They are financial institutions that offer banking services without holding a banking license. They provide financial services similar to banks, such as loans, asset financing, investments and credit facilities, but cannot accept demand deposits
Classification of NBFCs:
1.Deposit-taking NBFCs
2.Non-deposit taking NBFCs
Regulated by RBI under Chapter IIIB of the RBI act,1934. Must obtain a Certificate of Registration from RBI. Need minimum Net Owned Funds of Rs.10 crores. Not covered under Deposit Insurance and Credit Guarantee Corporation.
Importance of NBFCs:
1.Complement banks in financial inclusion, especially in rural and semi-urban areas
2.Cater to unbanked or underbanked sectors like small businesses, informal sector, and individuals with no credit history
3.Play a key role in housing finance, vehicle loans, SME financing, and consumer durable lending
4.Aid in capital formation and employment generation
Challenges:
1.Short-term borrowings, long-term lending
2.Triggered by events like IL&FS crisis (2018)
3.Limited Access to RBI Liquidity Window
4.Compared to banks, NBFCs were earlier lightly regulated
5.High NPAs-Especially in unsecured lending sectors.
