News Analysis / Road infra firms must float NBFCs
Published on: April 20, 2022
Source: The Hindu
Context:
Infrastructure firms should float their own nonbanking financial companies (NBFCs) to fund road construction related projects. The National Highways Authority of India should also have a financial arm like the Power Ministry’s Power Finance Corporation.
What are NBFCs?
Non-Banking Financial Companies (NBFCs), sometimes known as Non-Banking Financial Institutions (NBFIs), are financial businesses that provide a range of banking services but lack a banking licence.
In general, these institutions are not permitted to accept typical demand deposits—or the funds that are easily available, such as those in checking or savings accounts.
Because of this constraint, they are not subject to traditional inspection by federal and state financial regulators.
NBFCs examples include the following:
The Reserve Bank of India (RBI) has announced a number of adjustments for non-banking lenders to detect big exposures on a Scale-Based Regulation (SBR). These regulations are intended to mitigate credit risk concentration in NBFCs.
The amendments were made to the circular titled "Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs" issued in October 2021, which prescribes a Large Exposure Framework (LEF) for NBFCs in the Upper Layer.
NBFC related Issues:
NBFC supporters say that these institutions serve a critical role in supplying the expanding demand for credit, loans, and other financial services. Customers include both enterprises and people, particularly those who may struggle to qualify under traditional banks' more severe rules.
Proponents argue that NBFCs not only provide alternative lending sources, but also more efficient ones. NBFCs eliminate the middleman function that bank frequently perform in order to allow clients to interact with them directly, decreasing costs, the process known as disintermediation, charges, fees, and rates are reduced.
It is critical to provide finance and credit in order to keep the money supply liquid and the economy running smoothly.
Pros:
Cons:
The 2008 financial crisis, which led to the Great Recession, was centred on NBFCs. Critics argue that their numbers have expanded since then, making them a larger concern than ever before.
What Are Some Examples of Nonbank Financial Institutions?
There are several sorts of NBFCs. Some of the most well-known are:
The RBI's Department of Non-Banking Supervision (DNBS) is tasked with regulating and supervising NBFCs in accordance with the regulatory regulations contained in Chapters III B and C and Chapter V of the Reserve Bank of India Act, 1934.
The Reserve Bank's Regulatory and Supervisory Framework allows for, among other things, registration of NBFCs, prudential regulation of several types of NBFCs, the issuance of instructions on the acceptance of deposits by NBFCs, and sector monitoring through off-site and on-site supervision.
Deposit-taking NBFCs and Systemically Important Non-Deposit Accepting Companies face increased regulation and oversight.
The three main goals of regulation and supervision are:
In severe circumstances, the RBI is also entitled under the RBI Act 1934 to take disciplinary action, such as cancelling a Certificate of Registration, issuing prohibitory orders against receiving deposits, filing criminal proceedings, or filing winding-up petitions under the provisions of the Companies Act.
