{"id":40973,"date":"2024-05-19T07:22:44","date_gmt":"2024-05-19T01:52:44","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=40973"},"modified":"2025-04-25T08:20:54","modified_gmt":"2025-04-25T02:50:54","slug":"explained-non-banking-financial-company","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/explained-non-banking-financial-company\/","title":{"rendered":"Explained | Non-Banking Financial Company"},"content":{"rendered":"<h2><strong>What\u2019s in today\u2019s article?<\/strong><\/h2>\n<ul>\n<li>Background<\/li>\n<li>What is a Non-Banking Financial Company (NBFC)?<\/li>\n<li>Financial Activities &amp; Services Performed by NBFCs<\/li>\n<li>News Summary<\/li>\n<li>What are the RBI\u2019s Gold Loan Norms?<\/li>\n<li>Need for Reinforcing These Norms<\/li>\n<li>How Will the RBI\u2019s Scrutiny Affect NBFCs?<\/li>\n<\/ul>\n<h2><strong>Background<\/strong><\/h2>\n<ul>\n<li>The Reserve Bank of India (RBI) earlier this month asked gold loan lenders to stick to regulatory norms while lending.<\/li>\n<li>This has been decided in a bid to tighten its grip over Non-Banking Financial Companies (NBFCs).<\/li>\n<li>The RBI has recently increased its scrutiny of NBFCs after it found certain NBFCs to be flouting regulatory norms.<\/li>\n<li>Recently, the RBI banned IIFL Finance from issuing fresh gold loans after the firm was found violating lending norms.<\/li>\n<\/ul>\n<h2><strong>What is a Non-Banking Financial Company (NBFC)?<\/strong><\/h2>\n<ul>\n<li>Non-Banking Financial Company (NBFC) is a company registered under the <strong>Companies Act, 1956<\/strong>.<\/li>\n<li>It is engaged in the business of loans and advances, acquisition of shares\/stocks\/bonds\/debentures\/securities issued by Government or local authority.<\/li>\n<li><strong>Difference Between NBFCs and Banks<\/strong>:\n<ul>\n<li>NBFC <strong>cannot accept demand deposits<\/strong>;<\/li>\n<li>NBFCs do not form part of the payment and settlement system and <strong>cannot issue cheques drawn on itself<\/strong>;<\/li>\n<li>Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Systematically Important NBFCs<\/strong>:\n<ul>\n<li><strong>NBFCs whose asset size is of \u20b9500 crore or more<\/strong> are considered as systemically important NBFCs.<\/li>\n<li>The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Financial Activities &amp; Services Performed by NBFCs<\/strong><\/h2>\n<ul>\n<li><strong>Financial Services<\/strong>: NBFCs offer a variety of financial services, including loans and credit facilities, asset financing, leasing, hire-purchase, investment in securities, and managing portfolios of stocks and shares.<\/li>\n<li><strong>Credit Provision<\/strong>: They play a significant role in providing credit to different sectors, especially underserved markets and small-to-medium enterprises (SMEs) that might not have easy access to traditional banking services.<\/li>\n<li><strong>Investment<\/strong>: NBFCs are involved in investment activities such as acquiring shares, stocks, bonds, debentures, and securities issued by the government or other market players.<\/li>\n<li><strong>Specialized Financing<\/strong>: Many NBFCs focus on niche markets and specific financial products, such as microfinance, infrastructure finance, housing finance, and insurance services.<\/li>\n<li><strong>Regulation<\/strong>: In India, NBFCs are regulated by the Reserve Bank of India (RBI), which sets guidelines for their operations, including capital adequacy, risk management, and governance practices.<\/li>\n<li><strong>Role in Economy<\/strong>: NBFCs complement the banking sector by providing financial services to segments that are not fully served by banks. They help in deepening the financial markets and increasing financial inclusion.<\/li>\n<\/ul>\n<h2><strong>News Summary<\/strong><\/h2>\n<ul>\n<li>The RBI has increased its scrutiny of NBFCs after it found certain NBFCs to be flouting regulatory norms.<\/li>\n<li>In March, the RBI banned IIFL Finance from issuing fresh gold loans after the firm was found violating lending norms.