Non-Banking Financial Institutions

Introduction

 Non-Banking Financial Services are provided by Non Banking Financial Institutions(NBFIs) which are an important alternative channel of finance for the commercial sector in India’s bank dominated financial sector. Their role in promoting financial inclusion and catering to the needs of small businesses and specialised segments is an additional dimension of their relevance in the Indian context. Regulations relating to governing non-banking financial companies (NBFCs) are being increasingly harmonised with those of banks to forge the right balance for financial stability while encouraging them to focus on specialised areas. Non-Banking Financial Institutions (NBFIs) have been intermediating a growing share of the resource flows to the commercial sector. NBFIs regulated by the Reserve Bank are All-India financial institutions (AIFIs), non-banking financial companies (NBFCs) and primary dealers (PDs) . AIFIs, largely an outcome of development planning in India, were created as apex public entities for providing long-term financing / refinancing to specific sectors. 

The Reserve Bank regulated NBFI sector grew by 15.8 per cent in 2017-18; by the end of March 2018, it was 19.8 per cent of the scheduled commercial banks (SCBs) taken together in terms of balance sheet size. Within the NBFI sector, AIFIs constituted 23 per cent of total assets, while NBFCs represented 75 per cent and standalone PDs accounted for 2 per cent.

All India Financial Institutions (AIFIs), NonBanking Financial Companies (NBFCs) and Primary Dealers (PDs) form three important segments of the Non-Banking Financial Institutions (NBFIs) sector in India that are regulated and supervised by the Reserve Bank. AIFIs constitute institutional mechanism entrusted with providing sector-specific long-term financing. NBFCs comprising mostly private sector institutions, provide a variety of financial services including equipment leasing, hire purchase, loans, and investments. Primary dealers (PDs) play a crucial role in fostering both the primary and secondary government securities markets. The operational and financial performance of NBFIs sector.

Non-banking financial institutions (NBFIs) comprise a heterogeneous group of financial intermediaries. Those under the regulatory purview of the Reserve Bank consist of all-India financial institutions (AIFIs), nonbanking financial companies (NBFCs) and  primary dealers (PDs) AIFIs are apex institutions established during the development planning era to provide long-term financing/refinancing to specific sectors such as (i) agriculture and rural development; (ii) trade; (iii) small industries; and (iv) housing. NBFCs are dominated by joint stock companies, catering to niche areas ranging from personal loans to infrastructure financing. PDs play an important role as market makers for government securities. Although housing finance companies, merchant banking companies, stock exchanges, companies engaged in the business of stockbroking/sub-broking, venture capital fund companies, nidhi companies, insurance companies and chit fund companies are also NBFCs, they have been exempted from the requirement of registration with the Reserve Bank under Section 45-IA of the RBI Act, 1934

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples include:

1. All India Financial Institutions (AIFI)

         Exim

         Nabard

         Sidbi

         NHB

2. Non banking financial companies

3. Primary Dealers (PD)    

1. All India Financial Institutions

At the end of March 2018, there were four financial institutions under the regulation and supervision of the Reserve Bank viz., the Export Import Bank of India (EXIM Bank), the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB). Four AIFIs viz., the EXIM Bank, the NABARD, the NHB and the SIDBI, are under the oversight of the Reserve Bank . (Table 1)

Table 1: Ownership Pattern of AIFIs

(End-March 2017)

*: State Bank of India (16.7 per cent), IDBI Bank Ltd. (16.3 per cent) and Government of India (15.4 per cent) are SIDBI’s three major shareholders.

At the end of March 2018, there were four financial institutions under the regulation and supervision of the Reserve Bank viz., the Export Import Bank of India (EXIM Bank), the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) (Chart VI.26). 

Chart VI.26: Ownership Pattern of AIFIs

( at end-March 2018)

*The financial year for EXIM Bank, SIDBI and NABARD runs from April to march and for NHB, it runs from July to June. ?

Financial assistance sanctioned by AIFIs during 2017-18 increased by 2.4 per cent whereas disbursement growth was robust at 21.1 per cent in line with an upturn in overall economic activity. Disbursement by all AIFIs expanded during the year, with the largest expansion recorded by SIDBI mainly reflecting increase in refinancing to the banks for on-lending to the MSME sector liability side, bonds and debentures and other borrowings also increased during the year to finance increased credit disbursement and investment activities. AIFIs largely raised short-term funds for financing their activities. While the NHB accounted for more than half of the total resources raised in 2017-18, the EXIM Bank accounted for the least, with most of its funds being foreign currency borrowings. Resources mobilised by the AIFIs through CPs, certificate of deposits, and term deposits increased during 2017-18. This resulted in higher utilisation of borrowing limits. The NABARD and the SIDBI together constituted 80 per cent of all resources raised by the AIFIs from the money market.

The total amount of the AIFIs’ net NPAs as well as their net NPA ratio declined during 2017-18 as both EXIM Bank and SIDBI reported a decline The sharp decline in net NPA of EXIM bank was partly reflective of higher provisioning The NPAs of AIFIs experienced aging, with sub-standard assets moving to the doubtful assets category in 2017-18. This was mainly evident in the case of EXIM Bank—which accounted for 94.5 per cent of the doubtful assets of all AIFIs taken together as at endMarch 2018.

2.  Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc. They also provide products/services that includes margin funding, leasing and hire purchase, corporate loans, investment in non-convertible debentures, IPO funding, small ticket loans, venture capital etc.

Importance of NBFC’S

According to RBI Non-Banking Finance Companies (NBFCs) is a constituent of the institutional structure of the organized financial system in India. NBFCs perform a significant and important role in our financial system. They facilitate the process of channelizing of public savings and provide better return to the depositors. We are aware that due to liberalization and globalisation, banking industry and financial sector has gone through many reforms. In the present economic environment, it is very difficult to cater the need of society by Banks alone, so role of Non-Banking Finance Companies have become indispensable. The activities of non-banking financial companies(NBFCs) in India have undergone qualitative changes over the years through functional specialisation. The role of NBFCs as effective financial intermediaries has been well recognised as they have inherent ability to take quicker decisions, assume greater risks, and customise their services and charges more according to the needs of the clients. While these features, as compared to the banks, have contributed to the rapid increase of NBFCs, their flexible structures allow them to unbundle services provided by banks and market the components on a competitive basis. The distinction between banks and non-banks has been gradually getting blurred since both the segments of the financial system engage themselves in many similar types of activities. At present, NBFCs in India have become prominent in a wide range of activities like hire-purchase finance, equipment lease finance, loans, investments, etc. By employing innovative marketing strategies and devising tailor-made products, NBFCs have also been able to build up a clientele base among the depositors, mop up public savings and command large resources as reflected in the growth of their deposits from public, shareholders, directors and their companies, and borrowings by issue of non-convertible debentures, etc Double-digit growth in credit extended by NBFCs has improved resilience and stability of the economy by filling up the financing gap opened by the muted bank credit growth from 2014. 

Role OF NBFC’S

(1)  Promoters Utilization of savings: Non-banking financial companies pay an important role in promoting the utilization of savings among public. NBFC’s can reach certain deposit segments such as unorganized sector and small borrowers were commercial bank cannot reach. These companies encourage savings and promote careful spending of money without much wastage. They offer attractive schemes to suit needs of various sections of the society. They also attract idle money by offering attractive rates of interest. Idle money means the money which the public keep aside, but which is not used. It is surplus money

(2)  Provides easy timely and unusual credit: NBFC’s provide easy and timely credit to those who need it. The formalities and procedures in case of NBFCs are also very less NBFCs also provides unusual credit means the credit which is not usually provided by banks such as credit for marriage expenses, religious functions, etc the NBFC’s are open to all everyone whether rich or poor can use them according to their needs.

(3) Financial super market: NBFCs play an important role of a financial supermarket. NBFCs create a financial supermarket for customers by offering a variety of services. Now NBFCs are providing a variety of services such as mutual funds, counselling, merchant banking etc apart from their traditional services. Most of the NBFCs reduce their risks by expanding their range of products and activities.

(4) Investing funds in productive purposes: NBFCs invest the small savings in productive purposes. Productive purposes mean they invest the savings of people in businesses which can earn good amount of returns. For example – In case of leasing companies lease equipment to industrialists, the industrialists can carry on their production with less capital and the leasing company can also earn good amount of profit.

(5) Provide housing finance: NBFCs, mainly the Housing Finance companies provide housing finance on easy term and conditions. They play an important role in fulfilling the basic human need of housing finance. Housing finance is generally needed by middle class and lower middle-class people. Hence, NBFCs are blessing for them.

(6) Provide investment advice: NBFCs mainly investment companies provide advice relating to wise investment of funds as well as how to spread the risk by investing in different securities they protect the small investors by investing their funds in different securities. They provide valuable services to investors by choosing the right kind of securities which will help them in gaining maximum rate of returns. Hence NBFCs plays an important role by providing sound and wise investment advice.

(7) Increase the standard of living: NBFCs play an important role in increasing the standard of living in India. People with lesser means are not able to take the benefit of various goods which were once considered as luxury but now necessity, such as consumer durables like television, refrigerators, air conditioners, Kitchen equipment’s, etc. NBFCs increase the standard of living by providing consumer good on easy instalment basis NBFCs also facilitate the improvement in transport facilities through hire purchase finance etc improved and increased transport facilities help in movement of goods from one place to another ad availability of goods increase the standard of living of the society. 

(8) Accept deposits in various forms: NBFC’s accept deposits forms convenient in public. Generally, they receive deposits from public by way of depositor a loaner in any form. In turn the NBFC’s issue debentures unit’s certificates savings certificates units etc to the public.

(9) Promote economic growth: NBFC’s play a very important role in the economic growth of the country. They increase the rate of growth of the financial market and provide a wide variety of investors. They work on the principals of providing a good rate of return on saving while reducing the risk to maximum possible extent. Hence, they help in the survival of business in the economy by keeping the capital market active and busy. the also encourage the growth of well organised business enterprises by investing their funds in efficient and financially sound business enterprises only.

One major benefit of NBFC’s speculative business means investing in risky activities. The investing companies are interested in price stability and hence NBFC’s have a good influence on the stock market. NBFC’s play a very positive and active role in the development of our country.

Function of Non-Banking Financial Companies:

(1) Receiving benefits: The primary function of NBFC’s is receive deposits from the public in various ways such as issue of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of NBFCs are made up of money received from public by way of deposits or loan or investment or any other form.

(2) Lending money Another important function of NBFCs is lending money to public. Non-banking financial companies provide financial assistance through: 

                                                                (a) Hire purchase finance: Hire purchase finance is given by NBFC’s to help small important operators professionals and middle-income group people to buy the equipment on the basis                                                                        on hire purchase. After the last instalment of Hire purchase paid by the buyer, the ownership of the equipment passes to the buyer.

                                                                (b) Leasing finance: In leasing finance, the borrower of the capital equipment is allowed to use it as hire against the payment of a monthly rent. The borrower need not purchase the                                                                               capital equipment, but he buys the right to use it.

                                                                (c) Housing finance: NBFC’s provide housing finance to the public, they fiancé for construction of houses, development of plots, land, etc.

History of NBFCS in India

The Reserve Bank of India Act, 1934 amended on 1 December 1964 by Reserve Bank Amendment Act, 1963. In this new 'Chapter III-B' introduced to Regulate 'Deposit Accepting' NBFCs. The different types of Committees to Review existing framework of NBFCs are

James S. Raj Committee

In early 1970s Government of India asked Banking Commission to Study the Functioning of Chit Funds and Examining activities of Non-Banking Financial Intermediaries. In 1972, Banking Commission recommended Uniform Chit Fund Legislation to whole country. Reserve Bank of India prepared Model Bill to regulate the conduct of chit funds and referred to study group under the Chairmanship of James S. Raj. In June 1974, study group recommended ban on Prize Chit and other Schemes. Directed the Parliament to enact a bill which ensures uniformity in the provisions applicable to chit funds throughout the country. Parliament enacted two acts. Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and Chit Funds Act, 1982.

Chakravarty Committee

During Planning Era, Reserve Bank of India tried best to 'Manage Money' and evolve 'Sound Monetary' system but no much appreciable success in realising social objectives of monetary policy of the country. In December 1982, Dr Manmohan Singh, Governor of RBI appointed committee under the Chairmanship of 'Prof Sukhamoy Chakravarty' to review functioning of monetary system in India. Committee recommended assessment of links among the Banking Sector, the Non-Banking Financial Institutions and the Un-organised sector to evaluate various instruments of Monetary and Credit policy in terms of their impact on the Credit System and the Economy.

Dr. A.C. Shah Committee (1992)

The working group of financial companies constituted in April 1992 i.e. the shah committee set out the agenda for reforms in the NBFC sector. This committee made wide ranging recommendations covering inter-alia entry point norms for NBFCs on the lines of banks, stipulation of credit rating for acceptance of public deposits and more statutory powers to reserve bank for better regulation of NBFCs.