Economy: January 2021 Current Affairs Current Affairs Notes | EduRev

Current Affairs & Hindu Analysis: Daily, Weekly & Monthly

Current Affairs : Economy: January 2021 Current Affairs Current Affairs Notes | EduRev

 Page 1


 
28                                                                               www.visionias.in                                                                        ©Vision IAS  
3. ECONOMY 
3.1. REGULATION OF NBFCS 
Why in news?  
Recently, the RBI has proposed a significant shift in its regulatory approach towards India’s non-banking financial 
companies (NBFCs).  
What is a NBFC and what role does it play in India’s Banking sector?  
A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, 
acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other 
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc.  
Following can be cited as key characteristics of NBFCs: 
• NBFCs do not include any institution whose principal business is that of agriculture activity, industrial activity, 
purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ 
construction of immovable property.  
• NBFCs are categorized: 
o in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, 
o non deposit taking NBFCs by their size into systemically important and other non-deposit holding 
companies (NBFC-NDSI and NBFC-ND) and  
o by the kind of activity, they conduct.  
• Major categories of NBFC include Asset Finance Companies, Investment companies, Loan companies, 
Infrastructure Financing companies (IFCs), Systemically Important Core Investment Company (CIC-ND-SI), 
Infrastructure Debt Funds (IDFs), NBFC-Micro Finance Institution (MFI), NBFC-Factors, Mortgage Guarantee 
Companies (MGC) and NBFC- Non-Operative Financial Holding Company (NOFHC) among others.  
• These companies get NBFC License with the 
Reserve Bank of India (RBI). But they are 
regulated by different agencies based on the 
role they play. (See infographic) 
Significance 
NBFCs as a collective play a crucial role in the 
banking sector by increasing the penetration of 
financial products to unbanked areas, providing 
innovative products for both rural and urban 
customers, catering to the need of infrastructure 
lending and to other areas where long term 
financing is needed.  
Status 
In the recent times, the NBFC sector has seen 
tremendous growth. For instance, in last five years 
alone, size of balance sheet of NBFCs has more than 
doubled from Rs 20.72 lakh crore (2015) to Rs 49.22 
lakh crore (2020). As of now, there are close to 
9,560 NBFCs in India.  
Why is there a need for change in regulation of 
NBFCs? 
The growth of NBFCs has simultaneously generated 
challenges vis-à-vis integration with other elements 
of financial sector, management within NBFCs etc. 
Page 2


 
28                                                                               www.visionias.in                                                                        ©Vision IAS  
3. ECONOMY 
3.1. REGULATION OF NBFCS 
Why in news?  
Recently, the RBI has proposed a significant shift in its regulatory approach towards India’s non-banking financial 
companies (NBFCs).  
What is a NBFC and what role does it play in India’s Banking sector?  
A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, 
acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other 
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc.  
Following can be cited as key characteristics of NBFCs: 
• NBFCs do not include any institution whose principal business is that of agriculture activity, industrial activity, 
purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ 
construction of immovable property.  
• NBFCs are categorized: 
o in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, 
o non deposit taking NBFCs by their size into systemically important and other non-deposit holding 
companies (NBFC-NDSI and NBFC-ND) and  
o by the kind of activity, they conduct.  
• Major categories of NBFC include Asset Finance Companies, Investment companies, Loan companies, 
Infrastructure Financing companies (IFCs), Systemically Important Core Investment Company (CIC-ND-SI), 
Infrastructure Debt Funds (IDFs), NBFC-Micro Finance Institution (MFI), NBFC-Factors, Mortgage Guarantee 
Companies (MGC) and NBFC- Non-Operative Financial Holding Company (NOFHC) among others.  
• These companies get NBFC License with the 
Reserve Bank of India (RBI). But they are 
regulated by different agencies based on the 
role they play. (See infographic) 
Significance 
NBFCs as a collective play a crucial role in the 
banking sector by increasing the penetration of 
financial products to unbanked areas, providing 
innovative products for both rural and urban 
customers, catering to the need of infrastructure 
lending and to other areas where long term 
financing is needed.  
Status 
In the recent times, the NBFC sector has seen 
tremendous growth. For instance, in last five years 
alone, size of balance sheet of NBFCs has more than 
doubled from Rs 20.72 lakh crore (2015) to Rs 49.22 
lakh crore (2020). As of now, there are close to 
9,560 NBFCs in India.  
Why is there a need for change in regulation of 
NBFCs? 
The growth of NBFCs has simultaneously generated 
challenges vis-à-vis integration with other elements 
of financial sector, management within NBFCs etc. 
 
