Non-Banking Financial Companies, abbreviated as NBFCs, are government-authorized institutions that provide on-demand credit services as per the banking regulations in the country. Other than engaging in credit activities, these companies have the authority to acquire government-issued stocks, bonds, shares, securities, and debentures and may receive deposits under such a scheme.
NBFCs: How are they different from banks?
Under the Companies Act, 1956, NBFCs are defined as companies that can perform lending operations like banks without fulfilling the definition of one. The main difference between NBFCs and banks is obvious – NBFCs don’t have a banking license, which bars them from offering certain services expected from a financial institution.
NBFCs are different from banks in the following ways:
- Cannot accept demand deposits, i.e. deposits that can be repaid on demand
- Cannot issue cheque-books to customers
- Don’t necessarily have to adhere to PSL norms
- Cannot be a part of the payment and settlement system
- Are regulated by multiple entities, namely, RBI, SEBI, NHBs, etc.
- Cannot offer facilities of Deposit Insurance and Credit Guarantee Corporation to its depositors
- Don’t necessarily have to maintain Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) unlike banks
This also means that NBFCs can cater to the section of the population excluded by the banks. This not only benefits the local borrowers to manage personal finance but also aids the unorganized sector in many ways. And, while the banking sector will always be the core of an economy, NBFCs can play a pivotal role as well.
Role of NBFCs in Economy
The major challenge with the economy of any country remains the unintended yet unresolved exclusion of the economically weaker sections of society. Banks only have a limited outreach and have to consider credit scores before lending. Thus, there is a gulf between prospective borrowers and lenders. This is where NBFCs can help bridge the gap and channelize capital formation. It is an important component of the financial sector in the following ways:
- Proper Mobilization of Resources
- Aids Capital Formation
- Promotes the development of Financial Markets
- Aids Employment Generation
- May Attract Foreign Grants
How NBFCs Impact Fintech
Fintech industry hinges on the profitability of banking and finance sectors and with the greater contributions of NBFCs each year, it is set to boom in the upcoming years. In fact, such ventures have been beating banks nearly every year since 2006. Even in terms of credit growth (increase in the amount lent every year), NBFC sector performs better than banks.
As the number of borrowers increases every year, the use of Fintech can help streamline asset management and credit system. Here are a few other benefits:
- It is cheaper to integrate Fintech and NBFCs
- Quick, hassle-free disbursal of loans
- Faster international transfers
- Minimal documentation process
- An alternate credit scoring system to fund those who do not meet the required CIBIL score
- Reliable fraud management
- Financial and user data can be retrieved whenever needed
While the current economic crisis states otherwise, the future of NBFCs can be very bright if the sector is given a push in the right direction. Also, the collaboration with blockchain and AI, NBFCs can break the traditional molds and drive growth. Making the best use of the data available along with the technology offered by Fintech sector, we can expect NBFCs to boost the economy.
A Software Engineer by study and a Writer by passion, Sumit Narula has a fair hand at writing for different domains. When not writing for CurlWIRE, he has been known to sneak a few peeks at social media updates, technology news, and newly-launched gadgets to stay updated and inspired.