Why are NBFCs Crucial for the Indian Economy?

  • May 03, 2024
  • Dushyant Sharma
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India’s financial services industry is huge. It comprises not only the commercial banks but also Non-Banking Financial Companies (NBFCs). NBFCs offer a wide range of financial services such as chit-funds and loans. However, they’re different from banks. NBFCs are often small players that go largely unnoticed. Yet, for the Indian economy, these financial institutions play an important role.

 

In this article, we will discuss why NBFCs are important for the Indian economy.

A Description of NBFCs

Non-Banking Financial Companies (NBFCs) are financial entities, albeit different from traditional banks. They do not possess a banking license. However, they do possess an NBFC License issued by the Reserve Bank of India (RBI).

 

It is legally permissible for NBFCs to approve loans and initiate credit facilities to the debtors. Certain NBFCs also assist their customers when it comes to retirement planning. An NBFC can include mortgage lenders, investment banks, money market funds, hedge and private equity funds, chit funds, peer-to-peer lenders, and even mortgage lenders. If the income of a financial entity from the financial assets exceeds 50% of its gross income and accounts for more than 50% of its total assets, it meets the criteria to be eligible as an NBFC. It is important to note that an NBFC is not allowed to engage in any core business whose main activities are agricultural, industrial, construction, sales or acquisition of immovable properties, buying or selling of any items other than securities.

 

The NBFCs’ need was identified, by the expert committees of the Reserve Bank of India (RBI), in the areas mentioned below:

  • Development of sectors like transport and infrastructure
  • Substantial employment generation
  • Huge contribution to the state exchequer
  • Irreplaceable supplement to bank credit in rural areas
  • Primary focus on semi-urban, rural areas and first time buyers and users
  • To finance economically weaker sections
  • Help and increase wealth creation
  • Broad-based economic development

Importance of NBFCs for India’s Economy

NBFCs play a vital role in the promotion of inclusive growth in India by catering to the diverse financial needs of customers that cannot avail services offered by the traditional banks. Additionally, when it comes to providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs), NBFCs often take the main role. NBFCs play an essential role in developing India’s economy since they boost transportation, employment generation and wealth creation, bank credit in rural areas and support society’s financially weaker sections. In matters related to insurance, emergency services like financial assistance and guidance is also offered to the customers. 

 

There is no doubt that the banking sector will always be considered the most essential sector in the field of business due to its credibility in supporting manufacturing, infrastructural development and being a backbone for the common man’s money. But even despite this, the NBFCs play a critical role and their presence in the country only helps in boosting the economy in the right direction.

 

Mr. P Vijaya Bhaskar - the Ex-Executive Director of the Reserve Bank of India, in a speech, explained that NBFCs are game changers that are important to the economy of India. 

Size Of Sector

Despite the slowing down of the economy, the NBFC sector has grown considerably. In March 2013, it accounted for the country’s 12.5% Gross Domestic Product (GDP) - a measure of the economy’s size.

Growth

Between 2006 and 2013, the NBFC sector outperformed the banking sectors in terms of year-over-year growth rates. On average, it expanded by 22% every year. Even though,  in 2011-12, India’s GDP fell to 6.3% from 10.5% in 2010-11, the NBFC sector witnessed a growth of 25.7%. This shows that NBFCs have been contributing more and more to the economy with each year passing by.

Profitability

Due to lower costs, NBFCs are more profitable as compared to the banks. As a result, NBFCs are able to offer the customers with cheaper loans. Due to this, NBFCs’ credit growth is higher compared to the banking sector. 

Infrastructure Lending:

Infrastructure projects require a lot of funds, and earn profits only over a longer time-frame, not right away. Due to this, these projects are considered to be riskier and a lot of banks are disinterested in lending loans to these projects. NBFCs, in the last few years, have contributed more to infrastructure lending as compared to the banks. In March 2013, NBFCs lent over one third of their total assets to the infrastructure sector in contrast to the banks that lent only 7.6% to this sector.

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By lending to the projects related to infrastructure, NBFCs contribute majorly to the economy. This is really important for a developing country like India. 

Promoting Inclusive Growth:

NBFCs offer services to a wide range of customers belonging to urban and rural areas. These financial institutions finance projects of small-scale companies, which assist in the rural areas’ growth. Additionally, they also offer small-ticket loans for affordable housing projects. All these services help in the promotion of inclusive growth in India.

Conclusion

The Non-Banking Financial Companies (NBFCs) are an essential component of the financial system of India. Retail clients in underserved and unbanked areas are being given credit by NBFCs. These financial institutions serve a wide range of clients in both rural and urban areas. They offer funding for small-business ventures and modest-cost financing for housing developments. NBFCs have a proven track record of innovating products that serve the needs of the customers. 

 

NBFCs are becoming famous as substitutes of traditional banks in India. To some extent, they have been successful in filling the gap in offering credit to retail customers in underserved and unbanked areas. They have made noteworthy contributions to the government’s financial inclusion strategy. If you’re planning to set up an NBFC, obtaining an RBI-issued NBFC license is mandatory. For assistance, you can get in touch with our NBFC License Consultants at Registrationwala.

 


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Dushyant Sharma
Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.

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