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.
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
| Bank | NBFC |
| Incorporated under Banking Regulations Act, 1949 | Incorporated under the Companies Act, 1956 |
| Is a government-authorized organization | Doesn’t need a bank license to operate |
| Can issue Demand Draft | Can not issue Demand Draft |
| Creates credit | Does not create credit |
| Provides transaction services | Does not provide transaction services |
| Can accept demand deposits | Cannot accept demand deposits |
| Form part of the payment and settlement system | Does not form part of the payment and settlement system |
| Can make cheques payable to itself | Cannot make cheques payable to itself |
| Depositors can use the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facility | Depositors 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.