Non-banking financial institutions and their reforms in them since 1990s

by

Non-Banking financial institutions and their reforms in them since 1990s

A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of Shares, stock, Bonds hire-purchase insurance business or chit business but does not include any institution whose principal business includes agriculture, industrial activity or the sale, purchase or construction of immovable property.  The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the [Reserve Bank of India Act, 1934] (Chapter III-B) and the directions issued by it. On November 9, 2017, Reserve Bank of India (RBI) issued a notification outlining norms for Outsourcing of functions/Services by Non-Bank Financial Institution (NBFCs) As per the new norms, NBFCs cannot outsource core management functions like internal audit, management of Investment portfolio, strategic and compliance functions for know your customer (KYC) norms and sanction of loans. Staff of service providers should have access to customer information only up to an extent which is required to perform the outsourced function. Boards of NBFCs should approve a Code Of Conduct for direct sales and recovery agents. For debt collection, NBFCs and their outsourced agents should not resort to intimidation or harassment of any kind. All NBFCs’ have been directed to set up a grievanceredressal machinery, which will also deal with the issues relating to services provided by the outsourced agency.Non-banking financial institutions and their reforms in them since 1990s

The experience worldwide shows that the important factor contributing towards theoperations and functions of NBFCs are changes in the international Financial Markets% thedegree of integration of domestic and international markets and the rapid development of technology in the financial sector like introduction of new Communication and transmissionsystem which reduce transaction costs and speed up information flows To an extent allthese factors have contributed to the Growth of NBFCs in India% especially during the later  part of eighties.

The Narasimham committee in 1991 outlined a framework for streamlining the functioning of the NBFCs and observed that prudential norms.in respect of conduct of business should also be laid down. It is this committee which made RBI to focus more on hire purchase and leasing companies which were playing greater role in the intermediation process. Thecommittee suggested that well managed hire purchase and leasing companies be permitted to operated in the Money-market/”>Money Market. For all other recommendations of this committee were referred to shah Committee in 1992. The shah committee in 1992 felt the need for changing thefocus of regulation and adopting steps for regulation and supervision more effective and important objective of these measures was to align these entities with theoverrall financial system subject to their adherence to the prudential norms.

Exemptions granted to NBFCs engaged in microfinance activities

The Task Force on Supportive Policy and Regulatory Framework for Microfinance set up by NABARD in 1999 provided various recommendations. Accordingly, it was decided to exempt NBFCs which are engaged in micro financing activities, licensed under Section 8 of the Companies Act, 2013, and which do not accept public deposits, from the purview of Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer of profits to the Reserve Fund) of the RBI Act, 1934.

MFIs & SHG-Bank linkage programme

In a joint fact-finding study on microfinance conducted by the Reserve Bank of India and a few major banks, the following observations were made:

  • Some of the microfinance institutions (MFIs) financed by banks or acting as their intermediaries or partners appear to be focusing on relatively better banked areas, including areas covered by the SHG-Bank linkage programme. Competing MFIs were operating in the same area, and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households.
  • Many MFIs supported by banks were not engaging themselves in capacity building and Empowerment of the groups to the desired extent. The MFIs were disbursing loans to the newly formed groups within 10–15 days of their formation, in contrast to the practice.

 

 

obtaining in the SHG Bank linkage programme, which takes about six to seven months for group formation and nurturing. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.

  • Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices. many cases, no review of MFI operations were undertaken after sanctioning the credit facility.

 ,

Non-banking financial institutions (NBFIs) are financial institutions that do not take deposits from the public. They include Investment Banks, insurance companies, and pension funds. NBFIs play an important role in the financial system by providing credit, investing in securities, and managing risk.

The reforms in non-banking financial institutions since the 1990s have been driven by a number of factors, including the financial crisis of 2008, the rise of new technologies, and the changing regulatory Environment. The objectives of the reforms have been to improve the stability of the financial system, to protect consumers, and to promote competition. The measures that have been taken include increased capital requirements, stricter risk management standards, and enhanced disclosure requirements.

The impact of the reforms has been mixed. On the one hand, the reforms have made the financial system more resilient to shocks. On the other hand, they have also made it more difficult for NBFIs to compete with banks.

