MEANING AND DEFINITION # ROLE OF NBFC IN INDIA'S GROWTH # ROLE OF NBFC IN URBAN FINANCIAL INCLUSION # ROLE OF NBFC IN REVOLUTIONIZING THE ECONOMY # ROLE OF NBFC IN CAPITAL MARKET # ROLE OF NBFC IN FACTORING # ROLE OF NBFC IN VEHICLE FACTORING
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ROLE OF NBFC IN FINANCIAL INCLUSION
1. ROLE OF NBFC IN FINANCIAL
INCLUSION
BY-
P. SAI PRATHYUSHA
1ST M.COM (BUSINESS FINANCE)
PONDICHERRY UNIVERSITY
2. NBFC DEFINITION AND MEANING
NBFC or Non- financial company is a financial institution that provides banking services
without requiring to hold a bank license. Many of its activities are similar to that of a bank
but they do not require any bank licenses.
Financial inclusion means “the provision of affordable financial services” to those who have
been left or unattended by the formal agencies of the financial system.
NBFCs are intermediaries engaged in the business of finances.
They accept deposits, delivers credit and plays an important role in channelizing the scarce
financial resources towards the creation of wealth.
NBFC is a company registered under the companies Act and it is regulated by RBI.
The principal business of NBFC includes activities related to investments, giving loans and
advances, leasing, hire- purchase, insurance business, chit fund business, acquisition of
shares, bonds, debentures, stocks and government or local authority bonds/securities
which are marketable.
3. ROLE OF NBFC IN INDIA’S GROWTH
NBFCs have played a critical role in the development of crore sectors of
infrastructure, transport and MSMEs.
It created opportunities for work and employment for economically weaker
sections by providing them financial support.
NBFC’s provided them with an alternative source of funding and liquidity.
They also make a major contribution to the state exchequer.
With the specialized expertise, they provide an alternative source of credit and
related services in the credit intermediation chain more cost-efficiently.
NBFC’s exist in areas where banks prefer to keep away from providing this
unorganized sector of society the last mile connectivity.
4. ROLE OF NBFC IN URBAN FINANCIAL INCLUSION
As per the industry estimates 40% of the urban population do not have access to basic
financial services such as bank accounts.
Urban financial inclusion has emerged as one of the major concerns given the migratory
nature of the urban poor.
They established a linkage by providing access to remittance, micro insurance and other
financial services.
Concerns of urban poverty was also factored in and the needs of various groups such as
rikshaw pullers, construction workers and migrant workers were considered.
5. ROLE OF NBFC IN REVOLUTIONISING THE ECONOMY
GROWTH :
In terms of year on year growth rate, the NBFC sector beat the banking sector in contributing
to the economy every year. On an average, this segment grew 22% each year in its initial
stages. Despite the slowdown in the economy and various setbacks faced in the last few years,
this sector is still growing and enhancing its operations.
PROFITABILITY :
NBFCs have been more profitable than the banking sector because of lower costs. This
enabled them to offer cheaper credit to customers. As a result, the amount of money lent to
customers by NBFCs is higher than that of the banking sector with more customers opting for
NBFCs.
6. ROLE OF NBFC IN REVOLUTIONISING THE ECONOMY
cont.….
Enhancing the financial market :
An NBFC caters to the urban and rural poor companies and plays a complementary role in the
financial inclusion. These financial companies bring much needed diversity to the market by
diversifying the risks, increasing liquidity in the markets thereby bringing efficiency and
promoting financial stability to the financial sector. They highlight the public issues of
corporations as well as providing funds needed by the start-up companies as capital. The
financial market is dependent on the functions that are taken care of by these lending
companies.
7. ROLE OF NBFC IN REVOLUTIONISING THE ECONOMY
cont.….
INFRASTRUCTURE LENDING:
NBFCs by lending to the infrastructure projects, contribute largely to the economy and is very
important for a developing country like India. The amount involved is quite large and the
projects being risky, with no surety of returns, and profits occurring after a longer time-frame.
These factors deter banks from financial these projects. Since their inception, NBFCs have
contributed more to infrastructure lending than banks.
Promoting inclusive growth:
NBFCs cater to a wide variety of customers- both urban and rural areas. They finance projects
of small scale companies, which is important for the growth in rural areas. They also provide
small ticket loans for housing projects. It plays an important role to attain stable financial
inclusions.
8. ROLE OF NBFC IN REVOLUTIONISING THE ECONOMY
cont.….
Upliftment in the employment sector:
More opportunities for employment are arising with the influence of the NBFCs in the private
as well as government sectors. The business activities in the private sector provide more
employment opportunities and occupation practices and NBFC plays a key role in their
growth and stability.
MOBILIZATION OF ASSETS:
With more public preferring to deposit in NBFCs because of their high rate of interest, they
mobilise resources, funds and capitals. Due to their easier norms for investing, they create a
balance between intraregional income and asset distribution. They turn the savings into
investments. Proper organisation of capital helps in the development of trade and industry,
which leads to economic progress. They are engaged in activities that generate zero to very
low revenue.
9. ROLE OF NBFC IN REVOLUTIONISING THE ECONOMY
cont.….
Financing for long – term:
They play a key role in providing firms with funds through equity participation. They supply
long run credit to trade and commerce industry. They facilitate to fund large infrastructure
projects and boosts the economic development. It permits growth with stable and soft
interest rates.
Raising the standard of living:
The NBFCs attract deposits from the general public and converts it into capital for industrial
and other sectors for smooth economic development. The rise in business activities in-turn
creates the demand for workforce and thus creates employment opportunities and raises the
purchasing power of individuals and subsequently raising demands. This works to upgrade
the standard of living and also attracts foreign deposits are attracted to these financial
institutions and support economic process and development.
10. ROLE OF NBFC IN CAPITAL MARKET
These constitute mainly investments in the capital market. They are
specialised NBFCs that are exclusively engaged in capital market
investment i.e., trading in securities. NBFCs therefore, help in giving
liquidity to the capital market . Further, NBFCs also lend to investors for
investing in capital market. Regulatory challenges in this regard might
come in the form of probable overheating of the market, which could be
addressed through appropriate regulatory measures including enhanced
disclosures.
11. ROLE OF NBFC IN FACTORING
Factoring involves acquisition of receivables and thereby getting entitled to undivided
interest on the receivables.
NBFC – factors are exclusively engaged in providing factoring service. Factoring
service is perceived as complementary to bank finance and is expected to enable the
availability of much needed working capital finance for the small and medium scale
industries especially those that have good quality receivables but may not be in a
position to obtain enough bank finance due to lack of collateral or credit profile. With
the help of NBFC – factors the small traders , industries and exporters get the
advantage of improving the cash flow and liquidity of their business as also availing
anciliary services like sales ledger accounting, collection of receivables, credit
protection, etc.
Factoring helps them to free their resources and have a one stop arrangement for
various business needs enabling smooth running of their business.
12. ROLE OF NBFC IN VEHICLE FINANCING
This is one of the niche sectors that the NBFCs cater to. Certain NBFCs that are
classified as asset finance companies have gained experience and expertise in this
segment and play a significant role in providing a livelihood to customers who are
drivers.
From the RBI’s side, the encourage the production activity that these NBFCs are
engaged in, the RBI has accorded certain additional dispensations to them in the form
of enhanced bank credit, higher exposure norm ceiling and provision of ECB under
automatic route for leasing related to infrastructure.