{"id":18652,"date":"2020-10-30T12:06:22","date_gmt":"2020-10-30T06:36:22","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=18652"},"modified":"2024-12-09T16:51:07","modified_gmt":"2024-12-09T11:21:07","slug":"challenges-encountered-by-nbfcs-their-remedies","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/challenges-encountered-by-nbfcs-their-remedies\/","title":{"rendered":"What are the Major Challenges Encountered by NBFCs & Their Remedies?"},"content":{"rendered":"\n

In the past few years, the financial sector has witnessed a significant transformation, and Non-Banking Financial Companies, aka NBFC, plays a pivotal role in that swift. NBFCs continued to reap immense success in the financial sector and its contribution has surpassed the contribution by the traditional banks. Henceforth, NBFC registration<\/strong><\/a> sound like a beneficial proposition for the entrepreneurs. But, there are certain quandaries encountered by an individual while starting NBFCs. In this write-up, we shall address all those challenges individually. So, without any further ado, let get started with Challenges encountered by NBFCs. <\/p>\n\n\n

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\"Major<\/figure><\/div>\n\n\n

Read our article<\/b>:NBFC Registration: Step by Step Procedure<\/a><\/mark><\/p>\n\n\n\n

What are the Challenges Encountered by NBFCs?<\/h2>\n\n\n\n

NBFCs have been strengthening their\npresence in the market and have made significant progress than the banks.\nHowever, newer or small NBFCs encountered challenges in safeguarding their\nexistence against their popular counterparts. <\/p>\n\n\n\n

Challenge of Funding due to the absence of Refinancing Option<\/h3>\n\n\n\n

In India, banks are outfitted with many refinancing options. Similarly, housing financing companies<\/a><\/strong> also have several refinancing alternatives at their disposal\u00a0and it refinances from the regulator of Housing Financing Companies.<\/em><\/p>\n\n\n\n

On the other hand, the NBFCs entirely\ndepend on the capital market or banks for obtaining resources. This acts as a\nresistance to the growth of the NBFCs. Furthermore, keep in mind the flows of\nfinds from these sources can get evaporates anytime. <\/p>\n\n\n\n

Challenges Related to Obtainment of NBFC license<\/h3>\n\n\n\n

The process of obtaining NBFC is far more complicated and cumbersome as compared to other licenses. The process involves tedious and complex documentation processes and approval from RBI<\/a><\/strong>. Keep in mind that RBI regulates the process which requires to be followed by the applicant to avail of the registration.\u00a0<\/p>\n\n\n\n

Intricate NBFC Compliances in India<\/h3>\n\n\n\n

After the NBFC incorporation, it is also needed to address multiple compliances. NBFC compliance<\/a><\/strong> differs from one company\u2019s type to another. So the difficulty sneaked on when an individual running an organization of loans and advances, etc. it becomes increasingly tiresome to address all aspect in consolidation.\u00a0Moreover, it also becomes tedious to know about the filing requirement of the prescribed returns.\u00a0This is probably one of the most intricate challenges encountered by NBFCs. <\/p>\n\n\n\n

No Versatility in Loan Classification of NPAs<\/h3>\n\n\n\n

The Non-Performing Assets (NPA) bears\nsignificant importance for the major players, but businesses with inconsistent\ncash flow encounter a negative impact on payment related delays. <\/p>\n\n\n\n

Classification under Non-performing assets\nand flexibility in scheduling is vital. The classification of NPA ought to be\nbased on assets financed rather than the borrower\u2019s profile. <\/p>\n\n\n\n

Absence of a Statutory Recovery Tool<\/h3>\n\n\n\n

The inadequate statutory recovery tool is\nanother complex issue taunting the NBFCs for a long. <\/p>\n\n\n\n

Several Representative Bodies<\/h3>\n\n\n\n

At present, multiple representative bodies\ngovern NBFCs activities across the country. It must be noted that NBFC is in\nthe initial phase and still far away from being acknowledged as a\nwell-established entity. Hence, it would be an ideal proposition if these\nentities are curbed by a single representative body. It is also crucial that\nevery segment is acknowledged sufficiently in the apex body that ensures the\nseamless growth of NBFCs. <\/p>\n\n\n\n

Lacking in Capacity Building<\/h3>\n\n\n\n

Non-banking finance companies must\nestablish a receptive ecosystem for capacity building on an individual as well\nas a collective basis. Then the majority of the NBFCs still lack the said\npotential, thus; it should be addressed as swiftly as possible. <\/p>\n\n\n\n

Undue Tax Treatment<\/h3>\n\n\n\n

There exists a tremendous variation within\nthe tax structure for banks vs NBFCs such as TDS, double taxation on the lease\nor hire purchase, etc.  <\/p>\n\n\n\n

Absence of Defaulter Database<\/h3>\n\n\n\n

NBFCs are more vulnerable to credit risk\nunder the influence of inadequate information. In addition to that, there is a\nrequirement of vital legislative changes to leverage the utility payments\ndatabase in the process of the credit assessment. <\/p>\n\n\n\n

Stripping of Priority Sector Status to Bank Lending To NBFCs<\/h3>\n\n\n\n

This is one of the critical obstacles\nencountered by Non-banking finance companies. The restoration must be deployed\nfor the priority sector, bank lending, and NBFCs. Henceforth, the synergy model\nbetween banks and NBFCs ensures uninterrupted financial backing to the\nunderprivileged section of the society. It will empower the NBFCs to create\nwealth and assets in the rural parts of India. The RBI can implant a provision\nto route a fixed percentage of bank lending priority via NBFC. <\/p>\n\n\n\n

Minimum Mandatory Credit Rating for NBFC<\/h3>\n\n\n\n

It is now mandatory for the NBFCs\n(deposit-taking ones) to obtain investment-based credit. It will empower them\nto accept deposits without any legal obstacles. If the rating of the NBFC is\ndegraded below the minimum rating, it cannot obtain deposits in any case\nwhatsoever. Furthermore, the NBFCs must intimate the Reserve Bank regarding its\nposition. <\/p>\n\n\n\n

What are the Solution to the Challenges faced by NBFCs?<\/h2>\n\n\n
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\"Challenges<\/figure><\/div>\n\n\n

The following section consolidates some practical strategies to overcome the <\/strong><\/em>challenges encountered by NBFCs.<\/strong><\/p>\n\n\n\n

Collaborating with Fintech Companies <\/h3>\n\n\n\n