It is generally accepted that greater financial system depth, stability and soundness contribute to economic growth. But beyond that, for growth to be truly inclusive requires broadening and deepening the reach of banking that helps both consumers and producers raise their welfare and productivity and build savings, make investments, avail credit, and more important, insure themselves against income shocks and emergencies.Though the Indian financial system has made impressive strides in resource mobilization, geographical and functional reach, financial viability, profitability and competitiveness, vast segments of the population, especially the underprivileged sections of the society, have still no access to formal banking services. If one takes a look at the number of bank accounts vis-à-vis the entire population, 92-94% of the population in the UK has either current or savings accounts, whereas in India the figure comes down to mere 31% .In rural areas the coverage among adult population is 39% against 60% in urban India2.
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The financially excluded sections largely comprise marginal farmers, landless labourers, self employed and unorganizedÂ sector enterprises, ethnic minorities, socially excluded groups, senior citizens and women3. Hence, there is need for making sure that the footprint of the banking sector is much more accessible to all the citizens.Although NBFCs cater to the rural and semi-urban space,yet their scale is capped to particular segments and regions.Hence it is imperative to increase the banking licences. A larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service. More importantly, it would promote financial inclusion, and ultimately support inclusive economic growth, which is a key focus of public policy.
As per RBI, a Non-Banking Financial Company(NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/ securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
NBFCs are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. Operations are, regardless of this, still exercised under bank regulation. NBFCs provide financial services that are partly fee based and partly fund based. Their fee based services include portfolio management, issue management, loan syndication, merger and acquisition, credit rating etc. and their asset based activities include venture capital financing, housing finance, equipment leasing, hire purchase financing factoring etc. NBFCs are doing functions similar to that of banks; however there are a few differences: An NBFC cannot accept demand deposits; An NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself;
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