Page 94 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 7: Non-banking Financial Companies

Web based services involve use of Internet for delivery of financial products & services. The Notes
Internet has leveled the playing field and afforded open access to customers in the global
marketplace. Internet financing could be a cost-effective delivery channel for NBFCs.
In the market of retail finance and financial loans, in order to beat the competition, NBFCs have
to increase the quality of their service which is described as the convenience offered to the
customer in terms of speed, accuracy and product features. Investors in future will also be
looking for certain qualitative details like reputation of the management and the financial track
record of the NBFC before they invest their monies. NBFCs stands a good chance to succeed as
they have an advantage of being lower in operating cost as compared with other financial
intermediaries because of their small size, efficient operation and fast decision making. NBFC's
aggressive collection mechanism and lower proportion of big corporate loans gives them an
edge in containing risk and also results in fewer amounts of NPAs which is critical in the
financial sector.

RBI and other regulatory authorities have a very important role, if NBFCs have to deliver their
cause. After strengthening of the regulatory framework in 1997, the mushrooming of NBFCs
has slowed down and the RBI has been releasing the lists of companies which have been refused
registration to caution the public. The authorities need to review the legislation and provide for
punitive penalties for any unit mobilizing deposits without registration. To protect individual
deposits held by NBFCs, the RBI have to tighten operating norms governing their operations.
However, the thrust of policy should be to relax its newly implemented regulatory framework
and increase the amount of funds which equipment and leasing companies can raise as public
deposits for the NBFC which are performing consistently well. The credit rating norms should
also be relaxed. Apart from these measures their should be some incentives to the well managed
NBFCs by giving them opportunity to become banks and by setting out very reasonable final
guidelines for entry of NBFCs into insurance and other areas.
The role of NBFCs has become increasingly important from both the macro economic perspective
and the structure of the Indian financial system. Over a period of time, one has to accept, that it
is only those which are big enough and serious about being in the finance business will and
must grow. Scamsters must get exemplary punishment. To survive and constantly grow, NBFCs
have to focus on their core strengths while improving on weaknesses. They have to constantly
search for new products and services in order to remain competitive. The coming years will be
testing ground for the NBFCs and only those who will face the challenge and prove themselves
will survive in the long run.
The industry comprising non-banking financial companies is heading towards consolidation.
Sound companies with soundest of fundamental would emerge stronger, and weak companies
with poor balance sheets would be weeded out of the system. NBFCs have survived all over the
world and would continue to survive even in our country. However, the coming time would be
quite crucial for NBFCs. From being a small business unit in a major industrial group, the
financial services are going through a phase where they themselves are major business with
each of its segment being a separate industry in itself. Size would be a major determinant of the
survival of the NBFCs along with promoters credentials and group backing. To survive a lot of
mergers and acquisitions are taking place in the industry. It is evident that only the top few will
be able to withstand the test of times. Already more that 60% of the total business of the NBFCs
is in the hands of around 50 players. However, there would also be a small NBFCs operating
into niche markets. They would take advantage of their expertise, in their particular areas and
operate at a premium. However, their operations would be local in nature and their ability to
grow limited.

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