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Why in news?

Non-banking financial companies (NBFCs) may face a tough time following the Reserve Bank of India’s recent directive on providing a moratorium on repayment.

Why would NBFC face the heat?

  • This is because though these entities are providing moratorium to their customers, they still have to continue repaying banks and other borrowers. NBFCs are highly dependent on banks for funding.
  • NBFCs face a double whammy because they are offering moratorium to customers despite not getting one themselves from their lender-banks.
  • That will put a significant pressure on the liquidity profiles of many NBFCs.
  • According to Crisil, liquidity pressure will increase for almost 25% of the Crisil-rated NBFCs if collections do not pick up by June 2020.
  • With collections being minimal and the moratorium [applicable] only for their borrowers, raising fresh funds is critical, especially because NBFCs, unlike banks, do not have access to systemic sources of liquidity and depend significantly on wholesale funding.

What exactly are NBFCs?

  • NBFCs or Non Banking Financial Companies are those companies which provide banking services without meeting the legal definition of a bank.
  • A NBFC is incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934.
  • The NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government.
  • They also deal in other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.
  • However, the companies CANNOT be NBFCs if their primary business is related to agriculture activity, industrial activity, sale/ purchase/ construction of immovable property.

Exact Definition of NBFC as per the RBI Act

As per the RBI Act, 1934 , a NBFC means:- (a) “a financial institution which is a company; (b) a non-banking institution which is a  company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (c) such other non-banking institution or class of such institutions, as the RBI specifies”.

What is the Significance or Importance of NBFCs?

  • These organizations play a crucial role in the economy, offering their services in urban as well as rural areas, mostly granting loans allowing for growth of new ventures. It has a key role in complementing the banking sector in reaching out to the underserved and unbanked segments of society like the MSMEs sector.
  • They alone count for 12.5% raise in Gross Domestic Product of our country.
  • Most people prefer NBFCs over banks as they find them safe, efficient and quick in assisting with financial requirements.
  • Moreover, there are various loan products available and there is flexibility and transparency in their services.
  • NBFCs indulge in wide-ranging lending activities – Because unlike PSBs (Public Sector Banks) which have much heavier burden of Non-performing assets (NPA) hampering the expansion of lending activities, NBFCs do Not have such an issue.
  • NBFCs have a role to play in strengthening of  microfinance in India which is critically important for women empowerment as various self-help groups (SHGs) led by women and catering largely to women have been involved micro-finance.
  • Digital lending platforms like peer-to-peer (P2P) lending have become popular in contemporary times and the NBFCs have a key role in this segment also.
  • NBFCs play a vital role as India’s diversity in terms of geographic expanse, demography, caste and class composition etc. is huge and ensuring  financial inclusion for the entire population is a critical challenge.

What are the differences between NBFCs and Banks?

  • NBFC CANNOT accept demand deposits; Banks CAN maintain demand deposits (savings/current accounts) but NBFCs accept only term deposits;
  • Banks form a part of Payment and Settlement Mechanism but NBFCs do NOT form part of the payment and settlement system and cannot issue cheques drawn on itself;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is available to depositors of Banks; but NOT available to depositors of NBFCs
  • Banks, including co-operative banks, can accept deposits; NBFCs, which have been issued Certificate of Registration by RBI with a specific licence to accept deposits, are entitled to accept public deposit.
December 2023