A Study of the Non-Banking Finance Companies in India

Author: Rajeswari Sengupta, Lei Lei Son, and Harsh Vardhan

Title: A Study of the Non-Banking Finance Companies in India

Abstract: In late 2018, the default by a major non-banking financial company (NBFC) in India led to a credit crunch in the Indian economy. The crisis raises questions about the business model of the NBFCs, and the role they play alongside banks in the economy. In this paper we analyse the evolution of the NBFC sector in India over time and its importance in extending credit and discusses the factors that may have contributed to the 2018 crisis. We attempt to understand the advantages and disadvantages of the business model of NBFCs, and the drivers of their rapid rise and subsequent challenges in recent years. We also briefly discuss the potential impact of the Covid-19 pandemic on the NBFC sector. Drawing lessons from the past, NBFCs need to be strengthened to play an important role in India’s financial landscape.

Keywords: : Non-banking financial company, financial intermediation, financial regulation, systemic risk, liquidity crunch,

JEL Code: G01, G23, G28

Weblink: http://www.igidr.ac.in/pdf/publication/WP-2022-009.pdf