NBFCs (Non-Banking Financial Companies) are the type of companies which provide banking services like loans and advances, acquisition of stocks/bonds/shares/securities/debentures. They are incorporated as per Companies Act 2013 and regulated...
A robust banking and financial system are essential components to channelize the growth of an economy. NBFC’s are financial intermediaries that play a vital role in developing Indian economy. It offers credit facilities to remote areas and supports those individuals who are often overlooked by the banks. Non-Banking Financial Companies underpins the weaker sections of the society, thereby bringing equilibrium in the nation. This write-up underlines the role of NBFC in the economic development of India.
Importance of Non-Banking Financial Companies
NBFC’s have been a chief contributor to the growth of (BFSI) Banking, Financial Services and Insurance industry. Non-Banking Financial Companies emerged as a perfect alternative for banks in terms of raising funds for businesses. Reserve Bank of India regulates the functions of NBFC’s considering its importance in accelerating society. NBFC’s are incorporated under Companies Act, 2013 and cater a wide range of financial services like the acquisition of stocks, bonds, securities, debentures, shares, loans and advances. Non-Banking Financial Companies value customers and emphasize on the creation of innovative products. The role of NBFC in economic development is beyond assessment due to its credibility in supporting infrastructural & manufacturing development.
How are NBFC’s a game-changer in the financial sector?
Reserve Bank of India acclaims NBFC’s to bring revolution in the financial sector. Here are some factors that Non-Banking Financial Companies contribute in Indian economy:
- Market Size: NBFC market has rapidly grown in the last few years despite the downturn in the economy. NBFC sector tremendously grew in size from INR 26.2 Lakh Crore (2017-18) to INR 30.9 Lakh Crore (2018-19).
- Growth: In terms of yearly growth rate, NBFC industry has surpassed Banking sector. On average, NBFC grew at a rate of about 22% each year, thus contributes a large part to the economy every year.
- Profitability Ratio: Since one requires less capital to set up NBFC than a bank, thereby it turns out to be a more profitable business model due to lower costs. NBFC’s offer loans to customers at a cheaper interest which results in credit growth. An increase in the sum of money being lent to the customers is more than that of the banks; it ultimately increases the customer base of NBFC’s with more prospects opting their services.
- Infrastructure Lending: A country’s economy is defined by the state of its infrastructure. NBFC’s contribute extensively to the economy by lending funds to Infrastructure sector, which is very crucial for a developing nation like India. An infrastructure venture requires a large number of funds which generates revenue only after a longer time-frame; thereby making such projects carry risk when it comes to lending. Hence, banks deter from lending to infrastructure projects in the last few years. Besides, NBFC’s have contributed more to infrastructure lending.
- Promotes inclusive growth: NBFC’s serve credit facilities to a broad spectrum of customers both in rural and urban areas. Non-Banking Financial Companies finance micro and small-scale Companies, which fosters progression in rural areas. Such financial institutions also provide small-ticket loans accessible for housing projects which stimulates inclusive growth in the country.
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Role of NBFC in the economic development of India
NBFC is the backbone and a quintessential source for the economic flow. Let’s look at the ways in which it aids society:
- Boost employment: NBFC’s jointly works with the Government to create more employment opportunities by investing in SME and Private sector. Private Companies helps in generating occupation for the smooth functioning of the firm. An increase in the new businesses simultaneously raises employment and NBFC financially supports these firms.
- Render long-term credit: Unlike the traditional lenders, NBFC’s provide long-term credit to facilitate Trade & Commerce industry. NBFC’s capitalize mega and large infrastructural projects which uplifts the economy at an extensive level. The long-term credit services with feasible interest rates ensure sustainable economic growth.
- Mobilization of resources: NBFC’s mobilize funds, resources and capital. Non-Banking Financial Companies create a balance between the distribution of assets and intraregional income. NBFC’s prove to be a potent lender by turning savings into investment practices.
- Nurtures standard of living: NBFC also shapes up society by uplifting living standards. Such entities drive foreign endowments from various regions, countries and agencies to support economic development. Further, NBFC’s participate in raising funds from the public and converting it into capital for industrial and several other sectors. An increase in emerging businesses raises the demand for manpower hence creates employment, which eventually raises the purchasing power of people and upgrades their living standards.
Revelation of NBFC future
Going forward, NBFC’s will play a substantial role in regards to financial inclusion for MSME’s and individuals that will be the backbone of an Indian economy. Further, NBFC’s will procure data and algorithm to fine-tune the marketing strategies and reduce the cost per acquisition resulting in higher margins. NBFC’s leverage technology and offers real-time solutions for individual’s progress and Company’s stability. Technology driven services will preserve Non-Banking Financial Companies in the long run. By nurturing the technologies like Cloud and SaaS-based models, NBFC’s will continue to empower the financial sector in our country.