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Understanding the NBFC Conundrum

What is Non-Banking Financial Companies (NBFCs)?

1. They are companies registered under the Companies Act, 1956.

2. They comprise mostly private sector institutions providing a variety of financial services that are regulated by Reserve Bank India.

3. Section 45(I) of the Reserve Bank of India (RBI) Act, 1934 lists the activities that can be undertaken by NBFCs.

How are NBFCs categorized?

1. In terms of the type of liabilities, they are categorized as deposit and non-deposit accepting NBFCs.

2. Non-deposit taking NBFCs are categorized by their size as systematically important and other non-deposit holding companies.

3. By the kind of activity they conduct- Asset finance company, Investment company, Loan company, NBFC-Infrastructure Finance Company, etc.

Which are the activities undertaken by NBFCs?

1. They are largely involved in serving those classes of borrowers generally excluded from the formal banking sector.

2. They often take the lead role in providing innovative financial services to MSMEs.

3. NBFCs are different from banks because they cannot accept demand deposits and do not form part of the payments and settlement system. They cannot issue cheques upon themselves.

4. They are specialized in different areas such as financing commercial vehicles, offering loans against gold (Muthoot Finance), infrastructure financing (IDFC Bank) or consumer durables (Bajaj Finance).

5. They provide end-to-end online personal loan solutions, right from obtaining information, applying for a loan, assistance with eligibility criteria and documentation.

6. They also accept deposits from customers, but, unlike banks, these are in the form of insurance premiums and shares listed on stock markets or held privately.

Where are the problems?

1. NBFCs face the problem of liquidity.

2. There has also been a rise in gross NPAs.

3. Recently, the SBI has stepped in to bail them out of the situation by buying assets of Rs.45, 000 crores.