The Non-Banking Financial Company (NBFC) industry has undergone a considerable transformation in the last few years and is playing a crucial role in the development of financial systems. NBFCs are basically financial institutions that provide all banking services to its customers. These services include loans, asset management, insurance, and such others. But the major point of these service companies is that they do not have banking licenses. As compared to banks, NBFCs can offer all services but can’t appeal to the traditional demand for deposit system, or funds from the general population that are easily accessible, such as those in checking for savings accounts. They are kept beyond the scope of typical federal and state financial regulator inspection by this limitation. These institutions can, however, take deposits from a small number of people, including directors, shareholders, and family members.
On the other hand, NBFCs are quite popular now as they too are a vital part of the financial sector. When comparing NBFCs against conventional banks, the former provides the trade and commerce sectors with long-term credit. They encourage economic growth by making it easier to finance significant infrastructure projects. Long-term credits provide access to growth along with soft loans and stable rates.
Advantages like these fuelled NBFCs’ growth in developed countries as well as in developing countries. In developing countries, the role of NBFCs is seen as playing in the contribution of generating employment, wealth creation, core infrastructure, transport, development in the economy, and many more. By utilizing technology in credit deployment, non-banking financial companies have beaten banks in the mortgage industry. NBFCs are already expanding into underdeveloped markets that banks do not cover.
Facts that led to the growth of NBFCs
As mentioned above, there are innumerable facts that give rise to NBFCs as compared to banks.
In customer-centric services, e.g., in terms of loans, the customers of traditional banks have to undergo snags wherethey have to worry about hidden interest rates and charges that may fluctuate according to market risks. However, NBFCs, on the other hand, including housing finance companies, are constantly evolving to provide mobile customer service. For the purpose of accessing their accounts online, borrowers shall be able to keep up to date with loan details, payments, and other charges.
NBFCs offer flexible eligibility criteria for the customers seeking loans, with the aid of innovative technologies. The NBFCs are taking a holistic view of assessing an individual’s creditworthiness with the assistance of Artificial Intelligence, Machine Learning and other new fintech solutions which have helped them to look beyond their credit history.
Compared to the banks, the lending procedure with NBFCs is smooth. While a loan disbursal at a bank may take a few days to weeks, an application can be processed by an NBFC in only 24 hours after it has been approved. When it comes to loan approval, NBFCs are more lenient than banks. The speedy and time-saving approach with NBFCs is useful, especially in unanticipated crises like medical emergencies, when NBFCs are proving to be immensely helpful and occasionally even lifesaving.
NBFCs offer specialized product lines to their customers. To cater to the target consumer demographic, some NBFCs have concentrated on a small range of goods or frequently a single line of products. With a solid understanding of their target market, NBFCs have tailored their product offerings to fit certain traits of the consumer group and concentrate on satisfying the appropriate demands. According to the client profile and loan risk inherent in each product line, several NBFCs are using non-standard pricing methods.
NBFCs contact directly with clients providing transparent operations. They offer key liquidity for the financial system. Banks only meet 14% of the financial demand; the remaining 80% is covered by NBFCs and other private lenders. The sector of society that banks find difficult to serve is covered by NBFC. NBFCs do this through direct client interaction, which lessens the need for middlemen, bureaucracy, and sourcing expenses.
Market Value of NBFC
ICRA ratings predict that retail-focused NBFCs would grow by 12–14%, while home financing companies may grow by 10–12%. On the other hand, if we talk about the AUM of NBFCs, then according to CRISIL Ratings, NBFCs’ assets under management might increase by 13–14% in FY 23–24. The predicted rise follows three fiscal years of single-digit growth that ended in March 2022.
Conclusion
NBFC, in the developed and developing countries, accelerates economic growth. In order to proactively provide regulatory support to the industry and safeguard long-term financial stability, developing countries are constantly striving to make the necessary changes to the NBFC regulatory framework. It is predicted that NBFCs will have a bigger effect on the socioeconomic makeup of the developing countries in 2023. There is still a lot of room for credit penetration. By collaborating with fintech and developing new business models with specialist products, NBFCs may set a new norm in the developing countries.
Blog by Tasleem Majumder
