An NBFC or a Non-Banking Finance Company, as its name suggests is a company other than a bank, that is also engaged in the financial transactions similar to a bank, e.g. lending, borrowing, underwriting etc. The major point of difference between a bank and an NBFC is that the NBFCs cannot accept deposits from customers which are repayable on request. However, the NBFCs can raise money by way of issuing debentures to the customers and converting their savings into investments. People sometimes prefer to invest their money in NBFCs over banks since the NBFCs mostly give a higher return than a bank although it comes with its risks. The money invested in an NBFC isn’t guaranteed by the DGIC like it is in a bank.
Notwithstanding its risks, the NBFCs have had a huge role to play especially in the Indian economy and in the interest of keeping this short and interesting, let’s dive directly into the advantages of NBFCs and their role in the economy.
Access to money
The NBFCs have sped up the access to money and credit in areas where the banks have not been as prevalent.
Mobilization of resources
Having NBFCs in addition to banks helps speed up the mobilization of resources, i.e., converting savings into investment, providing an impetus to the economy.
Support Indian Economy
Since the NBFCs invest the money that they raise into the stock market mostly, it helps increase the capital stock of the companies.
Reaching out to wider audiences
Under various Government schemes, the NBFCs are required to give out credit to MSMEs and people with very little or no collateral. This credit is given for a long term and at a very low interest rate which makes it affordable.
The loans and credit that are given to the MSMEs help with employment and job creation giving a further boost to the economic development of a country.
Since there is a 100% Foreign Direct investment allowed in NBFCs, it helps attract foreign investment and boost the foreign exchange for the country.
Helps in breaking the vicious circle of poverty by acting as an agent of the Government and lending to the needy.
Improved Risk Management
With all the aforementioned advantages of an NBFC, it is no surprise that the NBFC sector has seen unprecedented growth, growing at a faster rate than most banks.