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Challenges & Opportunities for the Future of NBFC in India

Challenges & Opportunities for the Future of NBFC in India
| Updated: Mar 08, 2021 | Category: NBFC, RBI Advisory

The Non- Banking Financial Companies (NBFC) performs the function of delivering credit to the local borrowers, unorganized sectors and corporate sector, performing like a banking sector but is different from banks. The purpose of NBFCs is to provide loans and advances and financial services to the public, becoming an integral part of the economy. NBFC enjoys the flexibilities in the privileges and rules that are provided by the government to grant loans and financial services to the people that have been an important aspect for the growth of the economy, yet there are many challenges faced by them. Therefore, this article will discuss about the challenges & opportunities for the future of NBFC in India.

Understanding Non- Banking Financial Companies (NBFC)

Non- banking Financial Companies are the companies registered under the Companies Act, 2013 / 1956 and are the financial institutions that offers various banking services and acts as a bank but are not banks itself. NBFCs are not allowed to take traditional demand deposits such as those in saving accounts from the public. Such limitations keeps the NBFCs outside the scope of ordinary oversight form the federal and state financial regulators. NBFCs include mortgage lenders, investment banks, insurance companies, private equity funds, hedge funds and Peer to Peer lenders. The NBFCs do not include businesses whose principal business is either of the followings:

  • Industrial Activity.
  • Agricultural Activity.
  • Purchase or sale or construction of any immovable property.
  • Sale or purchase of any goods excluding securities.
  • Providing any services.

What are the opportunities for the future of NBFC in India?

There are some of the opportunities for the future of NBFC in India which would help them to growth and emerge and contribute in the economy. One of the biggest opportunities for NBFC is its new to credit investment customers. Such customers are those people who belong from the rural area and have never borrowed credits or loans from any financial institution in the past. People from rural areas have limited access to banks and other credit financial institutions and services and they have to rely upon the NBFCs for availing credits. Therefore, NBFCs are a boon for the rural sector. NBFCs have become a profitable segment for such purposes.

Also, Read: What are the Different Types of NBFCs?

Further, NBFCs involves less paper work. The NBFCs are performing in a unique way, by which it can access creditworthiness of the people and provide them loans with less paperwork. For example, the NBFC provides loans to MSME’s making base of their invoices due for the payment. Such credit people are the greatest opportunity for NBFC as there are no competitions due to probable risk and the new to credit segment provides a huge opportunity for NBFCs to expand their market base in villages and tier 2 & 3 towns across the country. Majority of population in India lives in areas where banks would not provide loans and financial services because of the absence of requisite paperwork. And such people look for financial help and are capable of returning the loan but face the problem due to paperwork and are denied loans. There NBFCs, becomes a source of help to provide financial aid as it involves less paper work.

Taking into consideration the rise in non- performing assets (NPA), banks are being cautious in relation to credit worthiness of the customers and deny loans for the same. Due to this, credit gap is made. However, in the case of NBFCs, they charge high rate of interest, within the guidelines of the government. The customers accept to pay additional interest rate for loan to the NBFCs in order to skip any complications of complying with the requisites of the banks that are put on them.

Also, keeping in regard the financial needs of the people and the structure of the banks, for the interest of the people the government has exempted NBFC from harsh rules and regulations that are imposed on the other financial institutions, such as in the case of banks. The NBFCs enjoy the flexibility in rules relating to restrictions, paper work, thereby making it suitable for the entrepreneurs to show their interest in NBFC. One such example where the government has provided the opportunities to the NBFC to establish their place in the market is the foreign investment that is permitted to NBFCs up to 100%. There are continuing advantages for the NBFCs, are government takes initiative to implement rules to help in the growth of NBFC.

Further, NBFC has played an important role in contributing towards India’s GDP to the extent that the government is also coming forward now and will do so in future to protect the interests and help the NBFCs to grow and emerge as they have been providing financial help and services with easy procedure to the people of the country. The business of NBFC is of profit and their contribution in the growth of the India’s GDP shows that NBFCs are working for a better in these past years.

What are the challenges for the future of NBFC in India?

Even though there are many opportunities provided to NBFCs for its growth and improvement, yet there are some challenges that are faced by NBFCs in India.

The due diligence is important to optimize the default risk. Since the customers who avail borrowings from NBFCs do not have any credit history, it becomes quite difficult to verify their financial credentials. There NBFCs have to take up additional resources for on- ground visits, reference checks, and etc. all of this adds to the operational cost and becomes difficult to service this segment.

Further, since, new to credit customers do not have any experience on getting financial services, they may not naturally engage with the NBFC to take loans for their business of personal requirements. Therefore, to attract the customers, the NBFCs have to spend additional resources in educating and financial literacy and awareness. Oh the other hand, once these customers are made aware of the benefits of obtaining a loan from an NBFC, there is an extreme likelihood to convert the lead into real business.

Non- performing assets have been a challenge not only the banks but as well as for the NBFCs. With the new credit customers, the risk remains higher as compared to those customers who have a credit history. Therefore, NBFCs continuously works on checking and balancing so as to make sure that the EMIs are on time and records of the customers remains up to date and any issues are notified immediately.

Conclusion

NBFC plays a very important role in providing financial assistance to those in need and it supplements the role of traditional banks by meeting the financial requirements of the unorganized and organized sectors. There are many challenges & opportunities for the future of NBFC in India and therefore, it is necessary for them to work properly so as to create financial stability and protect the interest of the borrowers and depositors.

Also, Read: What are the Vital Documents Required for NBFC Registration?

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Japsanjam Kaur Wadhera is an Advocate and has completed her BA.LLB (Hons) and has experience of writing various research papers during her college time. Earlier she was working as an Associate Advocate in a reputed Law Firm. She has an extreme interest in writing legal content and her core area falls under legal enactments, tax and finance.

 

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