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Globalisation is on a steep rise, and businesses tend to turn complex, given this rise. To provide adequate support for these complexities, financial institutions have geared up to offer a range of financial products and services. Such financial institutions provide a strong foothold for businesses all around the world, especially so during the time of market fluctuations. They appreciate these financial institutions for the economic prosperity they bring in.

Recently, we have also seen a rise in the number of financial institutions. This has led to intense competition among financial institutions. Thus, financial institutions offer a variety of products to banking as well as non-banking customers at highly competitive prices. This puts investors and borrowers who are looking for economic opportunities in tight spots where it becomes challenging to make a choice.

Every right-minded consumer compares products by looking at the features it offers before choosing one. Even product reviews help in assessing the reliability of a particular product. Sometimes, the reputation of an institution or brand guides the decision-making process. Consumers are ready to pay a relatively higher price for their product if an institution offers it with a good market standing.

Thus, in the case of financial institutions, customers are left to assess whether he or she wants a financial or non-financial institution. They are also required to access the reputation of the institution and the services it offers.

While banks have been the most renowned financial institutions around the world. Recently, non-banking financial companies (NBFCs) have become popular when it comes to carrying out lending and other financial activities.

NBFCs and Banks Resemble Each Other in Many Ways but Have Considerable Differences as Well

NBFCs

The non-banking financial companies or NBFCs come registered under the Companies Act of 1956. They were formed by the GOI, with the motive of offering banking services to the under-privileged individuals who are reluctant about the gamut of banks and their services.

To be an NBFC, a financial company needs to fulfill two criteria: 

1. Its financial assets should make up more than 50 percent of the total assets
2. The income from those assets must make up more than 50 percent of its gross income.

NBFC provides lending services similar to banks. Their services range from offering advances, savings, and investment products along with managing stock portfolios, credit facilities, money market tradings, money transfers, etc. Further, NBFCs are also participating in activities like housing finance, hire purchase, venture capital, leasing, and infrastructure finance.

However, NBFCs only accept term deposits and never entertain deposits that are repayable on demand.

NBFC institutions can be of six types: 

1. NBFC that is an investment company involved in the acquisition of securities,
2. NBFC that is a loan disbursal company
3. NBFC that is an excluding asset finance company
4. NBFC that functions as an infrastructure finance company with at least 75 percent of its assets in infrastructure loans
5. NBFC that is a systemically important core investment company
6. NBFC is an infrastructure debt fund.

Even the RBI has issued rules and regulations to ensure that the NBFCs function smoothly. Regulation surrounds functions like accepting deposits, such as a compulsory credit rating, mandatory management of liquid assets for repayment, exposure limitation, depositing books, adequate capital maintenance, and the inspection of the NBFCs.

Bank

Banks are financial institutions that fall under the authority of a government. They execute banking activities such as granting loans, accepting deposits, managing withdrawals, providing utility services, and clearing checks too. Banks almost control a country’s financial system. The role of a bank as a financial intermediary, between depositors and borrowers, makes it possible for economies to function with ease. The responsibilities of banks include creating credit products, lending loans, managing deposits, securing money transfers, and providing public utility services.

There are different types of banks:

1. Public sector banks
2. Foreign banks
3. Private sector banks

Banks can also be categorized into segments like central banks and commercial banks. While every country has only one central bank, there is no limit to the number of commercial banks a country can have. Shareholders generally own banks. They are profit-driven institutions that function intending to increase shareholders’ wealth.

Common Differences between Banks and NBFCs

1. Origination

While NBFCs were formed under the Companies Act of 1956, banks were registered under the Banking Regulation Act of 1949. Both banks and NBFCs follow different sets of rules and regulations for the provision of services.

2. Authorisation

Banks and NBFCs differ in terms of the level of their authorisation. NBFCs do not require to hold a bank license to offer banking services to the public. However, the banks are authorized by governments, and they function with the ultimate goal of serving the general public.

3. Demand Deposits

A demand deposit is a fund from which a borrower can withdraw a deposit at any time, from the financial institution. While NBFCs do not accept DDs for any financial transactions, banks do accept them. Customers of banks use DD accounts for making payments.

4. Maintenance of Reserve Ratio

The Reserve ratio is the term used to describe a part of the depositor’s balance that must be kept by a bank as cash, as dictated by the central bank. NBFCs are under no regulation to maintain a reserve ratio to function in the economy; however, banks must maintain a reserve ratio as it affects the supply of money in a country.

5. Foreign Investment

While NBFCs are allowed to make a financial investment of up to 100 percent of their assets, banks can only make a limited financial foreign investment. As per the regulations, only Private Sector banks are allowed to accept FDI, and that too only up to 74%.

6. Deposit Insurance Facility

The facility of deposit insurance is offered by the Deposit Insurance and Credit Guarantee Corporation. While the deposit insurance facility is not available for NBFCs, banks can enjoy its perks and use it to safeguard their clients’ money.

In The End

Most customers resort to banks when they need more significant amounts and lower interest rates. However, today even NBFCs are providing their customers with competitive interest rates and great offers on loan products. This is the main reason why NBFCs have seen exponential growth in the past few years, both in terms of the demand they receive and the services they offer.

Without any stringent requirements for collaterals, thanks to their alternate credit disbursement mechanisms and the help of AI and ML, NBFCs often offer streamlined loan disbursal, even for borrowers with no credit history. This is the reason why they are gaining more popularity as compared to traditional banks.

Finezza is a lending management software that helps NBFCs to what they do, just efficiently. If there is anything else, you would like to know about NBFCs, their functions, or their facilities, write to us in the comment section below.

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.

NBFCs Today

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. 

Conclusion

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.

