Money lender is an age old institution meeting the demand for credit

Name : Rajeev Dewal, Subject: Non Banking Finance Companies, Message :
1. Why NBFCs mushroomed?:

A developing economy like India always craves for financial resources. Demand for credit is great and often organised traditional financing institutions (like banks and financial institutions)do not meet such demand thus creating a space for other types of financing. Money lender is an age old institution filling such space. Opening up of ecomnomy gave a further boost to the demand for credit. At this juncture, NBFCs, which basically were better organised money lenders happened in large number.

2. Is money lending bad per se?:

Money lending, done judiciously, is certainly a profitable activity; thus explaining riches of traditional money lenders i.e. sahukars etc.

3. Why many NBFCs failed?:

There are multiple reasons for failure of a several NBFCs. Following paragraphs attempt to capture some of them.

a) Some NBFCs, in the haste of making profits diverted their funds into investments in shares etc. rather than sticking to safer activities like lending. Such funds were often lost due to vagaries of stock market.

b) In some NBFCs cases, funds were diverted to other group companies of the NBFC and eventually lost.

c) Some NBFCs lacked experience in lending and recoveries.

d) For quite some time, there was no regulator for NBFCs. However later Reserve Bank started regulating NBFCs.

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