What are the Functions of NBFCs in India? – An Overview

With the increasing functions of NBFCs in the Indian Economy, the RBI (Reserve Bank of India) announced the notification Master Direction – IT (Information Technology) Structure for the Non-Banking Financial Company sector in 2017. The directions on the Information Technology Framework for the NBFC sector are expected to increase protection and efficiency in processes, leading to advantages for NBFCs or their clients.

While big Non-Banking Financial Companies gaze at a strict deadline, smaller NBFCs, especially Fintech Start-ups, have a massive problem at hand; a distinctiveness crisis. The business models of start-ups like BankBazaar consent that they don’t become an NBFC, while the operations’ nature of start-ups like Lendingkart makes them an NBFC as part of the legal compliance. Scroll down to check the functions of NBFCs in India.

What is an NBFC?

Before we discuss the functions of NBFCs in India, let’s first understand the meaning of NBFCs. NBFCs or Non-Banking Financial Companies play an essential role in encouraging comprehensive growth in India by providing the varied financial requirements of bank excluded clients. Moreover, Non-Banking Financial Companies often take a lead role in delivering innovative financial services to MSMEs most appropriate to their business needs. Non-Banking Financial Companies (NBFCs) play a vital role in participating in the country’s economic development by furnishing a fillip to employment generation, bank credit, transportation, and wealth creation in rural areas and to aid financially weaker sections of society. Emergency services such as financial help and guidance are also furnished to the clients in matters relating to insurance.

Non-Banking Financial Companies are financial mediators involved in the business of accepting deposits providing credit and play an essential role in channelising the limited financial resources to capital formation. They supplement the functions of NBFCs in meeting the rising financial requirements of the corporate sector, providing credit to the unorganised sector & small local borrowers. But, they don’t include services concerning industrial activity, sale, agriculture activity, purchase, or construction of the immovable property. In India, regardless of being different from banks, Non-Banking Financial Companies are bound by the Indian Banking industry rules & regulations.

NBFCs concentrates on business-related loans & advances, acquisition of stock, debentures, shares, securities, bonds, and securities issued by the Indian Government or local authority or other securities of like marketable nature, hire-purchase, chit business, leasing, and insurance business.

The banking sector would constantly be the most vital sector in the field of business because of its credibility in aiding infrastructural development, supporting the manufacturing and even being the backbone for the regular man’s money. However, regardless of this, the functions of NBFCs are vital, and their presence in a nation would only increase the Economy in the correct direction.

Functions of NBFCs in India

Following are some essential functions of NBFCs:

1. Retail Financing: Entities that offer short-term funds for loans against gold, shares, property, majorly for consumption purposes.
2. Infrastructural Funding: This is the most significant section where foremost Non-Banking Financial Companies deal in.  A lot part of this segment alone makes up a significant portion of funds lent amongst the different segments. This mainstream comprises Railways or Metros, Real Estate, Ports, Flyovers, Airports, etc.
3. Hire Purchase Services: It’s a way through which the seller provides the products or goods to the buyer without transferring the goods’ ownership. The payment of the goods is made in instalments. Once the buyer pays all the instalments of the goods or products, the ownership of the good is automatically transferred to the buyer.
4. Trade Finance: Entities dealing in distributor or dealer finance so that they can for vendor finance, working capital requirements, & other business loans.
5. Asset Management Companies: Asset Management Companies (AMCs) are those companies that include fund managers (who invest inequity shares to gain good gains) who invest the funds pooled by small investors & actively manage it.
6. Venture Capital Services: The entities that invest in small businesses are at their starting stage, but their accomplishment rate is high and is capable enough for adequate return in the coming time.
7. Leasing Services: The entities that deal in leasing or for a good understanding of this word we can recognise it in such a way that the way we rent a property or flat for living similarly these entities offer the property to small businesses or sometimes even larger ones who cannot afford it for whatsoever reason. The only difference between leasing & renting is that leasing contracts are made for a fixed period of time.

How NBFCs in India are Game-Changers that are Essential to the Economy?

• Growth: In terms of growth rate, the Non-Banking Financial Company sector beat the banking sector between 2006 & 2013. On average, it grew approx 23% every year. This represents, it is contributing more to the Economy every year.
• Promoting Comprehensive Growth: Non-Banking Financial Companies provide an extensive variety of clients both in rural & urban areas. They finance projects of small-scale companies or entities, which is vital for the growth in rural areas. They also deliver small-ticket loans for affordable housing projects. All these help encourage comprehensive development in the country.
• Size of Sector: The Non-Banking Financial Company sector has grown significantly in the past few years regardless of a slowdown in the Economy.
• Infrastructure Lending: Non-Banking Financial Companies contribute hugely to the Indian Economy by lending to infrastructure projects, which are essential to a growing country like India. Since they need a huge amount of funds and earn profits only over a long time duration, these are riskier projects and prevents banks from lending. In the past few years, NBFCs (Non-Banking Financial Companies) have contributed more to infrastructure lending than banks.
• Profitability: Non-Banking Financial Companies are more profitable than the banking sector because of lower costs. This aids them by offering cheaper loans to clients. As an outcome, Non-Banking Financial Companies’ credit growth; the increase in the amount of money being borrowed to clients – is more than that of the banking sector with more clients opting for Non-Banking Financial Companies.

Conclusion

In the end, it is concluded that the functions of NBFCs in the development of the Indian Economy are excessive. Non-Banking Financial Companies have been the main contributor to the growth of the Banking, Financial Services^[1] & Insurance Industry. The functions of NBFC in economic development are beyond assessment due to its credibility in supporting the manufacturing and infrastructural development.

Read our article:RBI Presents NBFCs Dividend Distribution Guidelines