Table of Contents
Introduction
Banks are the only institutes that strike your mind while considering money management, loans, savings, and other finance-related services. They surely hold a strong presence in the financial market, justifying your choices. However, there are other non-banking institutes as well that you can plan to opt for.
NBFCs (non-banking financial companies) have emerged as strong financial players. They do not have a banking license but can provide a wide range of services, such as loans, asset financing, and more.
The only drawback you might face is that an NBFC cannot accept direct demand deposits. It means you cannot open a savings account through them. These institutes adhere to the regulations set by the national financial regulatory bodies, so it is safe to manage finances through them.
In this article, you will learn more about NBFCs, their working, and how they differ from traditional banks.
What is a Non-Banking Financial Company (NBFC)?
These are the trusted financial institutes that offer banking services without holding a banking license. Amongst the wide range of services and products they offer are loans, asset finance, hire purchase, and the list goes on. The key characteristics of these financial institutes are:
- An NBFC cannot demand direct deposits from you. However, they can issue bonds or accept term deposits.
- Unlike traditional banks, NBFC cannot issue a debit card or checkbooks.
- Their primary focus is on services like loans, leasing, and wealth management. You may also get some investment plans through popular NBFCs in your area.
It is safe to invest in an NBFC, as they adhere to all the regulations set by your national financial regulatory body.
Types of Non-Banking Financial Companies
Now that you have an idea about NBFCs, it is significant to know about their types for better clarity.
Asset Finance Companies
As the name suggests, these companies can help you with financing your assets, such as automobiles, company equipment, or property. They will give you enough funds to make the purchase, and you can repay over the pre-decided time period.
Loan Companies
These are particularly the loan companies that help businesses and individuals with loans. They often serve larger corporate clients or individuals who need significantly high amount of loan.
Investment Companies
The focus of investment-related NBFCs is on stocks, bonds, and other financial assets. Their agenda is to help you with ample opportunities in wealth creation.
IFC (Infrastructure Finance Companies)
These companies focus on financing projects related to infrastructure, like power plants, roads, bridges, and more. They often work in conjunction with government projects, helping a country with its infrastructural development.
HFCs (Housing Finance Companies)
If you need funds to build or renovate your home, you should go for the housing finance companies. These companies are helping people gain home ownership, especially in countries with developing economies.
Leasing and Hire-Purchase Companies
These companies help businesses to expand by providing leasing arrangements. They can raise funds to buy high-value machinery without worrying about the initial investments.
Functions of NBFCs
In the areas where you don’t have many bank options, the NBFCs fill the gap efficiently. Some of the core functionalities they cover are listed below.
In addition, there are non-banking companies that may also offer insurance services related to health, assets, and more.
Comparison with Traditional Banks
| Feature | NBFC | Traditional Bank |
|---|---|---|
| Regulation | These institutes are regulated by national financial regulatory bodies, like SEC. However, they face fewer restrictions. | Banks are strictly regulated by the central banks and the national finance regulatory bodies. |
| Deposits | Do not accept demand deposits. You cannot open a savings account. | You can open a savings or current account, as the traditional banks accept demand deposits. |
| Payment Services | You cannot issue cheques or use a debit card. | Plenty of payment services, like credit card, debit card, and other modes are available. |
| Lending Practices | NBFCs rely on bonds to raise funds or market borrowings. | They have access to the demand deposits, capital markets, and other modes. |
| Loan Offering | NBFCs rely on bonds to raise funds or market borrowings. | Provides a wide variety of loans for individuals and businesses. |
| Loan Interest Rates | The interest rate against your loans is high. | Lower rate of interest as compared to the NBFCs. |
| Risk Factor | As they lend funds to underserved sections, the risk involved is significantly high. | They typically lend money to large and reliable enterprises, with lower risk involved. |
Why Choose NBFCs over Banks
There are several advantages of NBFCs that make them superior to traditional banks under different scenarios. Some of the advantages that will support your choice of NBFCs are:
- You get better access to credit, especially if you do not qualify for bank loans due to poor credit history or any other reason.
