NBFC Weekly Digest – Edition 5

Pros and Cons of
NBFC Business in India

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, and it deals in the business of loans and advances, acquisition of shares, bonds/stock/ debentures/securities issued by Government or local authority or other securities of marketable nature, hire-purchase, leasing, chit business insurance business. But it does not include any institution whose principal business is agriculture activity, industrial activity, construction sale/purchase/ of immovable property.

Basically, Any non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is an NBFC.

– Isha Malik (Company Secretary, MUDS Management Pvt Ltd)

NBFC Weekly Digest

RBI’s recent Financial Stability Report says- NBFCs have continued to perform better than the banks. Net profit as a percentage of total income remained at 15.3% between March 2015 and March 2016. The flow of non-bank resources to the corporate sector, which includes NBFCs’ bond market borrowing and lending, has increased by 43% from April 2017 to December 2017. NBFC sector is growing at the cost of banks that are saddled by bad loans and poor profitability. NBFCs were the largest net borrowers of funds from the financial system.

There is a growing realisation of the significance of NBFCs in the industry, and in promoting India’s economic growth. There are huge growth opportunities for NBFCs because of the great advantages it offers; though there are some issues regarding the NBFCs. Both the pros and cons of NBFCs are elucidated below:

Advantages of NBFC:

  1. Can provide loans and credit facilities
  2. Can trade in money market instruments
  3. Can do wealth management such as managing portfolios of stocks and shares
  4. Can underwrite stock and shares and other obligations
  5. NBFCs are the last resorts of borrowing; NBFCs are there where banks are not there
  6. NBFCs are the largest propellants of ushering finance into the country
  7. Agility is very important for NBFCs as it sets the banks apart. Banks function slower as compared to the NBFCs
  8. The use of modern methods by NBFCs has overcome key challenges that had overwhelmed conventional lending. NBFCS have made great use of technological advancements like the use of mobile phones and the internet which has helped in making information easily accessible anytime anywhere. It has reduced the demand and reliance on bank branches
  9. Technology is not only at the head of banking and financial services, but also an increasingly digitized India has underpinned the rise of NBFCs. Digitalization has given NBFCs the ability to present multiple choices and reach the larger audience at quicker pace. This indirectly gives rise to larger NBFCs
  10. Combination of partnership and database helps in increasing penetration of financial inclusion. To reach large numbers of customers successfully, and minimize risks, NBFCs have forged partnerships including the government to use their database and identify customer worthiness. Thus lending has been productive.

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Another major advantage of NBFCs is the ground level understanding of their customers profile and the need for their credit, which gives them an edge, as their ability to customize their products according to client needs

– Divya Gupta (Market Analyst, MUDS Management Pvt Ltd)

Disadvantages of NBFC:

  1. NBFCs cannot accept demand deposits as it falls within the realm of activity of commercial banks
  2. An NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself
  3. Deposit insurance facility is not available for NBFC depositors unlike in case of banks
  4. All NBFCs cannot accept deposits; only some can. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits
  5. The regulatory mechanism for NBFCs is stringent

RBI has prescribed strict norms on capital adequacy and NPA in order to bridge the regulatory gaps between NBFCs and Banks, asking NBFCs to maintain minimum capital adequacy norms. It is reflected from a statement of the RBI which said that seven NBFCs were not able to meet the regulatory minimum capital adequacy norms of 15% as of March 2016.

– Mir Irfan (Market Analyst, MUDS Management Pvt Ltd)

“ NBFCs are slowly taking charge of the financial needs of India’s unorganized sector”

– Shweta Gupta, Founder and CEO, MUDS

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By | 2018-06-11T15:24:25+00:00 April 17th, 2018|NBFC Weekly Digest|0 Comments

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