NBFC

Service Offered by Non Banking Financial Companies (NBFCs)

The finance sector in India is revolutionizing. The Non-Banking Financial Companies (NBFCs) have rapidly emerged as an important segment as an alternative lender to provide finance. NBFCs have recognized as an important financial intermediary particularly for the small-scale and retail sectors with the growing importance assigned to financial inclusion.

NBFC is a heterogeneous group of financial institutions. They offer facilities like equipment lease finance, hire purchase finance, personal loans, vehicle financing, working capital loans, housing loans, loans against shares and investment, etc.

What are the Non Banking Financial Companies (NBFCs)?

NBFC is a Company registered under Companies Act 1956/2013^[1], engaged in the financing activities.

NBFCs are an essential part of the Indian financial system due to the enhancement of competition and diversification in the financial sector, spreading risks specifically at times of financial distress and also recognized as complementary to the banking system at competitive prices.

The number of NBFCs has increased immensely in the last few years since the venture capital companies, retail and industrial companies have entered into the lending business.

What are the Types of Non-Banking Financial Companies?

NBFCs varying types playing a key role in meeting the credit demand unmet by traditional banks. NBFCs are broadly divided into three categories namely:

• NBFCs accepting deposits from banks (NBFC-D)
• NBFCs not accepting/holding public deposits (NBFC-ND)
• Core Investment Companies(CIC)

Further, they are classified into various categories namely:

• Asset Finance Company (AFC)
• Investment Company(IC)
• Loan Company(LC)
• Infrastructure Finance Company(IFC)
• Micro Finance Institution(MFI)

Besides the above categories, the fastest-growing segment of the non-bank lending sector peer-to-peer lending has also recognized as NBFC by the RBI. The growth of P2P lending has been facilitated by the power of social networking, which brings like-minded people from all over the world together.

What are the Services Provided by the NBFCs?

NBFCs offer a range of product and services which includes loans and advances, credit facilities, saving and investment plans, acquisition of shares, stock, bonds hire-purchase, insurance business or chit business and money transfer service.

It also includes private education funding, retirement planning, underwriting stocks and shares, trading in money markets, TFCs (Term Finance Certificate) and other obligations.

Apart from this, NBFCs also provide wealth management services such as handling portfolios of stocks and shares and discounting services.

NBFCs are typically into the funding of:

• Construction equipment
• Commercial vehicles and cars
• Gold loans
• Microfinance
• Consumer durables and two-wheelers
• Loan against shares, etc.

List of major products offered by NBFCs in India:

• Funding for commercial vehicles
• Funding for infrastructure assets
• Retail financing
• Loan against shares
• Funding for plant and machinery
• Project finance
• Unsecured personal loans
• Trade finance
• Venture finance

Small and Medium Enterprises Financing:

• Financing of specialized equipment
• Operating leases of cars, etc.

Types of the instrument generally executed:

• Loans
• Hire purchase
• Financial lease
• Operating Lease

Why does One Prefer NBFC over Banks?

NBFC’s provide all types of financial services similar to banks with two major differences – they do not hold a banking license and they cannot accept monetary deposit from individual customers.

NBFC’s are recognized as complementary to the banking sector as a result of the implementation of innovative marketing strategies, the introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc.

In the past few years, the increased competition from banks in the retail finance segment has led to excess diversification by NBFCs from their core business activities. The NBFCs has introduced various innovative products such as IPO financing, three-wheeler financing, vehicles financing, small personal loans, finance for tires & fuel, asset management, mutual fund distribution, and insurance advisory, etc.

Moreover, NBFCs are aspiring to emerge as a one-stop-shop for all financial services.

In recent years, NBFCs have begun to create niches for themselves which are often neglected by banks. These mainly include providing finance to non-salaried individuals, traders, transporters, stockbrokers, etc.

NBFCs have also offered into riskier segments such as unsecured loans, purchase finance for used commercial vehicles, capital market lending, etc. NBFC’s customer profile is concentrated on the self-employed segment.