- It is a boon in rural areas with fewer banking options. Individuals or SMEs in this area can seek financial help from these non-banking institutes.
- If you need personalized banking services, the traditional banks wouldn’t cater to your needs. However, NBFCs are always ready to tailor-make the services for you.
Benefits of Using NBFCs
There are plenty of benefits that the Non-Banking Financial Companies (NBFCs) offer, especially for individuals and businesses seeking more accessible and specialized financial solutions in rural areas. We have listed a few benefits for you to make better decisions.
Easy Credit Access
People with poor credit histories or those who do not meet the bank requirements face trouble getting loans from banks. If you fall in this category, you can opt for the non-banking financial companies, and get easy access to credit even if your credit history is not very supportive.
If you don’t know that you can improve your credit score by following some techniques. read this article to find the best 11 tips to improve your credit score.
Specialized Financial Products
These companies help if you need a particular financial service with which a bank cannot help. The NBFCs excel in areas including leasing, microfinancing, asset finance, and more. It is beneficial for SMEs or small businesses who need to raise funds for expansion.
Swift Processing
These institutes are known for their fast processing. They do not have a long, stringent application process, so you can expect your loan approvals to get through much quicker than traditional banks. If you are looking for quick funds, NBFCs are your best bet.
Faster Technical Adaption
These institutes are fintech-friendly. It means that they quickly adapt to the latest technical upgrades. You can conveniently manage your loans and finances through customer-friendly digital platforms.
Tailor-Made Solutions
Another benefit of using NBFCs is that they offer tailor-made solutions for their customers. So, even if you want alterations in the banking services or products that they offer, they will certainly offer the best solutions.
Better Customer Service
Owing to the provision of faster processing, and tailor-made services, it is needless to mention that NBFCs offer better customer service. Moreover, if your choice of company is wise, you get 24×7 customer support services and answers to all your queries.
Risks and Challenges
There are always two sides to a coin, and along with the tremendous benefits, there are a few risks and challenges involved in opting for NBFCs. Different risks involved and the challenges they face are:
- NBFCs have limited liquidity options, as they do not have access to demand deposits. So, unlike traditional banks, they often struggle with raising sufficient capital to meet the growing demand of their clients.
- The regulatory framework for the NBFCs is stringent, so their compliance cost may increase. It will eventually restrict their expansion, and their ability to offer wider and better services to their clients.
- NBFCs work with industries that fall under the riskier category, like startups or individuals with low-income graphs. Thus, there are higher chances of defaults, which can threaten the workability of these institutes.
These are a few risks involved in indulging with non-banking financial companies. So, it is advisable to do proper research and associate only with trusted names that offer a safer environment.
Current Trends in the NBFC Sector & Future Scope
In recent times, the NBFC sector has rapidly evolved and shown diverse growth. Especially in the lower-income sector, like SMEs and microfinancing, these companies have emerged as a boon that offers capital funds quickly and without any chaotic application process.
Moreover, they are adapting swiftly to the digital-first models, and making use of technologies, like artificial intelligence to reach more customers.
In the coming years, the fintech integration is expected to revolutionize their operations and change the way these companies currently work. This integration will help with faster loan processing, more possibility of customizations in services, and a customer-friendly experience.
This dynamic combination of technical integration and fintech involvement is driving the future of NBFCs and showing a promising growth market in the coming future.
Also read – 10 Best Online Banks in the USA
Conclusion
Owing to the benefits and significance of NBFCs in the financial market, it is fair to say that they are strong players in this domain. They offer a safe environment for wealth management and help individuals and businesses to raise funds swiftly to meet their financial requirements.
While there are a few risks and challenges involved, the future of non-banking financial companies seems promising due to rapid technical innovations and fintech integration.
If you also plan to opt for NBFCs over traditional banks, it is advisable to first sort and have full clarity about your requirements. Based on that, explore and choose a company with an excellent track record and finances will never be a hindrance to your growth!
