The demand for credit is increasingly growing in India and meeting the needs of everyone as it is out of the league for the traditional banks to handle alone. The better alternative to the banks has been the NBFCs, as the banks are not in a position to meet the demand, all the time. They are known for offering quick and tailored solutions to fulfill the financial needs of individuals in different segments. Ever questioned what NBFCs are actually into?
What is NBFC?
To expand the abbreviation, NBFC is a Non-Banking Financial Company evolving in the mid-1980s. They are mainly registered under 1956, Companies Act under the regulation of the Reserve Bank of India. As it is regulated by the Central Bank of India, but the question is, are they banks?
The activities involved are of Banks such as lending money, offering loans, providing services of investment products, handling stock portfolios, acquisition of bonds and denbentures issued by marketable securities, housing finance, and much more, but they are not banks, instead, financial institutes, diversified into categories like Investment, Asset, and Loan type of a company.
To your surprise, Kotak Mahindra Finance was an NBFC and there are many others to mention!
To summarize in short, they are a crucial part of the financial system, especially during times of financial distress giving service equivalent to banks but at competitive prices but without a banking license but are restrained from financing agricultural, industrial, construction, purchase, and sale activities.
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How did they come into play?
The driving force behind their origin didn’t come with an agenda of making profits but rather came with the sole reason of making the services pertaining to finance accessible to everyone out there.
NBFC came into the financial system way back in the 1960s starting with a small scale to meet the financing needs of all individuals and initiated their operations by inviting investors to invest in fixed deposits and breaking into offering industrial firms with leasing deals. It lacked in making an impact on the financial market back then.
Its evolution began during the financial crisis in 2009 which had a massive hit on the business in the entire world as they were not receiving the financial aid from the banks that were meant to provide it. The best alternative to this was to wisely use the savings of the economy for capital investment. Due to the gap in the availability of credit in India, financial institutions had to come into play and that’s when the NBFC finally made their impact.
Ever since the NBFC began to grow from 7000 to 30,000 from 1981 to 1992. By 1997 its operations evolved by introducing a variety of products and in the last 20 years, it is evident in its remark in adding depth to the financial segment. And to this date, it has broadened the industry of finance and is availing financial services to all those who weren’t able to access it by inspiring the investors to believe in them to make them courageous enough to help the borrowers by lending.
Their deep interest in research keeps them ongoing to grow continually thereby.
The role of NBFC
NBFC indulges in the major creation of wealth among all with a strong agenda to make financial aid available to even those who are less fortunate to access. It can deliver by owning a top-notch digital tech platform to process loans faster and to offer specialized credits and other financial products & services to a vast audience. NBFC indeed is helping in market expansion, economic development, increasing employment, and the growth of sectors like SMEs, infrastructure, education, etc., similar to the services of a bank but not operated like a bank.
Questions to be asked before investing
Difference between NBFC and Bank
Banks |
NBFC |
| The bank is a government-entitled company offering financial services to the customers | NBFC offers services similar to the banks but is not bank licensed |
| The bank is registered under the banking regulation act | NBFC is registered under the company act |
| Bank takes care of payment and settlement | NBFC doesn’t involve in payment and settlement |
| Banks can issue self demand draft by itself | NBFC can’t issue self demand draft by itself |
| Self cheque can be drawn by their own | Self cheque can’t be drawn by their own |
| Banks can make credits using multiple other financial activities | NBFC can’t make credits using multiple other financial activities |
| Banks are into giving transactional services | NBFCs don’t offer any transactional services |
| Banks allow the deposit of money and they as well lend it | NBFCs don’t allow deposit and neither lends it |
| Foreign investments are only allowed up to the certain limit | Foreign investments are allowed up to 100 % |
Lasting Thoughts
The market size of the NBFC in India has rapidly increased from 22.68% to 44.92% from 2018 to 2020 and in the fiscal year 2021 – 2022, a growth of 15% more is anticipated. So nearly 10,000 NBFCs are registered with the Reserve Bank of India and the government wants the NBFC sector to expand more full-fledging. In fact, the revenue made by NBFC is more than the Banks. Their positive impact on the economy in regards to wealth management, infrastructure development, employment, and an agenda to make credit accessible to even the unorganized sector is remarkably projecting them toward growth.
Should you consider investing in NBFC? When you plan to do so, ensuring they are registered and have a credit rating of AAA or at least A, is something that must be seen to make a safer investment. And as well take into consideration the upgrade and downgrade throughout its lifetime in the future aspect for that matter.
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