The challenges that NBFIs face in the future include regulatory arbitrage, systemic risk, and moral hazard. Regulatory arbitrage is the practice of NBFIs shifting their activities to jurisdictions with less stringent regulations. Systemic risk is the risk that the failure of one NBFI could have a negative impact on the entire financial system. Moral hazard is the risk that NBFIs will take on excessive risk because they believe that they will be bailed out by the government if they fail.

Despite the challenges, the future prospects for NBFIs are positive. The growth of the global economy and the increasing demand for financial services will create opportunities for NBFIs to expand their businesses. However, NBFIs will need to adapt to the changing regulatory environment and the increasing competition from banks.

Opportunities for NBFIs include the following:

  • The growth of the global economy will create demand for financial services, which NBFIs can provide.
  • The increasing demand for retirement Savings will create opportunities for NBFIs to offer pension products.
  • The rise of new technologies will create opportunities for NBFIs to develop new products and services.

Risks for NBFIs include the following:

  • The changing regulatory environment could make it more difficult for NBFIs to operate.
  • The increasing competition from banks could reduce NBFIs’ market share.
  • The failure of one NBFI could have a negative impact on the entire financial system.

NBFIs can mitigate the risks by the following:

  • Complying with the changing regulatory environment.
  • Developing new products and services that meet the needs of customers.
  • Managing risk effectively.
  • Diversifying their businesses.

Non-banking financial institutions (NBFIs) are financial institutions that do not accept deposits from the public. They include investment banks, insurance companies, and pension funds. NBFIs play an important role in the financial system by providing credit, liquidity, and risk management services.

The reforms of NBFIs in the 1990s were aimed at strengthening their regulation and supervision. The reforms were prompted by a number of factors, including the Asian financial crisis of 1997-1998, which highlighted the risks posed by NBFIs. The reforms included measures to improve the transparency and disclosure of NBFIs, to strengthen their capital requirements, and to improve their risk management practices.

The reforms of NBFIs have been successful in reducing the risks posed by these institutions. However, there are still some challenges that need to be addressed, such as the need to improve the coordination of supervision of NBFIs across different jurisdictions.

Here are some frequently asked questions about non-banking financial institutions and their reforms in the 1990s:

  • What are non-banking financial institutions?
    Non-banking financial institutions (NBFIs) are financial institutions that do not accept deposits from the public. They include investment banks, insurance companies, and pension funds. NBFIs play an important role in the financial system by providing credit, liquidity, and risk management services.

  • What were the reforms of NBFIs in the 1990s?
    The reforms of NBFIs in the 1990s were aimed at strengthening their regulation and supervision. The reforms were prompted by a number of factors, including the Asian financial crisis of 1997-1998, which highlighted the risks posed by NBFIs. The reforms included measures to improve the transparency and disclosure of NBFIs, to strengthen their capital requirements, and to improve their risk management practices.

  • What were the successes of the reforms of NBFIs?
    The reforms of NBFIs have been successful in reducing the risks posed by these institutions. For example, the number of NBFI failures has declined since the reforms were implemented.

  • What are the challenges that need to be addressed in the future?
    There are still some challenges that need to be addressed, such as the need to improve the coordination of supervision of NBFIs across different jurisdictions. Additionally, there is a need to continue to monitor the risks posed by NBFIs and to adjust the reforms as necessary.

  1. Which of the following is not a non-banking financial institution?
    (A) Mutual fund
    (B) Insurance company
    (C) Pension fund
    (D) Commercial bank

  2. Which of the following is a reform that was implemented in the non-banking financial sector in the 1990s?
    (A) The introduction of new regulations
    (B) The Privatization of some non-banking financial institutions
    (C) The consolidation of some non-banking financial institutions
    (D) All of the above

  3. Which of the following is a benefit of the reforms that were implemented in the non-banking financial sector in the 1990s?
    (A) Increased competition in the non-banking financial sector
    (B) Improved efficiency in the non-banking financial sector
    (C) Increased access to financial services for consumers
    (D) All of the above

  4. Which of the following is a challenge that the non-banking financial sector faces in the future?
    (A) The rise of FinTech companies
    (B) The increasing complexity of the financial system
    (C) The changing needs of consumers
    (D) All of the above

  5. Which of the following is a way that the non-banking financial sector can address the challenges that it faces in the future?
    (A) By investing in technology
    (B) By developing new products and services
    (C) By partnering with FinTech companies
    (D) All of the above