Understanding NBFCs: Their Working and Impact on the Indian Economy

NBFCs or Non-Banking Financial Companies are financial institutions that provide financial services similar to banks, but do not hold a banking license. They are regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934. In this blog, we will explore how NBFCs work and their impact on the Indian economy.

NBFCs can be categorized into several types based on their business activities, such as:

1. Asset Finance Company (AFC): An AFC provides loans and credit facilities for the purchase of various assets, such as vehicles, machinery, and equipment.

2. Investment Company (IC): An IC invests funds in securities and other financial assets to generate income.

3. Loan Company (LC): An LC provides loans and credit facilities to individuals and businesses.

4. Infrastructure Finance Company (IFC): An IFC provides finance for infrastructure projects, such as power, telecom, and transportation.

5. Microfinance Company (MFC): An MFC provides small loans and credit facilities to individuals and small businesses, especially in rural areas.

Working of NBFCs:

NBFCs play an important role in the Indian economy by providing various financial services to individuals and businesses. They operate on the principle of borrowing and lending. They raise funds from various sources such as banks, financial institutions, and the public, and lend the same to individuals and businesses. NBFCs earn a profit by charging a higher rate of interest on the loans they provide than the cost of funds they have borrowed.

NBFCs offer a range of financial services, including loans, credit facilities, investment advice, wealth management, and other financial services. They cater to various sectors and segments of society, such as small and medium enterprises, agriculture, housing, infrastructure, and consumer finance.

Impact on the Indian economy:

NBFCs have had a significant impact on the Indian economy. They have played a crucial role in providing credit to small and medium enterprises (SMEs), which are the backbone of the Indian economy. They have also contributed to the growth of the agriculture and housing sectors by providing credit to farmers and homebuyers.

NBFCs have played a critical role in the growth of the Indian retail sector. They have provided easy access to credit for consumers, which has resulted in increased consumption and demand for goods and services. This, in turn, has boosted the growth of the economy.

NBFCs have also contributed to the growth of the Indian capital markets. They have facilitated the flow of funds from investors to the capital markets, thereby providing liquidity to the markets.

According to the Reserve Bank of India (RBI), the total assets of NBFCs in India increased from ₹22.0 trillion in March 2019 to ₹31.6 trillion in March 2021. The loan book of NBFCs grew by 9.2% in March 2021 compared to March 2020. The capital adequacy ratio (CAR) of NBFCs improved to 25.5% in March 2021 from 24.1% in March 2020.

In terms of profitability, the net profit of NBFCs increased by 12.5% in March 2021 compared to March 2020. The return on assets (ROA) of NBFCs improved to 1.9% in March 2021 from 1.4% in March 2020.

However, it's worth noting that the COVID-19 pandemic has had a significant impact on the financial performance of NBFCs. The RBI has introduced various measures to support the liquidity and solvency of NBFCs during the pandemic, such as providing additional liquidity support and relaxation of asset classification norms.

In conclusion, NBFCs have had a significant impact on the Indian economy by providing various financial services to individuals and businesses. They have played a crucial role in providing credit to SMEs, agriculture, and housing sectors, and have contributed to the growth of the Indian retail sector and capital markets. Their continued growth and success are vital for the sustainable development of the Indian economy.