NBFCs started operations in India in the 1960s. They began as an alternative for individuals whose financial needs were not sufficiently met by the banking system of the country. For the initial period, they operated on a limited scale without any significant impact.
NBFIs invited fixed deposits from investors, in the beginning. They worked out leasing deals for big industrial firms. Soon after, the Companies Act regulated financing. However, the unique and complex nature of operations of NBFIs called for a separate regulatory mechanism.
The regulation assigned the banks with limited authorities to regulate deposit-taking companies. It is since then that the RBI has initiated measures to control the NBFC sector for the betterment of the economy.
On the basis of recommendations of James S. Raj Study Group formed in 1975, RBI accepted and implemented regulations that allowed financial companies the freedom gearing oftentimes. According to the salient features of the Directions, the purchase and leasing companies were allowed to accept deposits to the limit of their net owned funds. The Directions also prescribed the need for Companies to maintain liquid assets in the form of unencumbered approved government securities.
Non-Banking Financial Institutions are growing as an integral component of the Indian financial system. The NBFCs are heterogeneous in terms of their activities and size of operations and serve as critical financial intermediaries for credit seekers of the country. They are strengthening the economy and have etched a distinct place for themselves by serving the credit requirements of both wholesale and retail customers.
Here are ways in which NBFCs help the economy:
Very often, NBFIs specialize in one or two particular sectors and develop an informational advantage.
NBFCs play a crucial role in the process of intermediation. Especially so in the areas where established financial entities are not active or accessible for a borrower. The Penetration of NBFCs in rural parts of the country has encouraged small savers to invest money and even borrow it when needed.
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