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5) What are NBFCs? How are they different from banks? Discuss their financial activities and the issues currently being faced by the Indian NBFCs. (250 words)

Topic:  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

5) What are NBFCs? How are they different from banks? Discuss their financial activities and the issues currently being faced by the Indian NBFCs. (250 words)

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Why this question:

The article highlights the ripple effect of the NBFCs crisis on the Indian economy. Non-banking financial companies (NBFCs) are facing a crisis, particularly the smaller ones that are struggling with asset-liability mismatch amid corporate governance issues. Thus, it is important for us to ponder on the topic from exam point of view.

Key demand of the question:

The answer must provide for a detailed discussion on what are NBFCs, their role and activities in the economy, what are the issues currently they are facing and what needs to be done to resolve it.

Directive word:

DiscussThis is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer

Introduction:

write a few introductory lines defining what are NBFCs – is a Company that offers financial assistance and other banking services without actually being a bank. It is a Company registered under the Companies Act, 1956.

Body:

Answers must discuss the following aspects:

  • What are the characteristics of NBFC? How are they different from Banks?
  • Business they undertake?  – Loans and advances, Acquisition of shares/stocks/bonds/debentures/securities, Leasing, Hire-purchase, Insurance business, and Chit business.
  • Further, Companies whose primary business constitutes receiving deposits either in instalments or lump sum in any manner are also deemed as NBFCs. However, NBFCs exclude institutions engaged in the following kinds of business: Agriculture activity, Industrial activity, Purchase or sale of any goods (other than securities) or Providing any services and sale/purchase/construction of immovable property.
  • Discuss How are NBFCs different from banks?
  • Then move on to discussing the problems of the NBFCs – asset-liability mismatch amid corporate governance issues, NBFCs had borrowed short term from banks and mutual funds while lending to developers of long-term projects, which got held up because of various factors, willful corporate defaulters etc.
  • Suggest solutions – take cues from the article.

Conclusion –

Conclude with way forward.