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Why are Non-Banking Financial Companies important?
India’s financial services sector is huge. It is not just comprised of commercial banks, but also non-banking financial companies (NBFCs). These firms offer a wide array of financial services like loans, chit-funds, and are different from banks. NBFCs are often small players that largely go unnoticed. However, they are still important to the economy, especially in a developing country like India where 70% of the population lives in rural areas.
In a speech, P Vijaya Bhaskar, Executive Director of the Reserve Bank of India, explained NBFC companies are game-changers that are very important to the economy. Here’s how:
Size of sector:
The NBFC sector has grown considerably in the last few years despite the slowdown in the economy. As of March 2013, it accounted for 12.5% of the country’s Gross Domestic Product (GDP) – a measure of the size of the economy. This is up from 8.4% in March 2006. However, this only counts NBFCs with assets more than Rs 100 crore. “If the assets of all the NBFCs below Rs 100 crore are reckoned, the share of NBFCs’ assets to GDP would go further,” Bhaskar said in his speech.
In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On an average, it grew 22% every year. Even when the country’s GDP growth slowed to 6.3% in 2011-12 from 10.5% in 2010-11, the NBFC sector clocked a growth of 25.7%. This shows, it is contributing more to the economy every year.
NBFCs are more profitable than the banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth – the increase in the amount of money being lent to customers – is higher than that of the banking sector. Credit grew an average 24.3% per year for NBFCs as against 21.4% for banks. This shows that more customers are opting for NBFCs.
NBFCs contribute largely to the economy by lending to infrastructure projects, which are very important to a developing country like India. But they require large amount of funds, and earn profits only over a longer time-frame. As a result, these are riskier projects. This deters a lot of banks from lending to infrastructure projects. In the last few years, NBFCs have contributed more to infrastructure lending than banks. NBFCs lent over one third or 35.8% of their total assets to infrastructure sector as of March 2013. In contrast, banks lent only 7.6%.
Promoting inclusive growth:
NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. All these help promote inclusive growth in the country.
Non-banking financial companies have a strong presence all over the world, especially in the US, UK and Japan. “Globally, the size of non-bank financial intermediation was equivalent to 117% of GDP as at the end of 2012 for 20 jurisdictions and the euro area,” as per RBI date. This amounts to $70 trillion.