14 more NBFCs surrender their licence to RBI

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The Reserve Bank of India (RBI) on October 12 announced that 14 non-banking finance companies (NBFC) have surrendered their certificate of registration. These NBFCs include Shivam Hire Purchase & Finvest, Sun Finlease (Gujarat), Chitrakoot Motor Finance and Alkan Fiscal Services among others.

RBI said it has also cancelled the licence of one housing finance companies viz., Ind Bank Housing. Of the total 14 NBFCS, 10 NBFCs have surrendered their licence due to exit from the non-banking financial institution (NBFI) business.

These 10 NBFCs are Shivam Hire Purchase & Finvest, Shree Shanti Trades, Adroit Commercial, Sun Finlease (Gujarat), Chitrakoot Motor Finance, VIP Finstock, Dhruvtara Finance Services, Saija Finance, Micrograam Marketplace and TMF Business Services Limited
(formerly Tata Motors Finance).

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While, the remaining four NBFCs have surrendered as they ceased to be legal entities due to amalgamation/merger/dissolution/voluntary strike-off, etc.

What is NBFC?

non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFC facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering.

NBFCs perform functions similar to that of banks but there are a few differences-

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  • an NBFC cannot accept demand deposits;
  • an NBFC is not a part of the payment and settlement system and as such,
  • an NBFC cannot issue cheques drawn on itself, and
  • deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks.

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 refused to give money to NBFCs. This leads to NBFC crisis.

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