A lending management system can turn around the way the business runs at a lending firm by streamlining the core business functions at the company. Regardless of the size of the lending business, a quality loan servicing software can not only save time and money for a business but also please the end customers of the firm.

It can be not very easy to choose from a wide range of lending management solutions available in the market that can yield the best results for your business. Businesses that follow an Inside-Out approach, keeping in mind their internal needs along with an insight into the finite set of resources are likely to make a mindful choice of lending management systems.

As more and more NBFCs and MFIs gear up to leverage automated lending management tools,

Here is a list of critical things to consider before investing:

1. Needs of the Lending Business

Lending management software can be a helpful tool to steer your business strategy in the right direction. To decide which Lending Management System you must invest in, it is best to review the short-term and long term goals of the business. Moreover, it’s essential to access the pain points of the software package and current technologies used by the company. Research the requirements from top management to the loan servicers who will be working with the program to analyze where your staff spends most of their time and where you might be able to gain the most efficiencies. Such a gap analysis will provide necessary answers that will help in choosing a better lending management solution. While some lenders need a system that can handle the variable loan and rate types, others may require flexible repayment options, backdated payments, partial payments and custom payment schedules for their business model.

Gap analysis prioritizes the essential features you need today to help you better service your loan portfolios. Lending management software vendors who collaborate to work as strategic partners with lending businesses are your best bets. Given your budget, compare which vendor is offering the most helpful functionality and can accommodate changes to your software requirements as your business evolves. A software vendor who is continually working on developing new features to stay ahead of industry trends should be your welcome partners.

2. Ease of Deployment and Customization

Financial lending companies that work with software tools that do not hamper the security of the data and are easy to use are set to succeed in the industry. A lending management solution that offers the ease of customization can quickly help the business adapt to the diversity of needs of their client base.

It is common business logic that the sooner the operations team at the lending firm becomes adept at using the software solution, faster can they garner the returns on their investment. With a software that is simple to install, the learning process for the lender is streamlined. For example, cloud-based lending management platforms can be set-up even without IT expertise. Software systems that come with a well-designed workflow that acts like a built-in training tool for the operations team, also make the right choice.

3. Choosing Between Cloud-based and On-premise Software Solution

Cloud computing is the ‘in’ thing in almost every sector of business, especially the financial industry. With new perspectives, cloud tech is reinventing new models within the commercial lending sector. Cloud-based lending management tools can improve the efficiencies of the business through better management of functions like assembling, connecting, and using the resources available, to meet business demands. Cloud-based solutions are successful options for companies with the lower capital outlay and reduced operational costs. Software-as-a-solution (Saas) lending management tools allow companies to deploy less expensive solutions than comparable on-premises programs, and it’s easier to manage in house. As SaaS platforms are hosted from a remote location, their service package includes redundant back-up systems and high-level cybersecurity. Apart from the ease of deployment, users gain easy access to advanced features and functionality with cloud solutions. They offer regular maintenance, frequent software upgrades and new product releases, along with proper customer service support. The financial lending firm need not build or fund its own IT department with Saas solutions; thus, it ensures a lower set-up cost than the on-premises program.

On the other hand, the on-premises program brings in the distinct advantage of control. Businesses with a dedicated IT department to manage cybersecurity and 24/7 uptime often prefer on-premise solutions. Such activity enjoys access to databases that are complementary to the lending software they choose. Sometimes, lending organization opt for maintenance of their systems behind their proprietary firewall and thus go for on-premise solutions.

4. Ease of Third-Party Integration

Businesses must ensure that the loan processing module they choose needs to work in syncs well with other systems like a CRM or ERP. The lending management system a business opts for should allow for secure transfer of data from a variety of different methods and software if need be. Given the tech-centric nature of the majority of processes followed today, it’s best if a lending management tool caters to the usage patterns of a client and the core processes they follow. The convenience of integration of data from their party channels onto the lending platform is what makes it a hit. Loan Management Systems should be able to connect with third-party applications for improved functionality of the overall loan processing function.

5. Scope of Evolution and Scalability

Businesses must also consider the range for improvements a lending management solution has. Is the tech being used capable do handling future growth and future demands of the lending markets? Sometimes, lending software is based on static interfaces that do not work well with the dynamic nature of the financial markets. It is unlikely that such software would be a good fit for firms looking for an excellent long-term lending management solution. Only a Loan Management Solution that adheres to evolving compliance mechanisms are set up for success. Businesses need to factor in all the costs to scale up the product with growing or more complex operations for getting an accurate picture of the ROI the product will deliver eventually.

6. Security Features and Accessibility for End Users

Your lending management systems must pace up with the times! Choosing a lending management solution that allows end-users to access it from anywhere is a must for modern businesses. Add to that, well-integrated origination and loan serving functionalities ease the functioning of the lending business. Furthermore, the software solution needs to ensure that the user data is protected in all circumstances. In the view of widespread cyber attacks, data theft, and account hacking, the new financial sector has been suffering. Using a lending management solution that assures adequate measures to ensure that the data of the clients is not compromised in any way.

You can opt for a solution that offers a range of individual modules to suit businesses of all sizes. Solutions with automated decision-making and borrower evaluation cycle and risk segmentation make a valuable choice.

Conclusion

The loan disbursal policy of NBFCs and MFIs plays a vital role in instilling trust in the borrowers in order to augment its topline. This is where an efficient loan management system comes to play. Lending businesses need to evaluate all available options by asking the right kind of questions with an inside-out approach.

We hope the criteria mentioned above serve as a decision-making framework to help you cut through the clutter and give your business the best opportunity to succeed.

If you are looking for an LMS which provides a 360 degree solution, we are just a click way. Get in touch with us!