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What are the Major Challenges and Remedies by NBFCs? – An Overview

Major Challenges and Remedies by NBFCs
Karan Singh
| Updated: Mar 23, 2021 | Category: NBFC, RBI Advisory

In the last few years in India, the financial sector has observed a rapid transformation, and NBFCs or Non-Banking Financial Companies plays a vital role in that growth. Non-Banking Financial Companies in India continued to gain huge success in the financial sector, and its involvement has surpassed the contribution by the traditional banks. Henceforth, NBFC Registration sound like a favourable scheme for all the entrepreneurs in India. However, there are some difficulties faced by an individual while commencing an NBFC in India. In this blog, we discuss some major challenges and remedies by NBFCs in India.

What is an NBFC? – An Overview

Before we discuss some major challenges and remedies by NBFCs, let first understand the term “NBFC”.  An NBFC stands for Non-Banking Financial Company, and it’s a financial company which is registered under the Companies Act, 1956 and 2013, involved in the business of advances or Credits or loans, acquisition of stocks or bonds or debenture or shares or securities issued by Local Authority or Government of India or other marketable securities such as leasing, chit business, nature, hire-purchase but does not include any organization or any institution whose principal business is that of industrial activity, agricultural activity, sale or purchase of any goods and services and sale or construct or purchase of an immovable property. A non-banking organization that is a company and has the principle business of getting deposits under any arrangement or plans in a single lump sum or instalments by way of contributions or another manner is also an NBFC (Non-Banking Financial Company). After knowing the term NBFC, we can now move forward and understand all the major challenges and Remedies by NBFCs in India.

Also, Read: Prerequisites of NBFC Registration in India – An Overview

Various Roles of NBFCs in India

Following are some specific roles of NBFCs in India:

  • It helps in growing wealth creation.
  • Helps in economic development.
  • A huge contribution to the state exchequer.
  • Development of financial markets.
  • It delivers long-term audit and dedicated credit.
  • Substantial employment generation.
  • Development of infrastructure.

What are Some Major Challenges and Remedies by NBFCs in India?

You can check all the major challenges and remedies by NBFCs in India from below:

Challenges encountered by NBFCs

Non-Banking Financial Companies have been consolidating their presence in the financial market and have made noteworthy progress than regular banks. However, new or small NBFCs in India encountered some major challenges in protecting their presence against their popular counterparts.

Challenges encountered by NBFCs
  • Absence of Refinancing Option: In India, regular banks are prepared with several refinancing options. Similarly, housing financing companies also have certain refinancing substitutions at their disposal, and it refinances from the regulator of Housing Financing Companies. On the other hand, the Non-Banking Financial Companies entirely depend on the capital market or banks to attain resources. This acts as a resistance to the NBFC growth. Moreover, always remember the flows of finds from these sources can get vanishes anytime.
  • Issues in availing NBFC License: The process for obtaining an NBFC License is more difficult and complicated as compared to other licenses. The process involves complex and boring documentation processes and approval from the Reserve Bank of India (RBI). Always keep in mind that RBI controls the process, which should be followed by the applicant to avail NBFC Registration.
  • Complex NBFC Compliances: Once the NBFC Registration is done, it also requires to address some compliances. NBFC compliance differs from one type of company to another. So, the difficulty grassed on when a person running an organization of loans and advances, etc., it becomes difficult to know about the filing necessities of the suggested returns. This is probably one of the most complex challenges faced by NBFCs.
  • No Flexibility in Loan Classification of NPAs: NPA or Non-Performing Assets bears important significance for the major players, but businesses with unpredictable cash flow encounter a negative impact on payment related delays. Classifications under NPAs and flexibility in scheduling is crucial. The arrangement of NPA ought to be based on assets financed rather than the profile of a borrower.
  • Absence of Legal Recovery Tool: The insufficientstatutory recovery tool is another complicated issue taunting the Non-Banking Financial Companies for a long.
  • Undue Tax Treatment: There exists a great variation within the tax structure for banks vs NBFCs, such as TDS (Tax Deducted at Source), double taxation on the lease or hire purchase, etc.
  • Absence of Defaulter Database: Non-Banking Financial Companies are more susceptible to credit risk under the influence of insufficient information. In addition to that, there is a necessity for essential statutory changes to control the payments database in the credit assessment’s process.
  • Absent in Capacity Building: NBFCs in India must create an accessible ecosystem for capacity building on a person as well as a collective basis. Then the bulk of the Non-Banking Financial Companies still lack the said perspective; hence, it must be addressed as quickly as possible.

Remedies to the Challenges Encountered by NBFCs

Following are some remedies to overcome the challenges faces by NBFCs in India:

Remedies to the Challenges Encountered by NBFCs
  • Team up with Fintech Companies: The Non-Banking Financial Companies can team up with Fintech Companies since their services are affordable and innovative in terms of brokerage, payment, and credit scoring.
  • Assign SMEs to Manage Compliances: An expert team of Subject Matter Experts (SMEs)can be appointed for NBFC License, compliances, and documentation. It will let them overcome differences through a general approach.
  • Create an Effective Business Plan and Observing Framework: If a Non-Banking Financial Company is in its starting phase, it is crucial for them to summaries an understandable business plan along with an observing framework to keep their eyes on discrepancies.
  • Co-originating Lending: It will let these financial companies overcome funding-related problems along with other disputes.
  • Implement Risk Management: A company should set up a framework related to Risk Management since there are many difficulties that the company might face. It will strengthen the company to identify the possible loopholes with ease.

Conclusion

The major challenges and remedies by NBFCs are countless; however, it is not something that cannot be overcome. The Reserve Bank of India or RBI has observed the challenges and is about to make some computable decision for Non-Banking Financial Companies. These companies are vital for the survival of the financial sector in India.

Also, Read: NBFC Registration Procedure with RBI – A Complete Guide

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Karan Singh

A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

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