Highlighting the Trends & Investments in NBFCs – An Overview

A Non-Banking Financial Company or NBFC plays an essential role in the growth of a nation’s economy. However, in the last few years, this sector has faced many challenges due to tight government compliance and developing technology.

Moreover, Non-Banking Financial Companies often take a truthful role in providing innovative, economical services to MSMEs (Micro, Small, and Medium Enterprises), enhancing their business necessities along with catering to the Micro Finance necessities. In this article, we will discuss some present situation regarding the trends & investments in NBFCs.

An Overview of NBFCs

Before we discuss the trends & investments in NBFCs, let us first understand the term NBFC. Non-Banking Financial Companies plays a crucial role in encouraging reasonable opportunities for growth in the country by rendering an extensive range of monetary aid to the poor as well as a fortunate section of society. Moreover, NBFCs is a noticeable provider of distinct monetary services of MSMEs suitable to their necessities and providing to Microfinance needs for the peoples.

As mentioned above, they consider the noteworthy alternative to the banking sector in fulfilling the financial needs of the industrial sector. But, the possibility of operation of the NBFC sector is restricted by the rules & regulations laid by the Indian Government.

Before we begin to describe the important role of Non-Banking Financial Companies in the present situation, it is very much required to understand the primary purpose behind the functionalities of these respected financial institutions. To be defined, Non-Banking Financial Companies are not essentially focusing on profitability as their primary goal to make economic services available to all areas of society and the working sector.

Government Aid to Triggers Credit & Investment in NBFCs

Following are some growth-related reforms and schemes started by the Finance Ministry for the improvement of the Non-Banking Financial Sector:

• Credit Guarantee for the NBFC: In the year 2019, the Finance Minister announced the Budget mainly focused on a Partial Credit Guarantee Scheme to overcome the liquidity crisis, while for the year 2020-21, the Budget further support guaranteeing securities on affected assets of NBFCs.

By backing up hassled assets through bonds, the Government of India helps to improve or develop the financial standing of the Non-Banking Financial Companies by making them qualified for the credit. The much-required credit can save many Non-Banking Financial Companies from being bankrupt and even increase the probabilities of investments in Non-Banking Financial Companies.

• Exclusive Liquidity Scheme: In the mid-year of 2020, the Finance Ministry of India introduced a scheme called Special Liquidity Scheme to solidify monetary credit to concerned Non-Banking Financial Companies through SPV (Special Purpose Vehicle) established by SBICAP. This scheme was announced in the outlook of the COVID-19 pandemic as a relief package for the struggling Non-Banking Financial Companies and Microfinance minister.
• Alteration in Factor Regulation Act: Alternative move that is expected to encourage the MSME sector to make alternations in the current Factor Regulation Act, 2011^[1] would permit Non-Banking Financial Companies to extend invoice funding to MSMEs through the portal of TReDS.

This extent will considerably decrease one of MSMEs’ top loopholes timely accesses to much-required credit, and working credit necessities meet. Moreover, it would trigger the chances of trends & investments in NBFCs.

The Indian Government, in connection with APEX banks, permitting Non-Banking Financial Companies to avail easy credit against the bonds. With such help, Non-Banking Financial Company can smother their current liabilities and continue to conduct their operation for a prolonged period. Such credit is accessible at easy repayment options and interest, so that flow of cash within the economy remains modest.

• Limit Declined under SARFAESI Act: The Budget simplified reducing the size of asset if Non-Banking Financial Companies from Rs. 500 crore to Rs. 100 crore to make them eligible for the recovery of debt under the SARFAESI Act. This will allow them to keep track of the growth of the NPA ratio (Non-Performing Asset) of Non-Banking Financial Companies.
• Alteration in Current Scheme: To develop Agri-finance, the attention was on expanding the opportunity of the NABAED Refinance Scheme to involve Non-Banking Financial Companies and other cooperatives that are currently actively operating in the sector of agriculture. Consequently, the credit of agriculture is worth Rs. 15 lakh crore led out by the Government of India for the Financial Year 2021.

Why are NBFCS in India looking for Investment from Banks and Further Sources?

In the present situation in India, Non-Banking Financial Companies all over the country are fronting unyielding pressure to survive in a competitive atmosphere. They are in frantic need of funds owing to the following reasons:

• In the financial sector, the growth of many industries has spoiled, and Non-Banking Financial Companies are not an allowance here. Lack of credit has worn their ability to endure longer in the market, and they are fronting a strict liquidity crisis at this point. This is one of the primary reasons why such firms are searching for various trends & investments in NBFCs from various sources and traditional banks.
• Tough competition is making life very tough for Non-Banking Financial Companies operating all over the nation. Acceptance of the latest and advanced technology their equivalent is fading their grip on the current market. To gain a modest edge, these firms should leverage up-to-date technology and restructuring their Information Technology Department. Speciously, such tasks require the attaining of full investment, which seems to be a discouraging task for Non-Banking Financial Companies at this point. Government should frame out strategies or plans that can increase the chances of trends & investments in NBFCs.

Significant Challenges for NBFCs in Future – Trends & Investments in NBFCs

It’s not an easy job for Non-Banking Financial Companies to stay competitive in the upcoming future without using advance and latest technology and required infrastructure alterations. To stay forward of the curve, these companies are needed to change their focus on the following measures:

1. Joining interactions across the value chain of lead generation;
2. Confirming extensive reach to supply all sides of society and industries looking for financial support or help;
3. Creating chances to accept the latest advances technology and to implement flawlessly across all services;
4. Emerging tactics to mitigates the fiscal gap formed by the Covid-19;
5. Finding feasible investors, apart from PE investors and banks that are affected by the trends & investments in NBFCs;
6. Altering risk management assessment in accordance with the current situation to avail correct results.

Conclusion

In view of the present trends & investments in NBFCs, Non-Banking Financial Companies are all set to avail much need flexibility not only from the point of view of the Government but also from the Private Equity Investors. Such investors may step up investments in Non-Banking Financial Companies despite the credit emergency that is likely to continue for months from now onwards.

Read our article:What are the Major Challenges and Remedies by NBFCs? – An Overview