenges. Some of these include:
- High Cost of Funds – The cost of funds for NBFCs is much higher than that for banks because they are not eligible to avail cheap deposits from the public and rely on expensive sources like corporate bonds and equity markets. This makes it difficult for them to compete with banks when it comes to lending rates.
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Recent Developments in NBFCs
Recent developments in the NBFC sector have been significant. In the recent past, several mergers and acquisitions have taken place.
- Axis Bank acquired Fino Payments Bank Ltd (Fino) for Rs 1,950 crore in May 2018;
- Kotak Mahindra Bank Ltd acquired ING Vysya Bank Ltd for Rs 5,700 crore in July 2018;
- ICICI Bank acquired Yes Bank Ltd for Rs 18,000 crore in October 2018;
- Federal Bank Ltd acquired Centurion Bank of Punjab Ltd for Rs 875 crore in November 2018;
- Kotak Mahindra Bank acquired Oriental Insurance Company Limited (OICL) from LIC Housing Finance;
- Limited (LICHFL) at an enterprise value of Rs 12 billion on December 17th 2018.*
Future of NBFCs in India
The future of NBFCs in India is promising. The changing regulatory environment will help create a level playing field for all players in the financial services sector, which will encourage more competition and growth prospects for NBFCs.
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Future Regulatory Environment:
The Reserve Bank of India (RBI) has been working on creating a more robust regulatory framework for NBFCs since 2016, when it appointed an expert committee to review their regulatory requirements and make recommendations regarding their classification, licensing norms etc., based on international best practices. The committee submitted its report in April 2018 and recommended that NBFCs be classified into three categories based on their risk profile – low-risk/low-volume lenders; medium-risk/medium-volume lenders; high-risk/high-volume lenders – instead of being treated as one homogeneous group under the current structure where only two categories exist: small finance banks (SFBs) or non-banking financial companies (NBFCs).
The key points of this article are as follows:
- The impact of NBFCs on the Indian economy.
- How NBFCs can help in the economic development of India.