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In India, the SEBI and the Reserve Bank of India both regulate NBFCs. They are essential to the financial industry. They assist with the loan process. By meeting the varied lending needs of various economic sectors, NBFCs play a significant role in the Indian financial system. They are important in the financial system due to their capacity to offer specialised financial products and services catered to the unique requirements of various societal groups. An NBFC functioning in the financial industry is subject to inherent risks. Over time, the NBFC industry has changed significantly in terms of its operations, size, technical complexity, and expansion into additional markets for financial services and goods. In this blog, we will examine the risk management framework for the NBFCs
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According to the RBI, a non-banking financial company is one that is registered under the Companies Act of 1956. Obtaining loans and credit facilities, purchasing bonds, stocks, or shares, leasing property, financing assets, offering insurance, exchanging currencies, running hedge funds, participating in chit trades, etc., are all examples of activities that a non-banking financial company engages in.
The identification, evaluation, and reaction to risk elements that occur in the company are inherent in the operation of a business, and they are all included in risk management. Effective risk management is acting proactively rather than reactively in an effort to influence the business’s future events as much as feasible. As a result, sound management in risk can potentially reduce the likelihood of a risk happening and its possible consequences.
Beyond being successful in the financial sector, NBFCs face challenges in the form of risk. Some of the major risk factors faced by NBFCs in their day-to-day activities are given below. The major risk factors faced by NBFCs are:
The execution of risk-management techniques in the sector to guarantee that the business models remain viable, sufficiently ring-fenced, and sustainable continues to be difficult against the background of an obvious expansion in the scope of operations and growing regulatory rigour. Asset quality standards will highlight any weaknesses in the framework’s credit risk management. In contrast, risk-adjusted yields on investments, treasury earnings, and “mark to market” commitments can highlight market risk management issues. Here are the tips to mitigate certain levels of risk that NBFCs are facing:
Our current era of banking, which began with nationalised banks, is marked by NBFC’s growth and success. NBFC is part of the banking revolution that happened. And NBFCs are currently responsible for the last mile of financial service distribution. The RBI and the Ministry of Finance periodically announced different initiatives to help borrowers and institutions get through this unprecedented and difficult period. But, it is the responsibility of every institution to take prior steps to mitigate the risk they are anticipated to face in the business.
Read our Article: Capital adequacy norms for NBFCs in India
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
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