NBFC

NBFC stands for Non Banking Financial Corporation. It is a financial institution. However, it doesn’t have the banking license. The primary difference between NBFC and bank is that the NBFC doesn’t take demand deposit. You might be thinking what is demand deposit. The accounts where we can withdrawal funds at any time. Like in a bank saving/current account, we can withdrawal, spend & deposit anytime we want.

Why do we need a NBFC when we already have a Banking Institution?

NBFC is more like a wealth management firm. It takes money from the rich pockets and give them in loans to the industrialist or common people. NBFC’s are not that popular among common people as we generally do the transaction through the banks. They plays a crucial role for the economic development as they provide the credit required by the industrialist and for the infrastructure with a long term loans. However, the banks are not willing to provide such long term loans because of the risk. One needs a minimum minimum net owned fund of ₹ 2 Crore to set up a NBFC and other formalities as per RBI’s guidelines. Some NBFC’s also take fixed deposits just like banks.

NBFC are the hidden pillars of a successful economy just as there are numerous people behind a company’s or individual’s success.

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How do NBFC makes profit?

NBFC’s are for profit organization. They earn mostly from the interest they take on the loans. Now a day, there is a new trend of interest free EMI or zero cost EMI, which doesn’t charge any interest. So, how does the financiers earn in such scenarios? They charge fees from the product seller. For instance you will find zero cost EMI for various product over e-commerce. The cost of the interest is born by the e-commerce companies. We as consumers are attracted to collateral and interest free loans. However, mostly we end up purchasing things we cannot afford or don’t require.

There is not that huge profit in UPI transaction for the companies. The real profits lies in lending. There are gathering the data now in the information first world. Most of the payments startups has applied for NBFC license so that they could figure out a profitable business model.