{"id":32692,"date":"2024-11-25T17:01:19","date_gmt":"2024-11-25T11:31:19","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=32692"},"modified":"2024-11-25T17:01:21","modified_gmt":"2024-11-25T11:31:21","slug":"nbfcs-an-important-pillar-of-the-financial-ecosystem","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/25-11-2024\/nbfcs-an-important-pillar-of-the-financial-ecosystem","title":{"rendered":"NBFCs: An Important Pillar of the Financial Ecosystem"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The Reserve Bank of India (RBI) has been encouraging Non-Banking Financial Corporation (NBFCs) to adopt prudent growth strategies and focus on long-term sustainability.\u00a0<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Non-Banking Financial Corporation (NBFCs)?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>NBFCs are companies registered under the <strong>Companies Act, 1956,<\/strong> engaged in financial activities such as;\n<ul class=\"wp-block-list\">\n<li>Offering loans and advances,<\/li>\n\n\n\n<li>Acquiring shares, stocks, bonds, debentures, or other marketable securities,<\/li>\n\n\n\n<li>Operating deposit schemes in various formats.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>It does not include any institution whose <strong>principal business is that of agriculture activity, industrial activity, purchase or sale of any goods<\/strong> (other than securities) or providing any services and sale\/purchase\/construction of immovable property.\u00a0<\/li>\n\n\n\n<li>The functions of the NBFCs are managed by both the <strong>Ministry of Corporate Affairs and the Reserve Bank of India.<\/strong><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is the difference between banks &amp; NBFCs?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:\n<ul class=\"wp-block-list\">\n<li><strong>Demand Deposits: <\/strong>NBFC cannot accept demand deposits;<\/li>\n\n\n\n<li><strong>Payment System: <\/strong>NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;<\/li>\n\n\n\n<li><strong>Deposit Insurance:<\/strong> Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Importance of NBFCs<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>NBFCs are critical to India&#8217;s financial ecosystem, particularly in rural and semi-urban areas where banks have limited reach. Their importance lies in;\n<ul class=\"wp-block-list\">\n<li><strong>Financial Inclusion:<\/strong> By providing credit to underserved regions.<\/li>\n\n\n\n<li><strong>Faster Services:<\/strong> With simplified processes and doorstep delivery.<\/li>\n\n\n\n<li><strong>Priority Sector Lending (PSL):<\/strong> Addressing credit needs in agriculture, microfinance, and other unorganized sectors.<\/li>\n\n\n\n<li><strong>Economic Growth: <\/strong>Supporting sectors like housing, infrastructure, and small enterprises through financing.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Challenges faced by NBFCs<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Higher Risk Weights:<\/strong> In 2023, RBI increased risk weights for loans to NBFCs, making bank borrowing more expensive.\n<ul class=\"wp-block-list\">\n<li>Bank funding to NBFCs dropped from 22% to 15% year-on-year by April 2024.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Funding Constraints: <\/strong>Smaller NBFCs with lower credit ratings face a fund crunch due to rising borrowing costs and limited financing options.<\/li>\n\n\n\n<li><strong>Shallow Bond Market: <\/strong>India\u2019s debt market lacks depth and liquidity, limiting access to diversified domestic funding.<\/li>\n\n\n\n<li><strong>Regulatory Constraints:<\/strong> SEBI&#8217;s cap on the issuance of International Securities Identification Number (ISIN) and absence of active market makers hinder bond market growth.<\/li>\n\n\n\n<li><strong>Cost Pressures:<\/strong> Rising credit costs, projected to increase from 2.6% in 2024 to 4% by 2025, affect NBFCs&#8217; profitability.<\/li>\n\n\n\n<li><strong>Overseas Borrowing Challenges: <\/strong>While attractive due to <strong>reduced hedging costs, <\/strong>overseas funding is still at a nascent stage for many NBFCs.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Way Ahead<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Strengthening Bond Market:<\/strong> Developing a vibrant and liquid bond market will reduce reliance on bank funding and support NBFCs in raising long-term capital.<\/li>\n\n\n\n<li><strong>Co-Lending Model:<\/strong> Encouraging co-lending arrangements between banks and NBFCs can lower borrowing costs and ensure better credit distribution.<\/li>\n\n\n\n<li><strong>Focus on Compliance:<\/strong> NBFCs must adhere to RBI\u2019s guidelines on risk mitigation and grievance redressal to build credibility.<\/li>\n\n\n\n<li><strong>Diversified Funding Sources: <\/strong>Exploring securitization, commercial papers, and equity markets while balancing domestic and overseas funding options.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Concluding remark<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>NBFCs remain a cornerstone of India\u2019s financial system, particularly for promoting financial inclusion and economic growth.\u00a0<\/li>\n\n\n\n<li>However, funding challenges, regulatory pressures, and market inefficiencies must be addressed to ensure their sustainability.<\/li>\n<\/ul>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/epaper.thehindu.com\/ccidist-ws\/th\/th_international\/issues\/108921\/OPS\/GHLDJL0I8.1+G6KDKG1EM.1.html\" target=\"_blank\" rel=\"noopener\"><strong>TH<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Reserve Bank of India (RBI) has been encouraging Non-Banking Financial Corporation (NBFCs) to adopt prudent growth strategies and focus on long-term sustainability.\u00a0<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-32692","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/32692","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=32692"}],"version-history":[{"count":1,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/32692\/revisions"}],"predecessor-version":[{"id":32693,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/32692\/revisions\/32693"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=32692"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=32692"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=32692"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}