Role of NBFCs in the Indian economy

Swetha Dhinesh

09 May, 2023

India has a substantial financial services industry. It includes non-banking financial institutions (NBFCs) as well as commercial banks. These businesses are distinct from banks and provide various financial services, including loans and chit funds. NBFCs are frequently small players who receive little attention. Even in a developing nation like India, they are still vital to the economy. By supplementing other financial institutions in our nation, NBFCs have significantly boosted the growth of the Indian economy throughout the years. As they play a crucial role in the direction of savings and investments in a wave of the rapid industrial revolution, they serve as a middleman between investors and savers. The prosperity of our nation depends on all citizens having access to financial services, especially for an economy as diversified and as huge as India’s. Following the industrial revolution, there was a significant increase in credit demand and credit penetration, which should continue to fuel economic growth. 

Financial organisations like NBFCs, whose primary duty is to move excess savings into deficit units, can be extremely important for our nation. By offering a variety of products tailored to the needs of SMEs, NBFCs have also provided financing to these businesses. The NBFCs offer many services to the MSMEs of our country in addition to loans secured by property. As a result, in a developing nation like India, NBFCs play a very important role in addition to banks.

​​Future of NBFCs

In spite of the difficulties, NBFCs in India appear to have a bright future. Between 2021 and 2026, the industry is projected to expand at a very fast rate. Several factors, including the rising demand for credit, the government’s initiatives to support financial inclusion, and the rise of digitalization, are anticipated to fuel the growth.

In the coming years, NBFCs will contribute more to the socio-economic framework of the Indian economy. In India, the potential for credit penetration is still very high. By collaborating with fintech and developing new business models with tailored products, NBFCs may raise the bar.

The most recent changes and trends in NBFCs that aid in economic development 

Below are the major developments from NBFCs which helps in the faster development of our Indian economy.

• Digital Transformation

One of the major trends that have impacted the financial services sector, especially NBFCs in India, is digital transformation. Digital platforms are now an essential delivery method for financial services due to the widespread use of smartphones and the Internet. NBFCs have embraced digital technologies quickly to improve customer experience, reorganise workflows, and in costs reduction.

They have created online applications, disbursement, and repayment systems. For risk assessment and credit rating, they have also started using artificial intelligence and machine learning algorithms. Because of the tremendous improvement in operational efficiency brought about by the digital revolution, NBFCs are now able to offer their clients faster and more reliable services.

• Products Innovation

Indian NBFCs have been providing innovative solutions to meet the changing needs of their clients. For instance, gold loans have grown in popularity as a tool to raise short-term capital, with NBFCs dominating this market. They also provide loans against securities, loans for education, and loans for consumer goods. The innovation has aided NBFCs in expanding their customer base and diversifying their loan portfolio, which has led to a growth rate that is sustainable.

• Regulatory Structure

In recent years, there have been significant changes to the NBFC regulatory framework. New rules were put in place by the RBI from time to time to improve the sector’s financial stability and stop incidences of default from happening again. Higher capital adequacy ratios, stronger liquidity standards, and a more rigorous classification scheme were required under the laws. The cost of complying with the new regulations has gone up for NBFCs, which has temporarily slowed expansion. They have, however, also produced a stronger regulatory environment, which has raised investor confidence and lowered the sector’s risks.

• Robotic Process Automation

NBFCs that use robotic process automation are renowned for their quick operations. It is one of their key benefits over traditional banks, in fact. They achieve this pace by using robotic process automation to automate a number of repetitive tasks. It enables NBFCs to automatically collect data from application forms, Instantaneously validate KYCs, determine eligibility, and expeditiously pay loans in the event applications are approved. Robotic process automation aids NBFCs in accelerating operations while also lowering expenses, generating leads, and enhancing customer service.

• Facilitating growth

Several factors have made it easier for NBFCs to grow. The regulatory system that oversees them is one of the key causes. NBFCs benefit from more regulatory flexibility than banks, which are subject to tight regulations and capital requirements. The accessibility of capital is another element that has aided in the expansion of NBFCs. The majority of NBFCs’ funding comes from wholesale sources, which include bonds, commercial paper, and bank loans, among others. Furthermore, as a result of the expansion of the corporate bond market and the growing involvement of foreign investors, funding has become more readily available in recent years.

NBFCs have also contributed significantly to the expansion of the Indian economy. They have given credit to important industries like real estate, infrastructure, and MSMEs, which have recently played a significant role in accelerating economic growth. Providing financing to the SME sector, which contributes significantly to employment and output in the Indian economy, has also been essential.  

According to the Economic Survey 2022–23, the overall amount of credit provided by NBFCs is increasing, with the total outstanding balance reaching Rs. 31.5 lakh crore as of September 2022, up from Rs. 28.03 lakh crore in September 2021. The industrial sector continued to get the largest amount of loans from NBFCs’ balance sheets, followed by the retail, service, and agricultural sectors. 

• Credit and Finance for MSMEs

According to a report by the Press Trust of India (PTI), the asset base of non-banking financial companies (NBFCs) has increased to over 54 Lakh crore as of March 2022, accounting for one-fourth of the commercial banking sector’s balance sheet. The Confederation of Indian Industry, an industry organisation, hosted an NBFC summit at which the Union Minister spoke. He said that NBFCs were helping small and medium-sized businesses (SMEs) access funding and turned into the growth engines of the Indian economy. NBFCs have aided MSME companies in expanding their operations and adding employment to the nation. In the most recent financial year, NBFC loans increased by more than 10%, while bank loans only increased by 5%.

Importance of NBFCs in the Indian Economy

The RBI states that Non-Banking Financial Companies complement the traditional banking system in the process of financial intermediation throughout the world. In a nation like India, where traditional lending methods are still used, there is a sizable population without access to official loans, and they have taken on special relevance. According to a report from the RBI^[1] published last year, NBFCs were responsible for the majority of loans (60%) approved through digital platforms.

Although NBFCs in the nation have existed since the 1960s, it has only been over the past ten years or so that they have actually come of age. Numerous variables, including shifting consumer needs, more digitalisation, and technology, for their meteoric rise. They have kept up with the rapid evolution of technology by utilising big data, artificial intelligence (AI), and machine learning (MI) to create ground-breaking credit products and procedures that have made formal lending accessible to everyone. 

Conclusion

Since NBFCs work in connection with the government and the private sector on operations, they significantly raise the living conditions of the general community. Due to its reputation for supporting industry, fostering the development of infrastructure, and even serving as the foundation for the average person’s finances, the banking sector will always be of utmost importance in the business world. However, in recent times NBFC sector has played a crucial role, and its presence in a country only serves to strengthen the economy. 

Read our Article: Credit Rating of Non-Banking Financial Company’s (NBFCs) in India