Context

• RBI recently said that with the increasing role of non-banking financial companies (NBFCs) in direct credit intermediation, there is a need for NBFCs to augment risk management practices.
• RBI’s move comes in the wake of on-going rating downgrades of non-banks which has raised fears of another liquidity crisis.
• Hence, RBI has asked all shadow banks with a size of over ? 5,000 crore to appoint chief risk officers (CROs) with clearly specified roles and responsibilities.

About

What are Non-Banking Financial Companies (NBFCs)?

• These are establishments that provide financial services and banking facilities without meeting the legal definition of a Bank.
• Hence they are frequently referred to as “shadow banks”. The term ‘shadow bank’ was coined by Paul McCulley in 2007, with specific reference to American non-bank financial institutions that used short-term deposits to finance long-term loans.
• They are covered under the Banking regulations laid down by the Reserve Bank of India and provide banking services like loans, credit facilities, TFCs, retirement planning, investing and stocking in money market.
• However, they are restricted from taking any form of deposits from the general public.

What is the significance of NBFCs?

• These organizations play a crucial role in the economy, offering their services in urban as well as rural areas, mostly granting loans allowing for growth of new ventures.
• They alone count for 12.5% raise in Gross Domestic Product of our country.
• Most people prefer NBFCs over banks as they find them safe, efficient and quick in assisting with financial requirements.
• Moreover, there are various loan products available and there is flexibility and transparency in their services.

What are the examples of NBFCs?

• Power Finance Corporation Limited: It was founded in 1986 and is a Navratna Status company. It provides financial assistance to different power projects in the country. It supports organizations involved in Power generation, transmission and distribution.
• Shriram Transport Finance Company Limited: It was founded in 1979 and has been offering funding services for Light Duty Trucks, Heavy Duty Trucks, Mini Trucks, Passenger Vehicles, Construction Vehicles and Farm Equipments.
• Bajaj Finance Limited: It was founded in 2007. It offers loans to doctors for career enhancement, home loans, gold loans, individual Loans, business and entrepreneur loans.
• Mahindra & Mahindra Financial Services Limited: It offers insurance services and rural housing financial services, gold advances, vehicle advances, corporate advances, home credits and working capital advances.
• Tata Capital Financial Services Ltd: It offers commercial finance, infrastructure finance, wealth management, consumer loans and distribution and marketing of Tata Cards.