NON NBFI: 1. Reduce hoarding: They reduce hoarding

NON BANKING FINANCIAL INSTITUTIONS:

A
non-banking financial institution is a type of financial institution which do
not have a full banking license or the type of financial institutions are not
supervised by a national or international banking regulatories. These
institutions carry out financing activities, but their resources are not
directly obtained from the savers as debt. These type of institutions are
called as financial intermediaries and when they carry out lending activities,
then they are called as non-banking financial intermediaries. A non-banking
financial institution allows or facilitates bank related financial services
such as market brokering, risk pooling, investment etc.

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Non
banking financial institutions provides the banks with required infrastructure
to allocate surplus resources to companies with deficits and also to the
individuals. NBFIs also introduces competiton in the provision of financial
services. Banks offer a  set of financial
services but NBFIs choose particular kind of financial services that meets the
needs of the specific customers and also they specialize in a particular
sector. As these NBFIs unbundles their financial services and targets their
customers, they enhance the competition within the financial services industry.
These institutions offer most of the banking services such as  personal loans, education loans, retirement
planning, trading in money markets, underwriting stocks and shares etc. These
kind of financial institutions provides wealth management services such as
discounting services, managing portfolios of stocks and shares and also advice
on merger and acquisition activities. In the recent years, many venture capital
companies, retail and industrial companies have entered the lending business leading
to a huge competition. Non banking financial institutions are not allowed to
take deposits from the customer, so that they have to find some other way to
fund their operations e.g debt instruments. They donot create any credit but
they lend.

Regulated
by RBI

Regulated
by NHB

Regulated by state govt.

Regulated
by MCA

Regulated
by SEBI

Regulated
by IRDA

1.      
AFCs
2.      
LCs
3.      
IFCs
4.      
CICs
5.      
ICs
6.      
IDF- NBFC
7.      
NBFC-MFI
8.      
Factoring
9.      
MGC
10.  
RNBCC

Housing
finance companies

1.
Nidhi companies
2.Mutual
benefit companies

1. Merchant
banking companies
2.Venture
capital fund companies
3.Stock
broking
4.Collective
investment schemes
 

Chit
fund companies

Insurance
companies

NBFIs

 

 

 

 

 

 

 

 

 

                                                                                                                          

 

Roles of an NBFI:

1.      Reduce hoarding:
They reduce hoarding by bringing the ultimate lensers and borrowers together.
It simply means that people will not save the cas under their matresses.

 

2.      Help the household
sector: They help the household sector by
providing them with

Mortgage
loans etc thus by promotonig investment and saving activities amongst the
ordinary people

 

3.      Helps the business
sector: They help the business sector by
financing them with loans, purchasing of stocks and shares and by investing in
equipment, plant and inventory  

 

4.      Helps the state and
local government: They help them by purchasing the
bonds

 

 

5.      Helps the central
government: They help the central government
by buying and selling the government securities

 

6.      Lenders and NBFIs both
earn: Depositors earn interest when they save
their funds ith and NBFI and in turn NBFIs earn profit while they lend the
funds to the borrowers. The profit of intermediation arises from the difference
between the interest they pay on their debt and the return they receive on the
securities held by them.

 

 

7.      Provides liquidity:
they provide liquidity when they convert an asset into cash without any loss of
value in term of money

 

8.      Helps in lowering the
interest rate: competition amongst NBFIs leads
to lowering of the interest rates

 

 

9.      Brings stability in the
capital market: The assets that are held by NBFIs
are mostly traded in the capital market. If there were no NBFIs then there
would be no demand and supply of the financial assets and their yields which
brings an instability in the capital market

 

10. 
Both
savers and investors benefit from when there is a fall in the interest rates

 

 

11. 
Brokers
of lonable funds : They act as
intermediaries between the saver and the investor. They purchase primary
securities from investors and sell indirect securities to the savers. So
indirect securities act as a short term liabilities of financial
intermediaries. Their primary securities act as an earning asset but they are
the debt of the borrowers. Thus they
act as a broker of lonable funds by changing their debt into credit

 

12. 
NBFIs
makes larger transactions with lenders and borrowers.
They hire experts, which reduce the cost buying and selling the financial
assests while trading them.

 

 

13. 
Reduce
risks: When the non banking financial
intermediaries convert debt into credit, they reduce the risk to the lender. At
first they will create liabilities on themselves by selling indirect securities
to the lenders. Then they will buy the primary securities from the borrower of
funds. As they are acting as an intermediary between the lenders and the
borrowers, they take the risk on themselves and reduce the risk on the lenders.

