I. Introduction

The NBFC sector in India has undergone a significant transformation over the past few years. It has come to be recognised as one of the systemically important components of the financial system and has shown consistent year-on-year growth. NBFCs play a critical role in the core development of infrastructure, transport, employment generation, wealth creation opportunities, and financial support for economically weaker sections; they also make a huge contribution to the state exchequer. The success of NBFCs can be attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, and a better understanding of their customer segments. NBFCs in India comprise of heterogeneous entities, of which broadly, the Reserve Bank of India (RBI) regulates companies accepting public deposits and those non-deposit accepting entities involved in asset financing, providing loans and investments.

II. Structure of NBFCs in India

Indian financial system includes banks and non-bank financial institutions. Though banking system dominates financial services, non-banking financial institutions, especially NBFCs, have grown in importance by carving a niche for themselves in under-penetrated regions and unbanked segments. Since the late 1980s up to mid-1990s, the number of NBFCs increased substantially with the help of the public to fund in capital market IPOs and deposits. NBFCs multiplied from 7,063 in 1981 to 24,009 in 1990 and 51,929 in 1996, owing to the high degree of attention towards customers and simplification of loan sanction requirements. Post liberalisation and rapid industrial growth have helped in terms of lending activity.

Further, high deposit rates offered by NBFCs led the investors to invest their funds in NBFCs. Public deposit base of NBFCs broadened at an average rate of 80 percent CAGR during 1992-93 to 1996-97. However, strong growth of NBFCs could not be sustained; in the late 1990s, several loans granted by NBFCs turned sticky, and issues like money laundering surfaced; many NBFCs defaulted in repayments to their depositors.

 

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