Non Banking Financial Companies

Introduction

The modern financial landscape has seen numerous introductions in the past few decades, with NBFCs having emerged as one of the most important players. They have been providing a wide range of financial solutions which have catered to a wide customer base. Their wide range of activities comprise of loans and advances, equities, debt, chit funds, leasing etc.

How NBFCs are Advantageous in Empowering Financial Solutions

NBFCs which are registered under the Companies Act 1956 are regarded as the most important arm of the financial landscape, especially in a developing country like India which is majorly comprised of rural areas. Commercial banks are not able to reach a majority of these remote locations, and this is where NBFCs step in to provide their financial services where traditional banks are non-existent.

Some key services offered by NBFCs include:

Loans and credit facilities
Investments in money market instruments
Management of stock portfolios
Private education funding
Property investments
Retirement planning
Acquisitions and mergers support

NBFCs & Banks – A Brief Comparison

Firstly, the fees that NBFCs charge is lower as compared to banks which makes them more profitable. This in turn helps them in providing cheaper loans to borrowers. There is less paperwork involved when it comes to documentation in NBFCs, whereas banks have a lengthy loan disbursement procedure which is time consuming.

When it comes to stringent regulations, NBFCs score high as they have more relaxed set of regulations in comparison to banks. Loans can be availed by public as well as private sector through NBFCS. Banks cater to the requirements of large businesses, whereas NBFCs are more focussed on small businesses and borrowers. Also, when it comes to credit score, NBFCs are more lenient than banks which out rightly deny loans owing to low credit score.

Banks charge principal as well as interest at regular intervals for gold loans. In the case of NBFCs borrowers can pay interest throughout the loan tenure and pay the principal at the end. Repayment penalty clauses in NBFCs are relaxed as compared to banks. Furthermore, charges like stamp duty are not considered by banks while computing the property loan amount which is considered by banks.

Difference Between NBFC’s & Banks

There are a few fundamental differences between the two despite both being major lending institutions:

1. Demand Deposits
Deposits that are allowed to be withdrawn without any prior notice to the financial institutions are called demand deposits. NBFCs do not accept demand deposits in the customer’s account, whereas banks do accept these.
2. Issuance of Cheques
NBFCs do not have the authority to issue cheques unlike banks as they are not part of the payment and settlement ecosystem.
3. Deposit Insurance
The funds that NBFCs receive from depositors are not insured, and there is a risk of loss of funds in case the NBFC fails. Banks insure depositors funds, hence are much safer.

4. Reserve Ratio Compliance
Banks are required to set aside a part of the deposit as reserves as per RBI guidelines; However, NBFCs are not required to follow this regulation.
5. Foreign Capital
A cap of 74% foreign investment is reserved for banks, but there is no such cap for NBFCs.

Conclusion

NBFCs have emerged as the most important link in the financial sector, particularly for small businesses and borrowers. Owing to their diversified offerings, NBFCs have been taken over as an integral part of the Indian financial space. Their simplified sanction procedures and flexibility, backed by its low cost operations have pushed their growth at par with the traditional banks.