RBI has allowed an NBFC with assets size more than 500 Cr to be classified as QIB, this step of...
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.
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.
NBFCs varying types playing a key role in meeting the credit demand unmet by traditional banks. NBFCs are broadly divided into three categories namely:
Further, they are classified into various categories namely:
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.
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.
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.
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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.
|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.
Alternative lending firms, popularly known as NBFCs. They have contributed significantly to the success of numerous businesses.
The Reserve Bank of India (RBI) 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;
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.