29                                                                               www.visionias.in                                                                        ©Vision IAS  
Following can be cited as immediate challenges which have generated the need for regulatory reform:  
• Threat of systemic risks: Financial issues faced by key NBFCs like Infrastructure Lending and Financial Services 
Limited (IL&FS) and Dewan Housing Finance Corporation Limited (DHFL) has raised the threat of systemic risks 
posed by the NBFC sector to the overall financial sector.  
o The crises faced by IL&FS can be primarily attributed to the Asset-Liability Mismatch (ALM) due to short-
term borrowing alongside investments in infrastructure projects with long gestation periods.  
o The crises faced by IL&FS lowered the credibility of all major NBFCs. Alongside this, DHFL faced an 
allegation that its promotors were involved in a scam to siphon of money. Compounding these factors, 
share of DHFL plummeted and is currently struggling to pay INR 900 crore worth of debt.  
• Allowing large NBFCs to seamlessly become banks: Recently, RBI’s Internal Working Group (IWG) has revised 
the licensing norms for the Banking Industry. Since key NBFCs are to potentially become Banks, there is a need 
to bring consistency in regulation of Banks and NBFCs, so that the transition of NBFCs to Banks is seamless.  
o For example, if a large NBFC has a Capital Adequacy Ratio (CAR) similar to banks, it would be easier for it 
transition to become a bank as compared to with a lower CAR.  
• Emergence of FinTech Sector:  Emergence of the Financial Technology sector has changed the way Banking 
sector operates by creating innovative financial services which do not fit in traditional definitions. In this light, 
reforms in regulation of NBFCs can bring synergy between seamless operation and interaction of Banks, NBFCs 
and newly emerging element of FinTech.  
What are the changes that RBI has proposed?  
Broadly, RBI has proposed to move from a general approach of light touch regulation to one that monitors larger 
players almost as closely as it 
does banks. To enable this 
idea, it has proposed 
following changes:  
• Creation of four-layer 
regulatory framework 
which includes a Base 
layer, a Middle layer, 
Upper layer and a Top 
layer. The degree of 
regulation in each sector 
is proportional to the 
perception of risk in that 
sector.  
• Classification change for 
NPAs: It has also 
proposed classification of non-performing assets (NPAs) of base layer NBFCs from 180 days to 90 days overdue.  
What would be the potential impact of these changes?  
• Balance between flexibility of NBFCs and the potential systemic risks: The four-layered structure entails a 
largely laissez-faire approach for smaller NBFCs, plugging some of the arbitrages available to mid-sized NBFCs 
vis-à-vis banks, and imposing tougher ‘bank-like’ capitalization, governance and monitoring norms for the 
largest players and those which could pose a systemic risk due to the nature of their operations. 
• Improved trust and confidence in the NBFC Sector: Stricter regulation by RBI alongside early reporting of 
NPAs will instill confidence in the NBFC market potentially driving up the share prices, attracting more 
depositors and translation to better credit ratings.  
• Increased transparency in the sector: The primary issue that the NBFC sector faced was the lack of 
transparency which created financial risks for the overall banking system. Thus, more transparency in NBFCs 
via regulatory route would enable seamless flow of information, thus improving the transparency and risk 
assessment for the whole financial sector.  
 
Page 3


 
28                                                                               www.visionias.in                                                                        ©Vision IAS  
3. ECONOMY 
3.1. REGULATION OF NBFCS 
Why in news?  
Recently, the RBI has proposed a significant shift in its regulatory approach towards India’s non-banking financial 
companies (NBFCs).  
What is a NBFC and what role does it play in India’s Banking sector?  
A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, 
acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other 
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc.  
Following can be cited as key characteristics of NBFCs: 
• NBFCs do not include any institution whose principal business is that of agriculture activity, industrial activity, 
purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ 
construction of immovable property.  
• NBFCs are categorized: 
o in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, 
o non deposit taking NBFCs by their size into systemically important and other non-deposit holding 
companies (NBFC-NDSI and NBFC-ND) and  
o by the kind of activity, they conduct.  
• Major categories of NBFC include Asset Finance Companies, Investment companies, Loan companies, 
Infrastructure Financing companies (IFCs), Systemically Important Core Investment Company (CIC-ND-SI), 
Infrastructure Debt Funds (IDFs), NBFC-Micro Finance Institution (MFI), NBFC-Factors, Mortgage Guarantee 
Companies (MGC) and NBFC- Non-Operative Financial Holding Company (NOFHC) among others.  
• These companies get NBFC License with the 
Reserve Bank of India (RBI). But they are 
regulated by different agencies based on the 
role they play. (See infographic) 
Significance 
NBFCs as a collective play a crucial role in the 
banking sector by increasing the penetration of 
financial products to unbanked areas, providing 
innovative products for both rural and urban 
customers, catering to the need of infrastructure 
lending and to other areas where long term 
financing is needed.  
Status 
In the recent times, the NBFC sector has seen 
tremendous growth. For instance, in last five years 
alone, size of balance sheet of NBFCs has more than 
doubled from Rs 20.72 lakh crore (2015) to Rs 49.22 
lakh crore (2020). As of now, there are close to 
9,560 NBFCs in India.  
Why is there a need for change in regulation of 
NBFCs? 
The growth of NBFCs has simultaneously generated 
challenges vis-à-vis integration with other elements 
of financial sector, management within NBFCs etc. 
 
