What is the full form of NBFC?
NBFC stands for Non-Banking Financial Company. An NBFC registered company falls under the Companies Act, 1956. It is usually involved in the business of loans, advances, shares, stocks, bonds, etc. An NBFC first establishes a company under the Act and then applies for the NBFC registration with RBI.
Although they don’t own a banking license, they provide services that fall under banking and non-banking services for people. They are supervised by the Reserve Bank of India. NBFCs were started as an alternative to meet the financial needs that weren’t met by India’s then banking system.
How Does NBFC Differ from Banks?
Banks and NBFCs, though fall under the category of financial intermediaries and provide services that are quite similar, they have several differences:
- NBFCs fall under the Companies Act. However banks are consolidated under the Banking Act.
- Banks are allowed to issue cheque and other settlement systems to customers, unlike NBFCs.
- They are allowed a foreign investment up to a 100%, unlike banks that allowed only upto 74%.
- Credit creation is not possible in NBFCs, whereas it is possible in banks.
- NBFCs do not provide transaction services whereas banks provide transaction services.
- Banks play a role in the country’s payment mechanism, unlike NBFCs.
What Is the Role of NBFCs?
- The role of NBFCs is to be financial intermediaries. Along with accepting deposits, they also play a role in delivering credit and channelizing any scarce financial resources towards the creation of wealth.
- They help the banks meet the corporate sector’s financial requirements, delivering credit to any sector that is unorganized and also to other local borrowers.
- They help to meet the financial needs of customers who cannot access any services provided by banks.
- They provide innovative financial services to several enterprises such as micro, small, and MSMEs. This helps them to meet their financial requirements.
The Importance of NBFCs
There are about 9507 NBFCs in India as of January 31st, 2021, registered with the Reserve Bank of India. They play an essential role in lifting the country’s economic progress. Below, we’ve listed a few points that highlight the importance of NBFCs in India.
- NBFCs contribute to the growth of our country’s economy. They not only contribute but also beat the banking sector in that. Irrespective of the country's economic setbacks, NBFCs are growing steadily.
- They are not only created at lower costs but their model also proves to be more profitable than banks. Their increased profitability has allowed them to give cheaper credit to approaching customers, increasing the amount of money lent than the banking sector.
- They help in the growth of the country. They do this by providing financial support to larger infrastructure projects. Banks often don’t finance these projects because of the high risk involved behind lending such huge sums.
- According to many reports, NBFCs promote financial inclusion - providing financial support to both rural and urban customers.
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