NBFC¶
What is NBFC?¶
NBFC stands for "Non-Banking Financial Company." An NBFC is a type of financial institution that provides a range of banking and financial services similar to traditional banks, but it does not hold a banking license or operate as a full-fledged bank. NBFCs are regulated by financial authorities in various countries, and they are subject to specific regulatory frameworks that differ from those governing traditional banks.
The key characteristics of NBFCs include offering services like loans, credit facilities, investment products, and other financial services, but they are typically not allowed to accept demand deposits from the public. Instead, they raise funds through alternative means such as term deposits, debentures, and borrowing.
NBFCs play a vital role in the financial sector by extending credit to various sectors of the economy, including individuals, businesses, and industries. They often cater to customers who may not meet the stringent requirements of traditional banks, providing them with access to financing and financial services.
Examples of NBFCs include microfinance institutions, housing finance companies, vehicle finance companies, and more. The specific activities and services offered by an NBFC can vary depending on its specialization and regulatory permissions in a particular country.
Top 10 NBFCs in India¶
- Power Finance Corporation Limited
- Shriram Transport Finance Company Limited
- Bajaj Finance Limited
- Mahindra & Mahindra Financial Services Limited
- Muthoot Finance Ltd
- HDB Finance Services
- Cholamandalam
- Tata Capital Financial Services Ltd
- L & T Finance Limited
- Aditya Birla Finance Ltd.
Different between Banks and NBFCs are:
Note
| Particulars | Banks | NBFCs |
|---|---|---|
| Definition | Banking is the acceptance of deposits withdrawable by cheque or demand. NBFCs cannot accept demand deposits. | NBFCs are companies carrying out financial business, and they can't accept demand deposits. |
| Scope of Business | Banks have a limited scope of business defined by Section 6(1) of the Banking Regulation (BR) Act. | NBFCs have a broader scope and can engage in activities other than financial ones. |
| Licensing Requirements | Licensing requirements for banks are stringent, and even the transfer of shareholding is controlled by the RBI. | Forming an NBFC is relatively easier, but the acquisition of NBFCs is procedurally regulated and subject to approval. |
| Major Limitations | Banks cannot carry out non-banking activities. They can exercise powers of recovery under SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) and DRT (Debt Recovery Tribunal) laws. | NBFCs cannot provide checking facilities, and only specific NBFCs specified by the Central Government have powers under SARFAESI or DRT laws. |
| Major Privileges | Banks have the privilege of accepting demand deposits and are subject to strict regulatory controls. Private sector banks can have up to 74% foreign investment. | NBFCs, depending on their activities, can have up to 100% foreign investment. There are 18 specified activities for NBFCs. |
| Regulations | Banks are subject to stringent controls under the Banking Regulation (BR) Act and RBI Act. | Controls over NBFCs are relatively less stringent than banks. |
| SLR/CRR Requirements | Banks are required to maintain Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) as per RBI regulations. | NBFCs, specifically deposit-taking NBFCs (NBFC-Ds), have to maintain a certain ratio of deposits in specified securities. Non-deposit taking companies do not have this requirement. |
| Priority Sector Lending Requirements | Banks are required to allocate a certain minimum percentage of their lending to priority sectors as per RBI guidelines. | Priority sector lending norms are not applicable to NBFCs. |
The Impact of Covid-19 on NBFCs¶
The COVID-19 pandemic has had far-reaching economic consequences worldwide, and India has been no exception. Non-Banking Financial Companies (NBFCs) in India, which play a crucial role in providing financial services, have also faced significant challenges due to the pandemic. Here's an overview of the impact of COVID-19 on NBFCs:
Economic Consequences¶
- Recession Threat: According to various sources including CRISIL, Fitch, and SBI Research, India faced the possibility of entering a full-blown recession due to the pandemic's economic fallout.
- Increased Poverty: Arthur D Little warned that the pandemic could push approximately 120 million people back into poverty in India.
- GDP Loss: The pandemic was expected to result in a loss of up to 1 trillion dollars in India's Gross Domestic Product (GDP).
Lending and Borrowing Challenges¶
- Reluctance in Lending: Banks, a primary source of funding for NBFCs, became cautious and reluctant to lend to NBFCs amid the economic uncertainty caused by the pandemic.
- Moratorium Directive: NBFCs were directed by regulators to offer moratoriums to their debtors, which added to their financial challenges.
- Liquidity Support: The Reserve Bank of India (RBI) took several steps to provide relief to the financial sector, including NBFCs, but no moratorium was announced for capital market borrowings.
Government Stimulus¶
- Liquidity Support: In response to the economic challenges posed by the pandemic, the Indian government announced a liquidity support package of Rs 75,000 crores for NBFCs and Micro Financial Institutions (MFIs).
- Relief Measures: This support was aimed at providing relief to the struggling NBFCs, but the reluctance of banks to lend remained a concern.
Moratorium on Bank Facilities¶
- Asset Classification Relief: One significant relief measure was the moratorium on bank facilities for three months. This helped NBFCs manage their asset classification requirements.
- Impact on Liabilities: While this moratorium provided relief on the assets side, challenges emerged on the liabilities side for NBFCs with a high share of capital market borrowings.
- Unaffected Capital Market Borrowings: Notably, no moratorium was announced for capital market borrowings, such as bonds and commercial paper, which meant that repayments had to be made on time, even during a period when collections were significantly impacted.
In summary, the COVID-19 pandemic had profound effects on NBFCs in India, affecting their ability to borrow from banks, provide relief to borrowers, and manage their liabilities. The government and regulatory authorities implemented various measures to alleviate some of these challenges, but the situation remained complex, particularly for NBFCs heavily reliant on capital market borrowings.