10 NBFCs surrender their licences to RBI, Total 93 NBFCs surrendered license till July 2023, Why NBFCs are failing?

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The Reserve Bank of India (RBI) on August 10 said that 10 non-banking finance companies (NBFC) have surrendered their licences. The NBFCs include:

  • Latent Light Finance
  • Bharat Nidhi
  • Capitaltrust Microfinance
  • Saraogi Investments
  • Digvijay Capital Management

Out of 10, eight have surrendered their licences due to exit from Non-Banking Financial Institution (NBFI) business and the remaining as they ceased to be a legal entity due to amalgamation/ merger/dissolution/ voluntary strike-off.

The two entities that have ended their business are Hariom Holdfin Private Ltd and Capitaltrust Microfinance Pvt Ltd.

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The number of non-banking finance companies (NBFC) surrendering their licences to the Reserve Bank of India (RBI) has risen to a four-year high. According to data from the RBI, 93 NBFCs have surrendered their licences to the central bank until July 2023.

Difference between Bank and NBFC

BankNBFC
Incorporated under Banking Regulations Act, 1949Incorporated under the Companies Act, 1956
Is a government-authorized organizationDoesn’t need a bank license to operate
Can issue Demand DraftCan not issue Demand Draft
Creates creditDoes not create credit
Provides transaction servicesDoes not provide transaction services
Can accept demand depositsCannot accept demand deposits
Form part of the payment and settlement systemDoes not form part of the payment and settlement system
Can make cheques payable to itselfCannot make cheques payable to itself
Depositors can use the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facilityDepositors cannot use the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facility

What is NBFC crisis & How it happens?

  • NBFCs borrow money from banks or sell commercial papers to mutual funds to raise money.
  • This money is then given as a loan to small and medium enterprises, retail customers and so on.
  • But when NBFCs face liquidity crunch i.e. shortage of money, this leads to NBFC CRISIS.

The NBFC business model itself is flawed. It raises short-term funds which are then lent out as long-term loans. For example, an NBFC raises money by selling 6-month debt papers and on-lends this as a car loan with a tenure of 5 years. Now, every time the NBFC has to renew the 6-month debt paper or raise fresh loans to repay the old debt paper. This cycle continues but the cycle gets broken by the default of some firms. This creates fear among banks, mutual funds that more such entities could default. Due to this many institutions refuse to give money to NBFCs. This leads to NBFC crisis.

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