What Makes NBFCs Crucial To India’s Economy?

With a size of around $0.4 trillion, the sector’s potential cannot be ignored.

What Makes NBFCs Crucial To India’s Economy?
What Makes NBFCs Crucial To India’s Economy?
Rajesh Gupta - 23 August 2019

Non-banking financial companies (NBFCs), the financial intermediaries that recently have caught the country’s attention, are an imperative part of the Indian financial system, catering to the diverse financial needs of millions of small firms as well as individuals.

Certain sections of the society, primarily the economically weaker sections, for whom banks are perhaps unaffordable and inaccessible, rely solely on NBFCs to meet their credit requirements. These companies are the primary financers to those small and medium sized businesses, whose growth is critical for the growth of the Indian economy.

With a size of around $0.4 trillion, the sector’s potential cannot be ignored, considering the paramount role it plays in promoting financial inclusion and putting the Indian economy on the path of continuous advancement.

Before delving deep into the multifarious roles that NBFCs play in the current scenario, it is important to understand the key objective behind the working of these prestigious institutions. Well, it is not profitability that drives them, but these institutions work with the sole aim of making financial services accessible to one and all. The unique objective sets these firms apart from the banks and defines them as the prime engines of growth.

NBFCs have been playing an extremely crucial role in the core development of the country’s infrastructure. By offering long-term funds and credit to the Indian trade and commerce industry, these institutions are enabling the funding and growth of large infrastructure projects across the country. Apart from this, small-sized businesses, start-ups and MSMEs, which are slowly mushrooming in the country, are dependent on funds offered by NBFCs. Furthermore, as these small businesses expand their presence and operations, their need for both, skilled and unskilled labour, goes up in order to facilitate their increased operations. Thus, indirectly, NBFCs lead to the creation of more and more job opportunities at the macro-economic level.

As compared to banks, the customer base of NBFCs is pretty wide, as they cater to many in the urban as well as rural areas, offering loans for different kinds of requirements. This means that the credit growth of NBFCs, i.e., the amount of money that they lend to consumers, has been phenomenally more as compared to banks. Over the last few years, consumer lending in India has been on a continuous rise, with NBFCs definitely catering to a large chunk of it. As India’s economy grows further, the requirement for credit is bound to surge, and NBFCs, along with banks, can act the key credit facilitators, which could give a strong push to the growth and development of the Indian economy.

Having said this, NBFCs have been in the news for quite some time now because of the recent liquidity crunch that they are facing following the major default by IL&FS. Surprisingly, debt default by a single NBFC has shaken up the entire sector, where all are seen bearing the large implications of the event. The crisis situation has invited intervention from the government and the RBI, where certain measures have already been announced to ensure that NBFC funding is not affected. Other promising reforms to revive the sector are also on their way, which could perhaps take it out from its current doomed state. Let us wait for some stabilisation in the sector, so that these promising agents of change are actually able to bring about the much needed changes that the economy is waiting for.

Needless to say, NBFCs would continue to play a quintessential role in the country’s growth story. The funding received from these companies is the light that many individuals and small businesses hold on to in order to tread fast.

The author is Founder and Director, Cash Suvidha, An NBFC

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