29                                                                               www.visionias.in                                                                        ©Vision IAS  
Following can be cited as immediate challenges which have generated the need for regulatory reform:  
• Threat of systemic risks: Financial issues faced by key NBFCs like Infrastructure Lending and Financial Services 
Limited (IL&FS) and Dewan Housing Finance Corporation Limited (DHFL) has raised the threat of systemic risks 
posed by the NBFC sector to the overall financial sector.  
o The crises faced by IL&FS can be primarily attributed to the Asset-Liability Mismatch (ALM) due to short-
term borrowing alongside investments in infrastructure projects with long gestation periods.  
o The crises faced by IL&FS lowered the credibility of all major NBFCs. Alongside this, DHFL faced an 
allegation that its promotors were involved in a scam to siphon of money. Compounding these factors, 
share of DHFL plummeted and is currently struggling to pay INR 900 crore worth of debt.  
• Allowing large NBFCs to seamlessly become banks: Recently, RBI’s Internal Working Group (IWG) has revised 
the licensing norms for the Banking Industry. Since key NBFCs are to potentially become Banks, there is a need 
to bring consistency in regulation of Banks and NBFCs, so that the transition of NBFCs to Banks is seamless.  
o For example, if a large NBFC has a Capital Adequacy Ratio (CAR) similar to banks, it would be easier for it 
transition to become a bank as compared to with a lower CAR.  
• Emergence of FinTech Sector:  Emergence of the Financial Technology sector has changed the way Banking 
sector operates by creating innovative financial services which do not fit in traditional definitions. In this light, 
reforms in regulation of NBFCs can bring synergy between seamless operation and interaction of Banks, NBFCs 
and newly emerging element of FinTech.  
What are the changes that RBI has proposed?  
Broadly, RBI has proposed to move from a general approach of light touch regulation to one that monitors larger 
players almost as closely as it 
does banks. To enable this 
idea, it has proposed 
following changes:  
• Creation of four-layer 
regulatory framework 
which includes a Base 
layer, a Middle layer, 
Upper layer and a Top 
layer. The degree of 
regulation in each sector 
is proportional to the 
perception of risk in that 
sector.  
• Classification change for 
NPAs: It has also 
proposed classification of non-performing assets (NPAs) of base layer NBFCs from 180 days to 90 days overdue.  
What would be the potential impact of these changes?  
• Balance between flexibility of NBFCs and the potential systemic risks: The four-layered structure entails a 
largely laissez-faire approach for smaller NBFCs, plugging some of the arbitrages available to mid-sized NBFCs 
vis-à-vis banks, and imposing tougher ‘bank-like’ capitalization, governance and monitoring norms for the 
largest players and those which could pose a systemic risk due to the nature of their operations. 
• Improved trust and confidence in the NBFC Sector: Stricter regulation by RBI alongside early reporting of 
NPAs will instill confidence in the NBFC market potentially driving up the share prices, attracting more 
depositors and translation to better credit ratings.  
• Increased transparency in the sector: The primary issue that the NBFC sector faced was the lack of 
transparency which created financial risks for the overall banking system. Thus, more transparency in NBFCs 
via regulatory route would enable seamless flow of information, thus improving the transparency and risk 
assessment for the whole financial sector.  
 
