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The role of NBFCs in the Indian Economy

Updated On : November 2017

NBFCs (Non Banking Financial Companies) play an important role in promoting inclusive growth in the country, by catering to the diverse financial needs of bank excluded customers. Further, NBFCs often take lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) most suitable to their business requirements. NBFCs do play a critical role in participating in the development of an economy by providing a fillip to transportation, employment generation, wealth creation, bank credit in rural segments and to support financially weaker sections of the society. Emergency services like financial assistance and guidance is also provided to the customers in the matters pertaining to insurance.

NBFCs are financial intermediaries engaged in the business of accepting deposits delivering credit and play an important role in channelizing the scarce financial resources to capital formation. They supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. However, they do not include services related to agriculture activity, industrial activity, sale, purchase or construction of immovable property. In India, despite being different from banks, NBFC are bound by the Indian banking industry rules and regulations.

NBFC focuses on business related to loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.

The banking sector would always be the most important sector in the field of business because of its credibility in supporting manufacturing, infrastructural development and even being the backbone for the common man's money. But despite this, the role of NBFCs is critical and their presence in a country would only boost the economy in the right direction.

Game Changers

P Vijaya Bhaskar, ex – Excutive Director, RBI, explained how NBFC companies are game-changers that are very important to the economy

  • Size of sector : The NBFC sector has grown considerably in the last few years despite the slowdown in the economy.
  • Growth : In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On an average, it grew 22% every year. This shows, it is contributing more to the economy every year.
  • Profitability : NBFCs are more profitable than the banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result, NBFCs' credit growth - the increase in the amount of money being lent to customers – is higher than that of the banking sector with more customers opting for NBFCs.
  • Infrastructure Lending : NBFCs contribute largely to the economy by lending to infrastructure projects, which are very important to a developing country like India. Since they require large amount of funds, and earn profits only over a longer time-frame, these are riskier projects and deters banks from lending. In the last few years, NBFCs have contributed more to infrastructure lending than banks.
  • Promoting inclusive growth : NBFCs cater to a wide variety of customers - both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. All these help promote inclusive growth in the country.

NBFCs aid economic development in the following ways

  • Mobilization of Resources - It converts savings into investments
  • Capital Formation - Aids to increase capital stock of a company
  • Provision of Long-term Credit and specialised Credit
  • Aid in Employment Generation
  • Help in development of Financial Markets
  • Helps in Attracting Foreign Grants
  • Helps in Breaking Vicious Circle of Poverty by serving as government's instrument

The Technology Backbone

With the increasing role of NBFCs in the Indian Economy, the Reserve Bank of India has issued the notification Master Direction - Information Technology Framework for the NBFC Sector this year. The directions on IT Framework for the NBFC sector are expected to enhance safety, security, efficiency in processes leading to benefits for NBFCs and their customers. NBFCs with asset size above 500 crores are expected to adhere to the new "recommendations" by 30th September 2018. Recommendations for smaller NBFCs include developing basic IT systems mainly for maintaining the database.

While larger NBFCs stare at a strict deadline, smaller NBFCs, especially Fintech startups have a bigger problem at hand; an identity crisis! The business models of startups like BankBaaar mandate that they do not become a NBFC, while the nature of operations of startups like Lendingkart makes them a NBFC as part of the legal compliance.

Nelito Systems is expanding its horizons to provide IT solutions to Non-Banking Financial Companies (NBFCs). The FinCraft NBFC Suite includes

  • FinCraftTM CBS (Core Banking Solution)
  • FinCraftTM Data Cleansing
  • FinCraftTM BI & Analytics
  • FinDART (Data Purging, archival and retrieval solution)
  • FinCraftTM MMS (Mandate Management System)
  • FinCraftTM DSB (DoorStep Banking Solution)
  • Loan Origination (LOS)
  • Loan Management (LMS) and Finance module

Nelito excels in working with NBFCs of all sizes. The wide range of products in its stable ensures that NBFCs can partner Nelito for their digital consulting needs in every stage of their growth. The WheelsEMI case study is a bright example of one such partnership.

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