Deposit taking NBFCs down to record low of 34

Subject: Economy

Section: Monetary Policy

In News: The number of deposit-taking NBFCs has fallen to a record low of 34 in FY23, from 69 in pre-pandemic FY20.

Key Points:

The number of deposit-taking NBFCs has fallen to a record low of 34 in FY23, from 69 in pre-pandemic FY20, and 254 a decade ago, as per data from RBI’s Handbook of Statistics on the Indian Economy for FY23.
Number of NBFCs collecting deposits decreased consistently due to the changed norm of acceptance of deposits.

Why the number has fallen?

RBI has been cautious in allowing NBFCs to public deposits citing the objective of protection of depositors’ interest.
The RBI has not allowed any new NBFC to accept public deposits for more than 15 years.

Which NBFCs can accept public deposits?

Only NBFCs and HFCs, registered with RBI as deposit-taking entities, can accept public deposits.
This includes only those entities that have an investment grade rating.

Why is the matter getting focus now?

The merger of Housing Finance Development Corporation with HDFC Bank, has resulted in a vacuum in the NBFC deposit taking space.
Now there are increasing voices in the industry to allow more NBFCs to accept public deposits.
NBFCs of the country are said to have sought the RBI to grant more deposit-accepting licences.
This was in response to the central bank’s concerns regarding NBFCs’ high reliance on bank borrowings and the need to diversify their fundraising.
NBFCs’ share in overall bank credit increased to 9.9 per cent from 8.5 per cent a year ago.
Total public deposits of NBFCs accounted for a small portion of their borrowings, at ₹85,256 crore as of March 2023.

How are NBFC deposits different?

NBFCs lend and invest, therefore their operations are similar to those of banks; nevertheless, there are a few differences, as listed below:
- NBFCs are unable to accept demand deposits.
- NBFCs are not part of the payment and settlement system, so they are unable to issue checks drawn on themselves.
- Unlike banks, NBFC depositors do not have access to the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance facility.
The Reserve Bank of India does not assume any responsibility or guarantee for the company’s current financial soundness, or for the accuracy of any of the company’s statements, representations, or opinions, or for the return of deposits/discharge of liabilities.
NBFCs cannot accept deposits for a period less than 12-months and more than 60 months and the maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%.