The Stir Amongst NBFCs: What Will Be the Impact on Small Institutions?
Recent crisis of Infrastructure Financing and Leasing Services Ltd (IL&FS), a NBFC, has triggered so many future concerns. There are many fresh regulations are possible on NBFCs and other financial institutions. Will it cause any difficulty for big houses or it will hit badly the smaller financial companies?
What is a NBFC?
In India, according to the Companies Act, 1956, a Non Banking Financial Company (NBFC) is a company which is primarily engaged in loans and advances, acquisition of shares/stocks/bonds/debentures/securities, engaged in insurance business. This type of company can not open current and savings accounts and can not be involved in payment and settlement system. It can not accept demand deposits and can not issue cheques or accept demand drafts. It’s primary business is investment and lending. They are regularized and monitored by the Reserve Bank of India (RBI).
There are many popular NBFCs in India like Bajaj Finserv, Mahindra Finance, Tata Capital etc. These companies do not open current or savings accounts for customers but they can lend to their customers. These companies offer services such as individual (personal) loan, home loan, SME loan, gold loan etc.
How do NBFCs Raise or Arrange Money?
A NBFC may arrange money from different sources. Popularly they borrow money from other financial institutions like banks. They also accept non-chequable money from their customers in form of term deposits. This term deposit may be in form of lump-sum amount or in form of systematic investments. All the processes of fund raising and lending are regularized by the RBI. There are some regulations from RBI which are imposed while fund raising and lending.
Infrastructure Financing and Leasing Services Ltd (IL&FS) is a leading infrastructure and finance company in India. It has defaulted on the payment of its lenders. At the time of its payment obligations of banks, it has defaulted to repay the loans. This default has hit hundreds of investors and stakeholders. This default created a panic situation in the Indian financial market and it is being termed as India’s Lehman Brothers case.
What is Next?
This crisis has created such a ground where the stand-offs has been started between the central government and RBI. It result in more tight regulations on financial companies. It may also result in the cancellation of licences of many such companies. However, it may not hit more on big financial houses but it may definitely cause a turbulence to small finance companies.