What is the Difference between Banks and NBFCs?

Features	Banks	NBFCs
Regulated By	RBI-Banking Act	Companies Act and the direction of RBI
The process of Loan sanction	Moderately Stringent	Easier and faster
Product Offering	all types of loans	Majorly property loans
Interest Rate Benchmark	Base rate + Margin	Retail Prime Lending Rate(RPLR)-Spread
Overdraft   Facility	Available	Not Available
Passing interest rate benefit to existing borrowers	No much room more existing borrowers	High chance for existing and new borrowers to get benefited from discounts and offers
Pre-payment convenience through NEFT	Available at banks for all customers	Usually prefers cheque payments to process Electronic Clearing Service(ECS)
Interest Rates	Rate of interest will be comparatively lower	Depends on the property and applicant and most of the times will be higher than banks

The borrower prefers NBFCs over banks and the reason for this is banks have hard rules and requires more time to approve or sanction a loan. On the other hand, NBFCs ensures the processing is quicker and necessary loan amount is disbursed within days.

The rate of interest imposed by NBFC is high as compared to banks, borrowers still prefer to take loans from NBFC considering the ease of getting a loan and fewer complications.

You can read more about it Here, Complete report on NBFC vs Bank.

NBFCs in India as an Alternative Lending Market:

Alternative lending firms, popularly known as NBFCs. They have contributed significantly to the success of numerous businesses.

The Reserve Bank of India (RBI)^[2] has recognized the role of NBFCs in providing credit to rural segments. Non-Banking Financial Companies offer finance to small-scale industries thereby resulting in the growth of rural areas and the development of the economy as a whole.

As of 2017, NBFCs have grown tremendously both in terms of volumes and the number of service offerings;

• These financial institutions cater credit to infrastructure projects, which helps a developing country like India to a great extent. As of March 2013, NBFCs have lent over one-third of 35.8% of their total assets to the infrastructure sector, as compared to banks which lent a mere 7.6%.
• Non-Banking Financial Companies also provide loans for those seeking finance for a home purchase.
• Besides home loans, such financial institutions offer business loans, education loans, and personal loans, among many others. The number of individuals opting for such loans through NBFCs has increased.
• Moreover, the amount of money being lent to customers grew an average of 24.3% per year for NBFCs as compared to 21.4% for banks. This statistics shows that NBFCs are indeed a popular option for the masses.
• NBFC’s acting as account aggregators has helped in cross-selling of financial products to customers and contributed to fee-based income for NBFCs.

NBFCs: A Game Changer in Financial Sectors

• NBFC’s are growing due to their facility to innovate and customize their products based on the needs of their clients.
• Non-Banking Financial Companies have a detailed understanding of customers’ profiles hence it offers the best product as per their requirements.
• NBFCs are known to offer competitive interest rates, which help the customer in making a preferred choice. Such lowered rates reduce the cost of borrowing and help individuals obtain finance without any financial constraints.
• Non-Banking Financial Companies offers flexible repayment schemes, extended loan tenure, and lower fees and charges.
• Non-Banking Financial Companies require loan seekers to submit minimal documentation as compared to the extensive paperwork required by banks. Applicants also have flexible eligibility criteria against banks that require loan seekers to fulfill stringent eligibility criteria.
• NBFCs have therefore carved a niche in the finance sector. These alternative lenders also offer quick and efficient services to Micro Small and Medium Enterprises (MSMEs), the backbone of Indian economy.
• As Non-Banking Financial Companies have continuously played a critical role in encouraging the development of the Indian economy, this sector is expected to grow in the years to come.

Conclusion

The growth trend of the financial market has developed a non-banking finance company as a grey area for both Investor and lender to work on assisting and enhancing the projected growth of the Government of India.

As we are aware of Finance as blood of a business organization and the way non-banking financial companies are providing hassle-free loan required for an investment to the public can really help the targeted growth sector identify by Government.

It would not be wrong to say the non-banking financial companies are creating an environment for the investment in the different sector of the economy.