RBI cancels License of 17 NBFCs, What is NBFC and why are they failing in India?

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The Reserve Bank of India on March 10, 2023, said it has cancelled the Certificate of Registration (CoR) of 17 Non-Banking Financial Companies (NBFCs).

"17 Non-Banking Financial Companies have surrendered the Certificate of Registration (CoR) granted to them by the Reserve Bank of India (RBI)," the central bank said.

India’s central bank further noted that in the exercise of powers conferred on it under Section 45-IA (6) of the Reserve Bank of India Act, 1934, it has therefore cancelled the NBFCs’ CoR.

NBFC License Cancelled

Some of the NBFCs whose CoR got cancelled include Dhanbad Properties Private Limited, Soorya Vanijya & Investment Ltd., Jainex India Limited., Jayam Vyapaar Pvt Ltd, and JM Holdings Pvt Ltd, among others. Last year, three NBFCs on December 13 surrendered their certificate of registration to the RBI.

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What is NBFC?

A 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-

  • 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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