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Non-Banking Financial Company (NBFC)
Context
A combination of factors, including rising interest rates, regulatory action and funding scarcity, could moderate growth in the non-banking financial company (NBFC) sector from 18 per cent in 2024 to 13-15 per cent in the coming year, according to rating agency ICRA.
What is an NBFC?
- An NBFC (Non-Banking Financial Company) is a financial institution that provides financial services similar to banks but does not hold a banking license.
- NBFCs play an important role in the economy by providing credit and other financial services to parties usually not served by traditional banks.
- In India, NBFCs are regulated by the Reserve Bank of India (RBI) and must comply with specific regulatory norms.
- They primarily raise funds through public deposits, borrowings from banks, and capital markets.
- No Deposit Insurance: Unlike banks, deposits made in NBFCs are not insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- They play a crucial role in the financial system, offering services such as: Loans and Credit, Investment Services, Financial Leasing, Microfinance, Insurance and Asset Management
- Different types of NBFCs in India
- Asset Finance Companies (AFCs) primarily finance the purchase of physical assets like automobiles or industrial machinery.
- Investment Companies (ICs) focus on acquiring securities and stocks to build investment portfolios.
- Loan Companies (LCs) engage primarily in providing loans and advances.
- Infrastructure Finance Companies (IFCs) lend to infrastructure projects.
- Microfinance Institutions (MFIs) provide small loans to low-income individuals and groups.
Challenges faced by NBFCs
- The Reserve Bank of India (RBI) is nudging NBFCs to grow prudently and focus on long-term sustainability to avert stress in any segment.
- In November 2023, it increased the risk weights for loans to NBFCs by 25 basis points, making bank borrowing more expensive for them.
- Other challenges:
- tightening liquidity conditions intensify margin pressures
- restrict access to credit, especially for smaller and mid-sized players
- rising cost of credit
- limited bargaining power, especially for smaller NBFCs
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