 
30                                                                               www.visionias.in                                                                        ©Vision IAS  
Conclusion  
Given the banking sector’s own woes over the past two years (PMC Bank, Yes Bank, Lakshmi Vilas Bank), a holistic 
reboot of the oversight mechanism for NBFCs and banks is critical to retain confidence and maintain financial 
stability. Regulation of NBFCs which can lend for activities banks often do not support, be it micro-loans or 
infrastructure projects, if adequately formalized has the potential to ensure that the fledgling economic recovery 
is not hampered by funding constraints. 
3.2. DIGITAL LENDING 
Why in news? 
The Reserve Bank of India (RBI) has 
constituted a working group on digital 
lending. 
More about news 
• Recent spurt and popularity of 
online lending platforms/ mobile 
lending apps has raised certain 
serious concerns which have wider 
systemic implications. 
• Against this backdrop, the 
Working group is constituted by 
RBI to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated 
players. 
• The working group will evaluate digital lending activities and assess the penetration and standards of 
outsourced digital lending activities in RBI regulated entities 
• It will also identify the risks posed by unregulated 
digital lending to financial stability, regulated 
entities and consumers and recommend regulatory 
or statutory measures and robust fair practices code 
for digital lending players. 
• RBI had earlier clarified that legitimate public 
lending activities can be undertaken by banks, non-
banking financial companies (NBFCs) registered 
with RBI and other entities that are regulated by the 
State governments under statutory provisions, such 
as the money lending acts of the States concerned. 
• Further the RBI mandated digital lending platforms 
used on behalf of banks and NBFCs to disclose name 
of the bank or NBFC upfront to the customers. 
About digital lending 
• Digital lending is the process of offering loans that 
are applied for, disbursed, and managed through 
digital channels, in which lenders use digitized data 
to inform credit decisions and build intelligent 
customer engagement.  
• The digital lending ecosystem is complex and 
evolving. Around the world, digital lending models 
(see infographic) are characterized by distinct 
market structures, regulatory environments, and 
customer needs. 
Page 4


 
28                                                                               www.visionias.in                                                                        ©Vision IAS  
3. ECONOMY 
3.1. REGULATION OF NBFCS 
Why in news?  
Recently, the RBI has proposed a significant shift in its regulatory approach towards India’s non-banking financial 
companies (NBFCs).  
What is a NBFC and what role does it play in India’s Banking sector?  
A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, 
acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other 
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc.  
Following can be cited as key characteristics of NBFCs: 
• NBFCs do not include any institution whose principal business is that of agriculture activity, industrial activity, 
purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ 
construction of immovable property.  
• NBFCs are categorized: 
o in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, 
o non deposit taking NBFCs by their size into systemically important and other non-deposit holding 
companies (NBFC-NDSI and NBFC-ND) and  
o by the kind of activity, they conduct.  
• Major categories of NBFC include Asset Finance Companies, Investment companies, Loan companies, 
Infrastructure Financing companies (IFCs), Systemically Important Core Investment Company (CIC-ND-SI), 
Infrastructure Debt Funds (IDFs), NBFC-Micro Finance Institution (MFI), NBFC-Factors, Mortgage Guarantee 
Companies (MGC) and NBFC- Non-Operative Financial Holding Company (NOFHC) among others.  
• These companies get NBFC License with the 
Reserve Bank of India (RBI). But they are 
regulated by different agencies based on the 
role they play. (See infographic) 
Significance 
NBFCs as a collective play a crucial role in the 
banking sector by increasing the penetration of 
financial products to unbanked areas, providing 
innovative products for both rural and urban 
customers, catering to the need of infrastructure 
lending and to other areas where long term 
financing is needed.  
Status 
In the recent times, the NBFC sector has seen 
tremendous growth. For instance, in last five years 
alone, size of balance sheet of NBFCs has more than 
doubled from Rs 20.72 lakh crore (2015) to Rs 49.22 
lakh crore (2020). As of now, there are close to 
9,560 NBFCs in India.  
Why is there a need for change in regulation of 
NBFCs? 
The growth of NBFCs has simultaneously generated 
challenges vis-à-vis integration with other elements 
of financial sector, management within NBFCs etc. 
 