NBFCs

A Non Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 of India

Functions
performed by an NBFC

1.      Business of loans and advances

2.     
Aquisition
of shares

3.     
Insurance
business

4.     
Bonds hire
purchase

5.      It does not include any institution whose principal business
includes agriculture, purchase or construction of immovable property, Industrial
activity or the sale.

Different types of
NBFCs and their functions:

                      Type of NBFC

           Function or principle business

Asset finance
company (AFC)

Financing of
physical assets such as automobiles, cranes, tractors, generator sets,
general purpose industrial machines

Investment
company (IC)

Aquisition of
securities

Loan company
(LC)

providing
of finance whether by making loans or advances or otherwise for any activity
other than its own but does not include an Asset Finance Company.

Infrastructure
finance company(IFC)

Deploys ¾ th
of their total assets in infrastructure loans

IDF_NBFC

facilitate
the flow of long term debt into infrastructure projects.

NBFC factors

Factoring-
it is financial transaction and a type of debtor finance

Gold loan NBFC

Provides gold
loans e.g muthoot finance, manapuram finance

Residuary non
banking companies

receiving
of deposits and maintain investments as per directions of RBI, in addition to
liquid assets.

 

Differences between a
bank and a NBFC

                              BANK

                            NBFC

Incorporated
under banking regulations act 1949

Incorporated
under the companies act 2013

Accepts demand
deposits

Accepts time
deposits

Can issue
cheques drawn on itself

Cannot issue
cheques drawn on itself

Deposit
insurance facility of DICGC is available for bank depositors

Deposit
insurance facility of DICGC is not available for bank depositors

Required to
maintain the reserve ratios ( CLR, SLR etc)

Not required
to maintain the reserve ratios ( CLR, SLR etc)

Should have
banking license

Provides
banking services to people without holding a banking license

Allowed FDI
investment in private sector is 74%
Allowed FDI
investment in public sector is 20%
 

Foreign
investment allowed upto 100%

Can issue
demand drafts

Cannot issue
demand drafts

 

Digitisation of NBFCs
in india:

Gone
are the days  where the loan process used
to take a very long time. Digitisation and automation has made the entire loan
application process very smooth, easy and safe to both the lenders and the
borrowers. Administrative cost, which comprises establishment and operating
costs for offices and branches, paper trail, technology and communication
expenditure are reduced by the digitisation of NBFCs. Use of mobility and
digital field applications by sales staff for lead management, customer
onboarding and customer servicing is helping MFIs collect data in ‘digitised’
format. The digitised data is further enriched by using open APIs for Aadhaar,
e-KYC and e-sign to reduce costs and increase turnaround. Customer loan
applications is routed through workflows, automatically underwritten using
rules engine and disbursed through electronic payment modes to reduce paper
trail and administrative resource consumption. End-to-end paperless process is
enabled by issuing loan agreements in a customer’s digital locker, which can be
accessed via common service centres (CSCs) or other digital channels.
Transactions in cash (disbursal and collections) can be permitted through
biometric integration at point-of-sale terminals at local shops/CSCs without
the requirement of a field staff’s presence in the area.

NBFCs
are providing education loans and personal loans online and thus by saving many
hidden costs involved in the transaction of a loan file. Loans are processed in
a span of 3-4 days depending upon the loan provider. Many NBFCs are providing
end to end online personal loan solutions right from oobtaining the loan
application to loan disbursal. Maximum loan amount that is given is different
for different NBFCs and can be paid in a tenure of 24 to 120 months. Also
customer can access the repayment schedule, interest certificates online.EMI
can also be done via mobile transfers along with a facilty of paying the EMI at
the branch. Most of the NBFCs are offering loans to the borrowers without any
collateral.

Types
of online loans:

·        
Payday loans

·        
Auto title loans

·        
Guaranteed payday loans

·        
Instant payday loans

·        
Payday advance

·        
Payday loan direct
lenders

·        
Payday loans no dredit
check

·        
Personal loans

Some
NBFCs that provide online loans:

1.      Bajaj
finserv

2.     
Tata capital( repayment
of EMI online)

3.     
Opta credit

4.     
Capita world

5.      Capital
float

Disadvantages
of digitisation of NBFCs

1)      Higher
interest rates

2)      Chance
of online lender going out of business any day when compared to banks

 

 

Digitisation of NBFC in
rural india is still a distant dream:

India’s
vision to cashless has  paved a way for
several new entrants in the payment domain and also boosted the growth of NBFCs
in the urban part of the country. But digitisation is still a dream in the
rural part of india. This is mainly due to the extensive penetration of the cooperative
banks in the rural india. Demonetisation has played a crucial role in making
most of the transactions digital, but at the same time it caused many problems
to the rural population of the country where most of the people are illiterate
and don’t know to do transactions digitally. people in rural india handle their
day to day operations through cash, and they are mostly reluctant to do the
payments digitally. Hence it takes some more time to make the rural part of the
india go digital.

