Pros and Cons of NBFC Business in India

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Pros and Cons of NBFC Business in India
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NBFCs
Non-Banking Financial Companies (NBFC) do not
fall in the legal definition of Banks but they
proffer banking facilities and financial
services. It is a well-known fact that Banks are
not able to cater to the financial needs of all
Indians, however hard they try therefore, more
and more companies are applying for NBFC
Registration.  The functioning of NBFCs is
regulated and monitored by the RBI in compliance
with the provisions mentioned in Chapter III B of
the RBI Act of 1934. The segments which are
largely served by the NBFCs are instruments of
the capital and money markets such as stocks,
bonds, along with hire-purchasing, deposits,
leasing, insurance business, investment funds,
and chit business and many more similar
activities.
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RBIs recent Financial Stability Report says-
NBFCs have continued to perform better than the
banks. Net profit as a percentage of total income
remained at 15.3 between March 2015 and March
2016. The flow of non-bank resources to the
corporate sector, which includes NBFCs bond
market borrowing and lending, has increased by
43 from April 2017 to December 2017. NBFC sector
is growing at the cost of banks that are saddled
by bad loans and poor profitability. NBFCs were
the largest net borrowers of funds from the
financial system. There is a growing realisation
of the significance of NBFCs in the industry, and
in promoting Indias economic growth. There are
huge growth opportunities for NBFCs because of
the great advantages it offers though there are
some issues regarding the NBFCs.
NBFCs A Promising Venture
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Advantages

• Can provide loans and credit facilities
• Can trade in money market instruments
• Can do wealth management such as managing
  portfolios of stocks and shares
• Can underwrite stock and shares and other
  obligations
• NBFCs are the last resorts of borrowing NBFCs
  are there where banks are not there
• NBFCs are the largest propellants of ushering
  finance into the country
• Agility is very important for NBFCs as it sets
  the banks apart. Banks function slower as
  compared to the NBFCs
• The use of modern methods by NBFCs has overcome
  key challenges that had overwhelmed conventional
  lending. NBFCS have made great use of
  technological advancements like the use of mobile
  phones and the internet which has helped in
  making information easily accessible anytime
  anywhere. It has reduced the demand and reliance
  on bank branches
• Technology is not only at the head of banking and
  financial services, but also an increasingly
  digitized India has underpinned the rise of
  NBFCs. Digitalization has given NBFCs the ability
  to present multiple choices and reach the larger
  audience at quicker pace. This indirectly gives
  rise to larger NBFCs
• Combination of partnership and database helps in
  increasing penetration of financial inclusion. To
  reach large numbers of customers successfully,
  and minimize risks, NBFCs have forged
  partnerships including the government to use
  their database and identify customer worthiness.
  Thus lending has been productive

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Disadvantages

• NBFCs cannot accept demand deposits as it falls
  within the realm of activity of commercial banks
• An NBFC is not a part of the payment and
  settlement system and as such an NBFC cannot
  issue cheques drawn on itself
• Deposit insurance facility is not available for
  NBFC depositors unlike in case of banks
• All NBFCs cannot accept deposits only some can.
  Only those NBFCs holding a valid Certificate of
  Registration with authorisation to accept Public
  Deposits can accept/hold public deposits
• The regulatory mechanism for NBFCs is stringent

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What people at MUDS believe
Another major advantage of NBFCs is the ground
level understanding of their customers profile
and the need for their credit, which gives them
an edge, as their ability to customize their
products according to client needs. -Divya Gupta
(Market Analyst, MUDS Management Pvt Ltd) RBI
has prescribed strict norms on capital adequacy
and NPA in order to bridge the regulatory gaps
between NBFCs and Banks, asking NBFCs to maintain
minimum capital adequacy norms. It is reflected
from a statement of the RBI which said that seven
NBFCs were not able to meet the regulatory
minimum capital adequacy norms of 15 as of March
2016. -Mir Irfan (Market Analyst, MUDS
Management Pvt Ltd)
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NBFCs are slowly taking charge of the financial
needs of Indias unorganized sector!-Shweta
Gupta, Founder, and CEO, MUDS
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Thank You!