29                                                                               www.visionias.in                                                                        ©Vision IAS  
Following can be cited as immediate challenges which have generated the need for regulatory reform:  
• Threat of systemic risks: Financial issues faced by key NBFCs like Infrastructure Lending and Financial Services 
Limited (IL&FS) and Dewan Housing Finance Corporation Limited (DHFL) has raised the threat of systemic risks 
posed by the NBFC sector to the overall financial sector.  
o The crises faced by IL&FS can be primarily attributed to the Asset-Liability Mismatch (ALM) due to short-
term borrowing alongside investments in infrastructure projects with long gestation periods.  
o The crises faced by IL&FS lowered the credibility of all major NBFCs. Alongside this, DHFL faced an 
allegation that its promotors were involved in a scam to siphon of money. Compounding these factors, 
share of DHFL plummeted and is currently struggling to pay INR 900 crore worth of debt.  
• Allowing large NBFCs to seamlessly become banks: Recently, RBI’s Internal Working Group (IWG) has revised 
the licensing norms for the Banking Industry. Since key NBFCs are to potentially become Banks, there is a need 
to bring consistency in regulation of Banks and NBFCs, so that the transition of NBFCs to Banks is seamless.  
o For example, if a large NBFC has a Capital Adequacy Ratio (CAR) similar to banks, it would be easier for it 
transition to become a bank as compared to with a lower CAR.  
• Emergence of FinTech Sector:  Emergence of the Financial Technology sector has changed the way Banking 
sector operates by creating innovative financial services which do not fit in traditional definitions. In this light, 
reforms in regulation of NBFCs can bring synergy between seamless operation and interaction of Banks, NBFCs 
and newly emerging element of FinTech.  
What are the changes that RBI has proposed?  
Broadly, RBI has proposed to move from a general approach of light touch regulation to one that monitors larger 
players almost as closely as it 
does banks. To enable this 
idea, it has proposed 
following changes:  
• Creation of four-layer 
regulatory framework 
which includes a Base 
layer, a Middle layer, 
Upper layer and a Top 
layer. The degree of 
regulation in each sector 
is proportional to the 
perception of risk in that 
sector.  
• Classification change for 
NPAs: It has also 
proposed classification of non-performing assets (NPAs) of base layer NBFCs from 180 days to 90 days overdue.  
What would be the potential impact of these changes?  
• Balance between flexibility of NBFCs and the potential systemic risks: The four-layered structure entails a 
largely laissez-faire approach for smaller NBFCs, plugging some of the arbitrages available to mid-sized NBFCs 
vis-à-vis banks, and imposing tougher ‘bank-like’ capitalization, governance and monitoring norms for the 
largest players and those which could pose a systemic risk due to the nature of their operations. 
• Improved trust and confidence in the NBFC Sector: Stricter regulation by RBI alongside early reporting of 
NPAs will instill confidence in the NBFC market potentially driving up the share prices, attracting more 
depositors and translation to better credit ratings.  
• Increased transparency in the sector: The primary issue that the NBFC sector faced was the lack of 
transparency which created financial risks for the overall banking system. Thus, more transparency in NBFCs 
via regulatory route would enable seamless flow of information, thus improving the transparency and risk 
assessment for the whole financial sector.  
 
 
30                                                                               www.visionias.in                                                                        ©Vision IAS  
Conclusion  
Given the banking sector’s own woes over the past two years (PMC Bank, Yes Bank, Lakshmi Vilas Bank), a holistic 
reboot of the oversight mechanism for NBFCs and banks is critical to retain confidence and maintain financial 
stability. Regulation of NBFCs which can lend for activities banks often do not support, be it micro-loans or 
infrastructure projects, if adequately formalized has the potential to ensure that the fledgling economic recovery 
is not hampered by funding constraints. 
3.2. DIGITAL LENDING 
Why in news? 
The Reserve Bank of India (RBI) has 
constituted a working group on digital 
lending. 
More about news 
• Recent spurt and popularity of 
online lending platforms/ mobile 
lending apps has raised certain 
serious concerns which have wider 
systemic implications. 
• Against this backdrop, the 
Working group is constituted by 
RBI to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated 
players. 
• The working group will evaluate digital lending activities and assess the penetration and standards of 
outsourced digital lending activities in RBI regulated entities 
• It will also identify the risks posed by unregulated 
digital lending to financial stability, regulated 
entities and consumers and recommend regulatory 
or statutory measures and robust fair practices code 
for digital lending players. 
• RBI had earlier clarified that legitimate public 
lending activities can be undertaken by banks, non-
banking financial companies (NBFCs) registered 
with RBI and other entities that are regulated by the 
State governments under statutory provisions, such 
as the money lending acts of the States concerned. 
• Further the RBI mandated digital lending platforms 
used on behalf of banks and NBFCs to disclose name 
of the bank or NBFC upfront to the customers. 
About digital lending 
• Digital lending is the process of offering loans that 
are applied for, disbursed, and managed through 
digital channels, in which lenders use digitized data 
to inform credit decisions and build intelligent 
customer engagement.  
• The digital lending ecosystem is complex and 
evolving. Around the world, digital lending models 
(see infographic) are characterized by distinct 
market structures, regulatory environments, and 
customer needs. 
 
