NON In the recent years, many venture

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)      Multilateral
DFI

 

Development financial institutions

 

 

 

 

Other
DFIs
1)      ECGC

2)      DICGC
 

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

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

 

 

 

 

 

 

 

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:
 

 

 

(iv)
Credit for Housing expenditure/renovation

 

 

 

 

 

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

 

 

 

 

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