Non-Banking Financial Companies (NBFCs)

NBFCs play an important role in the Indian financial system by complementing and competing with banks and by bringing in efficiency and diversity into financial intermediation. The Reserve Bank’s regulatory perimeter is applicable to companies conducting non-banking financial activity, such as lending, investment or deposit acceptance as their principal business. The regulatory and supervisory architecture is, however, focused more on systemically important non-deposit taking NBFCs (with asset size Rs 5 billion and above) and deposit accepting NBFCs with light touch regulation for other non-deposit taking NBFCs. Certain categories of entities carrying out NBFI activities are exempt from the Reserve Bank’s regulation as they are being regulated by other regulators. They include housing finance companies (HFCs), mutual funds, insurance companies, stock broking companies, merchant banking companies and venture capital funds (VCFs), which are often referred to as the ‘shadow banking system.

New Categories of NBFCs

The NBFC segment has evolved considerably over a period of time in terms of operations, heterogeneity, asset quality, profitability and regulatory architecture. The Reserve Bank has been working on consolidating the various categories of NBFCs. At present, there are 12 categories of NBFCs. The latest addition is the NBFC – Peer to Peer Lending Platform (NBFC-P2P).

Peer to Peer Lending Platform

Guidelines on NBFC-P2P have been issued by the Reserve Bank in October 2017. The Reserve Bank issued a discussion paper on regulation of the peer-to-peer (P2P) lending platform as a NBFC.

The Government notified P2P as a NBFC activity on September 18, 2017 following which regulations were issued on October 4, 2017. The new regulations are expected to bring a major shift in crowd funding in India.

What is peer-to-peer lending?

• P2P lending allows an individual to lend/borrow money to/from other unrelated individuals without assistance from any financial intermediary.
• This is mainly done via the online platform that connects lenders with borrowers

What are the advantages?

• People who may not be eligible to get loans from banks/non-banking financial companies (NBFCs) can take loans.
• It can also allow customers to become lenders and earn interest. However, it comes with risks.

What are the disadvantages?

• Interest rates are higher than what a bank/NBFC may charge. Currently, it is not regulated so consumers can not approach any ombudsman in case of distress.
• Also, beyond the companies there are no grievance redressal systems in place.