 

Development financial
institutions:

A development
finance institution (DFI)
is an alternative financial institution which includes microfinance
institutions, community development financial institution and revolving loan
funds. These are introduced with n aim of providing long term finance to
priority sectors. These institutions provide a crucial role in providing
credit in the form of higher risk loans, equity positions and risk guarantee
instruments to private sector investments in developing countries.

There are two types of direct financial
institutions:

1)     
Bilateral DFI

2)     

Development financial institutions

Multilateral DFI

 

Other
DFIs
1)      ECGC

2)      DICGC
 

State level:
1)     
F.I’s
2)     
SFCs
3)     
SIDCs

 

All india financial
institutions:
1)      IFCI
2)     
IDBI
3)     
SIDBI
4)     
IDFC
5)     
NABARD
6)     
EXIM BANK
7)      NHB

 

 

 

 

 

 

Insurance and housing
finance:

Financing
in the housing sector involve the following:

(a)    Purchase
and development of house-sites, purchase of building materials and actual
building a house;

(b)   Meeting
the annual charges consisting of the upkeep and maintenance expenses including
rehabilitation of kutcha houses, taxes, interest and amortization charges on
capital; and

(c)    Covering
risks involved in long term housing investment.

 

Classification
of housing finance:

Period wise

Purpose wise

Security wise

Credit wise

(i)
Short-term loan (6 to 18 month)
                       

(i)
Credit for construction/extension
           
 

(i)
Secured against mortgage of land
 

(i)
Institutional credit
           
 

(ii)
Medium-term loan (2-5 years)
 

(ii)
Credit for plot purchase
 

(ii)
Secured against some tangible property of debtor as-bond, insurance policies
etc.
 

(ii)Non
institutional credit

(iii)
Long-term loan (5-25 years)
 

(iii)
Credit for maintenance of House and Credit for purchasing flat/individual
house
 
 

(iii)
Unsecured:
 

 

 

 

Development of Housing
Finance Market in India

 

 

    Up to late 1990’s           1998-2003                         2003 onwards

Specialized Lenders Housing Finance
Companies (HFCs)
 
Bank/Insurance Co sponsored HFCs
 
Builders promoted HFCs
 
Company promoted HFCs

Aggressive entry of Banks HFCs loose
market share
 
Irrational competition
 
Rapid disbursement
 
Credit quality issue

Oligopolistic market structure
 
Top 3 key players have over 80% of
incremental
 
More rational market
 
Sustained
mortgage growth at 25%

PHASE-I

PHASE-II

PHASE-III

risks of housing
finance:

1)      Risk
in analysis of the security

2)      Risk
in affirmation of borrower’s legal position

3)      Risk
in tracing evidence of title of ownership

 

                          

 

 

 

 

                       Classification of Housing Finance Industry

Organised Sector

Unorganised Sector
Small private
financers,
Household saving,
Loan from relatives and friends

On the basis of
Information

On the basis of
Registration

On the basis of
Operation

Private

Registered with NHB

Specialised Housing
Institutions

Public

Unregistered with NHB

Non-specialised
Housing Institutions

    HDFC      HUDCO          HDFC         Commercial    HDFC                 Commercial                       

    DHFL       BANKS        HUDCO            Banks       HUDCO                   Banks

    TATA          LIC`          LIC
HFL                            LICHFL                       

GLOBAL        GIC             GICHF                               GICHF         Cooperative
housing

                                                                                                                Finance
Societies

 

 

Challenges of digital
financial services in india:

 

1) Low levels of formal financial services (cash
dominance in transactions, informal credit and savings)

2. Lower income and financial literacy levels (low
value transactions, smaller fees, need for user education)

3. Underdeveloped technology and venture capital
ecosystems (shortage of skilled tech/finance entrepreneurs, small
markets, limited revenue potential)

4. Relatively weak infrastructure (underdeveloped payment systems,
customer credit data, legal enforcement mechanisms for payment obligations,
power, telco/Internet coverage).

 

 

 

 

 

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