Non-banking financial companies (NBFC) are companies registered under the Companies Act, 1956. They are responsible for providing financial services but are not regulated by a national or international governing body and do not hold a full-fledged license for conducting operations.
The financial services offered by NBFCs include disbursement of loans and advances, acquisition of stocks, shares or bonds etc. They do not accept demand drafts and are not a part of payment/settlement system unlike banks. NBFCs are more commonly known in the forms of microloan organisations, insurance companies, investment houses and more.
According to Alan Greenspan, non-banking financial institutions contribute in empowering the economy as they deliver “multiple alternatives to transform an economy’s savings into capital investment [which] act as backup facilities should the primary form of intermediation fail.”
How do NBFCs facilitate Economic Development?
1. Greater Employment Opportunities and Standard of Living
NBFCs help attain the objective of macroeconomic policies of creating more jobs in the country by promoting SMEs and private industries through lending them loans. This increase in new businesses consequently raises the demand for manpower and creates employment. Furthermore, the Purchasing Power Parity (PPP) of people rises and so does their standard of living.
2. Strengthening of Financial Market
The financial market relies heavily on Non-banking financial institutions for raising capital. The start-ups and small-sized businesses are dependent on funds offered by NBFCs and also in order to maintain liquidity. For an effective functioning and balance in the financial market, NBFCs play a significant role.
3. Supplying long-term credits
Unlike the regular banks, NBFCs extend long-term credits to infrastructure, commerce and trade companies. The traditional banks expect timely, schedules and short-term repayment of loans that may not always suit the requirements of these industries. NBFCs, on the other hand, fund large projects and so promotes economic growth. They also allow industries to participate in equity.
4. Mobilisation of Funds
Non-banking financial companies help in rotation of resources, asset distribution and regulation of income to shape the economic development. They enable converting saving into investments and thus helps in the mobilisation of funds/resources in the economy.
5. Growth of National Income
As NBFCs aim to build capital for several industries – private and otherwise – they aid in accumulating a capital stock for the country. This directly adds on to the national income and results in the progression of Gross Domestic Product (GDP).