<\/li>\n<\/ul>\n<h2><strong>What are the RBI\u2019s Gold Loan Norms?<\/strong><\/h2>\n<ul>\n<li>The RBI stipulates lenders to comply with certain norms while lending money in lieu of gold.<\/li>\n<li>For instance, lenders are not allowed to lend any amount of money that is greater than 75% of the value of the gold that is submitted as collateral by the borrower.<\/li>\n<li>This is to ensure that banks have sufficient cushion to absorb any losses by selling the gold in case the borrower defaults on the loan.<\/li>\n<li>The RBI also mandates that when a loan is disbursed to a borrower, no more than \u20b920,000 can be disbursed in the form of cash. The remaining loan amount needs to be deposited in the borrower\u2019s bank account.<\/li>\n<li>It also instructs lenders to conduct the auction of any gold (in case a borrower defaults) in a fair and transparent manner in locations that are accessible to the borrowers.<\/li>\n<\/ul>\n<h2><strong>Need for Reinforcing These Norms<\/strong><\/h2>\n<ul>\n<li>The gold loan portfolio of NBFCs has increased at an aggressive pace since the pandemic. It is growing over four-fold from about \u20b935,000 crore at the end of financial year 2020 to about \u20b91,31,000 crore by the end of FY 2023.<\/li>\n<li>The RBI may fear that such aggressive lending by NBFCs is happening in widespread violation of lending norms.<\/li>\n<li>This could potentially cause systemic trouble in the future as the gold loan industry grows in size rapidly.<\/li>\n<\/ul>\n<h2><strong>How Will the RBI\u2019s Scrutiny Affect NBFCs?<\/strong><\/h2>\n<ul>\n<li>The <strong>NBFCs expect the RBI\u2019s scrutiny of their lending practices to affect their growth and profitability<\/strong>.<\/li>\n<li>The RBI\u2019s insistence that no more than \u20b920,000 shall be disbursed as cash when a loan is approved, for instance, is expected to make NBFC gold loans less attractive.<\/li>\n<li>Many NBFCs might also have to become less aggressive in their lending practices as the RBI enforces the loan-to-value rules more strictly.<\/li>\n<li>Also, measures to make the auction process more transparent and accessible to borrowers could increase the cost of doing business for NBFCs and lead to higher borrowing rates for lenders.<\/li>\n<li>On the other hand, the <strong>RBI believes that its lending norms will make the gold loan business more sustainable and help avoid systemic risks in the long run<\/strong>.<\/li>\n<\/ul>\n<hr \/>\n<h3><strong>Q1. What is an Overdraft facility?<\/strong><\/h3>\n<p>An overdraft facility allows account holders to withdraw funds exceeding their account balance, up to a predetermined limit set by the bank. It acts as a short-term loan, offering flexibility and quick access to additional funds.<\/p>\n<h3><strong>Q2. What is a Residuary NBFC?<\/strong><\/h3>\n<p>Residuary Non-Banking Company is a class of NBFCs whose &#8216;principal business&#8217; is to receive deposits, under any scheme or arrangement or in any other manner.<\/p>\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.thehindu.com\/business\/Economy\/why-is-rbi-keeping-an-eye-on-gold-loans-explained\/article68191243.ece#:~:text=The%20story%20so%20far%3A%20The,to%20be%20flouting%20regulatory%20norms\" target=\"_blank\" rel=\"nofollow noopener\"><u>Why is RBI keeping an eye on gold loans? | Explained<\/u><\/a>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Non-Banking Financial Company is a company registered under the Companies Act, 1956.<\/p>\n","protected":false},"author":5,"featured_media":40974,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-40973","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/40973","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=40973"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/40973\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/40974"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=40973"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=40973"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=40973"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}