Introduction
You must have definitely heard about Muthoot Finance Ltd. at least once in your lifetime. It is India's first Non-Banking Financial Company ("NBFC"). With the rise in the number of start-ups in our economy, NBFCs like Muthoot Finance are accelerating the process of providing quick financial assistance.
Let Us Understand What NBFCs Are
NBFCs are financial institutions which are in the business of providing loans and advances, and securities issued by the government or local authorities. They provide these services without holding the license of a bank. However, they are registered with the Reserve Bank of India ("RBI") for delivering their services.
What is the Role of NBFCs in Economic Development?
NBFCs essentially carry out para-banking services. They are authorised by RBI for providing these services. The growth and penetration of NBFCs in the Indian economy has been remarkable, largely on account of the use of high-tech and new-aged technology. NBFCs make use of Artificial Intelligence ("AI") for providing services including customer service, compliance, data handling and KYC processes.
NBFCs play a major role in providing financial help to Micro, Small and Medium Enterprises (MSMEs). Different types of NBFCs cater to the needs of upcoming industries. For example, U GRO Capital, an NBFC listed on the Bombay Stock Exchange, caters to very specific sectors like healthcare, education, and auto components. NBFCs are facilitating the growth of start-ups in the country, which in turn creates job opportunities, a direct parameter of holistic development.
Is an NBFC Similar to a Bank?
Both banks and NBFCs are financial intermediaries, but there are certain differences:
- A government-authorised financial intermediary that aims at providing banking services to the general public is called a bank. An NBFC is a company that provides banking-like services to people without holding a bank license.
- An NBFC is not allowed to accept deposits that are repayable on demand, unlike banks, which accept demand deposits.
- An NBFC cannot issue self-drawn cheques and demand drafts.
- Banks create credit, whereas an NBFC is not involved in the creation of credit.
Conclusion
Unlike NBFCs, banking regulations are more stringent. Hence, banks cannot provide any services apart from the banking business. As a result, this creates wider scope for NBFCs to diversify their business and risk into the market, making them a more convenient form of intermediary for certain borrowers.
Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.