31                                                                               www.visionias.in                                                                        ©Vision IAS  
• In India government already created stack of public digital identity, payments, and documentation 
infrastructure, which conducive to digital lending.  
• Also, Aadhaar Enabled Payments System (AEPS) and high smartphone penetration and a focus on digital 
India programme adds complements to India’s enabling regulation. 
How digital lending will impact financial service ecosystem in India? 
• Efficiency and reach: Digital lending are enabling financial service providers (FSPs) to offer better products to 
more underserved clients in faster, fair, efficient and inclusive manner. 
• Innovation and competitiveness: Cost-efficiency gains from FinTech models drive product innovation, which 
will diversify and specialise 
business models to target 
wider markets. Also, it will  
increase participation of non-
traditional players. 
• Credit risk management: 
Enhancements to 
underwriting/ credit models 
using data from non-traditional 
data sources will improve 
robustness in credit risk 
management. 
• Ecosystem of growth and 
partnership: Supportive and 
collaborative regulators will aid 
further growth of the FinTech 
ecosystem in convenience of 
segmentation, targeting and 
positioning (STP) online models 
and consumers to increase financial inclusion and mobile penetration. 
What are the challenges faced by the digital lending ecosystem in India? 
• Unauthorised digital lenders: There are cases about individuals and small businesses falling prey to a growing 
number of unauthorised digital lending platforms/mobile apps. 
• Over-indebtedness and NPA: Taking out multiple simultaneous loans due to ease of access, limited or no 
evaluation of capacity to repay, limited customer understanding, could lead to over-indebtedness of 
consumers and NPA of lenders.  
• High interest rates and aggressive collection: Unauthorised digital lending platforms are charging excessive 
rates of interest and high-handed recovery methods. 
• Data privacy: There are concerns raised about misuse of agreements to access data on the mobile phones of 
the borrowers by digital lending platforms. 
How challenges in digital lending ecosystem can be tackled? 
• National Lending Corporation (NLC): An umbrella body NLC focussed on regulation over lending on line of the 
National Payments Corporation of India (NPCI) needs to be formed under the oversight of RBI. 
• Use of technology: Application of artificial intelligence, machine learning, and blockchain in the lending space 
should be increased to evaluate capacity of consumers to overcome problem of Over-indebtedness and NPA. 
• Financial literacy: It is vital to make aware consumers about frauds by unauthorised digital lenders and 
understand the digital lending ecosystem well. 
• Data protection: There must be clear guidelines to ensure data security, privacy and confidentiality of 
consumers.   
• Code of conduct: Digital lenders should proactively develop and commit to a code of conduct that outlines the 
principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance 
redressal. 
Page 5


 
28                                                                               www.visionias.in                                                                        ©Vision IAS  
3. ECONOMY 
3.1. REGULATION OF NBFCS 
Why in news?  
Recently, the RBI has proposed a significant shift in its regulatory approach towards India’s non-banking financial 
companies (NBFCs).  
What is a NBFC and what role does it play in India’s Banking sector?  
A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, 
acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other 
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc.  
Following can be cited as key characteristics of NBFCs: 
• NBFCs do not include any institution whose principal business is that of agriculture activity, industrial activity, 
purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ 
construction of immovable property.  
• NBFCs are categorized: 
o in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, 
o non deposit taking NBFCs by their size into systemically important and other non-deposit holding 
companies (NBFC-NDSI and NBFC-ND) and  
o by the kind of activity, they conduct.  
• Major categories of NBFC include Asset Finance Companies, Investment companies, Loan companies, 
Infrastructure Financing companies (IFCs), Systemically Important Core Investment Company (CIC-ND-SI), 
Infrastructure Debt Funds (IDFs), NBFC-Micro Finance Institution (MFI), NBFC-Factors, Mortgage Guarantee 
Companies (MGC) and NBFC- Non-Operative Financial Holding Company (NOFHC) among others.  
• These companies get NBFC License with the 
Reserve Bank of India (RBI). But they are 
regulated by different agencies based on the 
role they play. (See infographic) 
Significance 
NBFCs as a collective play a crucial role in the 
banking sector by increasing the penetration of 
financial products to unbanked areas, providing 
innovative products for both rural and urban 
customers, catering to the need of infrastructure 
lending and to other areas where long term 
financing is needed.  
Status 
In the recent times, the NBFC sector has seen 
tremendous growth. For instance, in last five years 
alone, size of balance sheet of NBFCs has more than 
doubled from Rs 20.72 lakh crore (2015) to Rs 49.22 
lakh crore (2020). As of now, there are close to 
9,560 NBFCs in India.  
Why is there a need for change in regulation of 
NBFCs? 
The growth of NBFCs has simultaneously generated 
challenges vis-à-vis integration with other elements 
of financial sector, management within NBFCs etc. 
 
29                                                                               www.visionias.in                                                                        ©Vision IAS  
Following can be cited as immediate challenges which have generated the need for regulatory reform:  
• Threat of systemic risks: Financial issues faced by key NBFCs like Infrastructure Lending and Financial Services 
Limited (IL&FS) and Dewan Housing Finance Corporation Limited (DHFL) has raised the threat of systemic risks 
posed by the NBFC sector to the overall financial sector.  
o The crises faced by IL&FS can be primarily attributed to the Asset-Liability Mismatch (ALM) due to short-
term borrowing alongside investments in infrastructure projects with long gestation periods.  
o The crises faced by IL&FS lowered the credibility of all major NBFCs. Alongside this, DHFL faced an 
allegation that its promotors were involved in a scam to siphon of money. Compounding these factors, 
share of DHFL plummeted and is currently struggling to pay INR 900 crore worth of debt.  
• Allowing large NBFCs to seamlessly become banks: Recently, RBI’s Internal Working Group (IWG) has revised 
the licensing norms for the Banking Industry. Since key NBFCs are to potentially become Banks, there is a need 
to bring consistency in regulation of Banks and NBFCs, so that the transition of NBFCs to Banks is seamless.  
o For example, if a large NBFC has a Capital Adequacy Ratio (CAR) similar to banks, it would be easier for it 
transition to become a bank as compared to with a lower CAR.  
• Emergence of FinTech Sector:  Emergence of the Financial Technology sector has changed the way Banking 
sector operates by creating innovative financial services which do not fit in traditional definitions. In this light, 
reforms in regulation of NBFCs can bring synergy between seamless operation and interaction of Banks, NBFCs 
and newly emerging element of FinTech.  
What are the changes that RBI has proposed?  
Broadly, RBI has proposed to move from a general approach of light touch regulation to one that monitors larger 
players almost as closely as it 
does banks. To enable this 
idea, it has proposed 
following changes:  
• Creation of four-layer 
regulatory framework 
which includes a Base 
layer, a Middle layer, 
Upper layer and a Top 
layer. The degree of 
regulation in each sector 
is proportional to the 
perception of risk in that 
sector.  
• Classification change for 
NPAs: It has also 
proposed classification of non-performing assets (NPAs) of base layer NBFCs from 180 days to 90 days overdue.  
What would be the potential impact of these changes?  
• Balance between flexibility of NBFCs and the potential systemic risks: The four-layered structure entails a 
largely laissez-faire approach for smaller NBFCs, plugging some of the arbitrages available to mid-sized NBFCs 
vis-à-vis banks, and imposing tougher ‘bank-like’ capitalization, governance and monitoring norms for the 
largest players and those which could pose a systemic risk due to the nature of their operations. 
• Improved trust and confidence in the NBFC Sector: Stricter regulation by RBI alongside early reporting of 
NPAs will instill confidence in the NBFC market potentially driving up the share prices, attracting more 
depositors and translation to better credit ratings.  
• Increased transparency in the sector: The primary issue that the NBFC sector faced was the lack of 
transparency which created financial risks for the overall banking system. Thus, more transparency in NBFCs 
via regulatory route would enable seamless flow of information, thus improving the transparency and risk 
assessment for the whole financial sector.  
 
 
30                                                                               www.visionias.in                                                                        ©Vision IAS  
Conclusion  
Given the banking sector’s own woes over the past two years (PMC Bank, Yes Bank, Lakshmi Vilas Bank), a holistic 
reboot of the oversight mechanism for NBFCs and banks is critical to retain confidence and maintain financial 
stability. Regulation of NBFCs which can lend for activities banks often do not support, be it micro-loans or 
infrastructure projects, if adequately formalized has the potential to ensure that the fledgling economic recovery 
is not hampered by funding constraints. 
3.2. DIGITAL LENDING 
Why in news? 
The Reserve Bank of India (RBI) has 
constituted a working group on digital 
lending. 
More about news 
• Recent spurt and popularity of 
online lending platforms/ mobile 
lending apps has raised certain 
serious concerns which have wider 
systemic implications. 
• Against this backdrop, the 
Working group is constituted by 
RBI to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated 
players. 
• The working group will evaluate digital lending activities and assess the penetration and standards of 
outsourced digital lending activities in RBI regulated entities 
• It will also identify the risks posed by unregulated 
digital lending to financial stability, regulated 
entities and consumers and recommend regulatory 
or statutory measures and robust fair practices code 
for digital lending players. 
• RBI had earlier clarified that legitimate public 
lending activities can be undertaken by banks, non-
banking financial companies (NBFCs) registered 
with RBI and other entities that are regulated by the 
State governments under statutory provisions, such 
as the money lending acts of the States concerned. 
• Further the RBI mandated digital lending platforms 
used on behalf of banks and NBFCs to disclose name 
of the bank or NBFC upfront to the customers. 
About digital lending 
• Digital lending is the process of offering loans that 
are applied for, disbursed, and managed through 
digital channels, in which lenders use digitized data 
to inform credit decisions and build intelligent 
customer engagement.  
• The digital lending ecosystem is complex and 
evolving. Around the world, digital lending models 
(see infographic) are characterized by distinct 
market structures, regulatory environments, and 
customer needs. 
 
31                                                                               www.visionias.in                                                                        ©Vision IAS  
• In India government already created stack of public digital identity, payments, and documentation 
infrastructure, which conducive to digital lending.  
• Also, Aadhaar Enabled Payments System (AEPS) and high smartphone penetration and a focus on digital 
India programme adds complements to India’s enabling regulation. 
How digital lending will impact financial service ecosystem in India? 
• Efficiency and reach: Digital lending are enabling financial service providers (FSPs) to offer better products to 
more underserved clients in faster, fair, efficient and inclusive manner. 
• Innovation and competitiveness: Cost-efficiency gains from FinTech models drive product innovation, which 
will diversify and specialise 
business models to target 
wider markets. Also, it will  
increase participation of non-
traditional players. 
• Credit risk management: 
Enhancements to 
underwriting/ credit models 
using data from non-traditional 
data sources will improve 
robustness in credit risk 
management. 
• Ecosystem of growth and 
partnership: Supportive and 
collaborative regulators will aid 
further growth of the FinTech 
ecosystem in convenience of 
segmentation, targeting and 
positioning (STP) online models 
and consumers to increase financial inclusion and mobile penetration. 
What are the challenges faced by the digital lending ecosystem in India? 
• Unauthorised digital lenders: There are cases about individuals and small businesses falling prey to a growing 
number of unauthorised digital lending platforms/mobile apps. 
• Over-indebtedness and NPA: Taking out multiple simultaneous loans due to ease of access, limited or no 
evaluation of capacity to repay, limited customer understanding, could lead to over-indebtedness of 
consumers and NPA of lenders.  
• High interest rates and aggressive collection: Unauthorised digital lending platforms are charging excessive 
rates of interest and high-handed recovery methods. 
• Data privacy: There are concerns raised about misuse of agreements to access data on the mobile phones of 
the borrowers by digital lending platforms. 
How challenges in digital lending ecosystem can be tackled? 
• National Lending Corporation (NLC): An umbrella body NLC focussed on regulation over lending on line of the 
National Payments Corporation of India (NPCI) needs to be formed under the oversight of RBI. 
• Use of technology: Application of artificial intelligence, machine learning, and blockchain in the lending space 
should be increased to evaluate capacity of consumers to overcome problem of Over-indebtedness and NPA. 
• Financial literacy: It is vital to make aware consumers about frauds by unauthorised digital lenders and 
understand the digital lending ecosystem well. 
• Data protection: There must be clear guidelines to ensure data security, privacy and confidentiality of 
consumers.   
• Code of conduct: Digital lenders should proactively develop and commit to a code of conduct that outlines the 
principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance 
redressal. 
 
32                                                                               www.visionias.in                                                                        ©Vision IAS  
3.3. STARTUP ECOSYSTEM IN INDIA  
Why in news?  
Recently, Prime Minister inaugurated the ‘Prarambh: Startup India International Summit’. This is the largest 
Startup India International Summit organized by the Government of India since the launch of the Startup India 
Initiative in 2016. 
More on news 
• Prarambh is expected to bring together top policy makers, industry, academia, investors, startups and all 
stakeholders from across the globe in order to attain objectives like-  
o Deliberating on good practices from best of the ecosystems across the world.  
o Showcase the spread and depth of entrepreneurship based on innovation in India.  
o Attain attention of global capital for startups in India, mobilize domestic capital, provide opportunities 
for accessing international markets and evolve enabling policy provisions. 
• It is being organized by Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of 
Commerce and Industry.  
• Over 25 countries and more than 200 global speakers including members of BIMSTEC (Bay of Bengal Initiative 
for Multi-Sectoral Technical and Economic Cooperation) countries participated in the inaugural event. 
What is a Start-up?  
The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry has defined a start-
up as an entity that is incorporated as a private limited company (as defined in the Companies Act, 2013) or 
Registered as a partnership firm (under the Partnership Act, 1932) or Registered as a limited liability partnership 
(under the Limited Liability Partnership Act, 2008) in India.  
Furthermore, the department has stated that, an entity will be considered a start-up: 
• Up to a period of ten years from the date of incorporation/registration, 
• Provided it has an annual turnover not exceeding Rs 100 crore in any preceding financial year, 
• If it works towards innovation, development or improvement of products or processes or services, or if it's a 
scalable business model with a high potential of employment generation or wealth creation.  
What is current status of Start-up Ecosystem in 
India?  
• India is currently the third-largest startup 
ecosystem in the world with close to 38 
unicorns (as of 2019) and with a collective 
valuation at around $130 billion.  
• Growth of the Start-up has increased at an 
average rate 15% year on year. Also, this 
growth in not limited to one or two sectors 
but is spread across sectors.  
o Enormous growth has been experienced 
in technology centric startups in health 
sector, education sector, agriculture etc. 
employing latest technologies like 
Internet of Things, