NBFCs started operations in India in the 1960s. They began as an alternative for individuals whose financial needs were not sufficiently met by the banking system of the country. For the initial period, they operated on a limited scale without any significant impact.
Here’s A Brief History about Non-Banking Financial Institutions
NBFIs invited fixed deposits from investors, in the beginning. They worked out leasing deals for big industrial firms. Soon after, the Companies Act regulated financing. However, the unique and complex nature of operations of NBFIs called for a separate regulatory mechanism.
To cater to the evolving needs of NBFIs, Chapter III B was included in the Reserve Bank of India Act, 1934.
The regulation assigned the banks with limited authorities to regulate deposit-taking companies. It is since then that the RBI has initiated measures to control the NBFC sector for the betterment of the economy.
On the basis of recommendations of James S. Raj Study Group formed in 1975, RBI accepted and implemented regulations that allowed financial companies the freedom gearing oftentimes. According to the salient features of the Directions, the purchase and leasing companies were allowed to accept deposits to the limit of their net owned funds. The Directions also prescribed the need for Companies to maintain liquid assets in the form of unencumbered approved government securities.
Between the period of the 1980s and 1990s, Non-Banking Financial Companies gained a firm hold on Indian ground. They started to attract a vast number of investors because of their customer-friendly reputation amidst the masses. The year 1991 brought with it the days of Liberalisation, Privatisation and Globalisation. The times saw massive growth of NBFCs during this phase.
During this time, the number of NBFCs grew from a mere 7,000 in 1981 to around 30,000 in 1992.
The phenomenal growth curve leads RBI into feeling that it was becoming increasingly difficult for it to regulate the NBFI industry. RBI then proceeded to form a committee that was headed by A. C. Shah, who formerly served as the Chairman of the Bank of Baroda, in 1992.
The committee was assigned the task to suggest measures for the effective regulation of the non-banking financial industry. The recommendations of the Shah committee ranged from compulsory registration to prudential norms.
From January 1997, the RBI Act 1934 was altered drastically. Chapters III-B, III-C, and V of the RBI Act 1934 saw significant changes. The alterations were made with the fundamental objective of giving birth to a complete regulatory and supervisory structure. The aim was to protect the interests of depositors and to ensure the healthy functioning of the NBFC mechanism in the economy.
Following the amendment of the RBI Act in 1997, the NBFCs have come a long way. There has been a substantial change in terms of operations, a variety of market products and instruments they offer and the technological sophistication they leverage to ease the process etc.
Non-Banking Financial Institutions are growing as an integral component of the Indian financial system. The NBFCs are heterogeneous in terms of their activities and size of operations and serve as critical financial intermediaries for credit seekers of the country. They are strengthening the economy and have etched a distinct place for themselves by serving the credit requirements of both wholesale and retail customers.
They facilitate bank-related financial services like investment, contractual savings, market broking and risk pooling but do not possess a banking license.
NBFCs today have gained much traction in the economy. They add considerable depth to the overall financial sector. NBFIs have a growing significance as a key player in broadening the economic horizons of creditors in India. Recent traction in the lending sector that to NBFC growth has generated immense academic and research interests from scholars who intend to dive deep into its onset, growth and performance.
In August of 2016, the union cabinet welcomed foreign direct investment (FDI) under the automatic route in regulated Non-banking financial companies.
Here are ways in which NBFCs help the economy:
- They supplement the banking infrastructure of the country by distributing excess resources to individuals and companies that face fund deficit.
- On the other hand, NBFIs also bring competition in financial services available in the country.
- While banks may offer packaged deals on financial services, NBFIs offer strictly customized services to suit the specific needs of clients they serve.
Very often, NBFIs specialize in one or two particular sectors and develop an informational advantage.
NBFCs play a crucial role in the process of intermediation. Especially so in the areas where established financial entities are not active or accessible for a borrower. The Penetration of NBFCs in rural parts of the country has encouraged small savers to invest money and even borrow it when needed.
Finezza is a unique lending lifecycle management software for NBFCs and MFIs. The platform leverages AI and ML tech to ease financial analysis and decision support for non-banking financial institutions. It allows these lenders to manage the entire lifecycle of a loan application easily and even helps in payment collection and mitigating cases of delinquencies. Backed by tech, Finezza helps lenders better assess an applicant’s creditworthiness through traditional credit scores and other alternate data points.
The software tool builds customizable reports that show repayment history, lapses, and predictive analysis of future repayment potential for loan evaluation officers and facilitate error-proof credit decisions. Finezza also helps in creating a seamless experience for the end borrowers, so that they are organically guided from origination to servicing of different categories of loans.
It enables a reduction in loan processing and approval times to elevate the customer experience of the borrowers. NBFCs benefit from its secure APIs and data pipelines that can be easily integrated into existing lending ERP systems. Finezza thus goes a long way in improving the lenders’ credit books through seamless credit assessment strategies that effectively omit false-positives.
If you are an NBFC, looking to boost conversion rates, process loans faster, and reap enhanced returns, Finezza is the tool for you!
Please write to us, if you have any queries about Finezza.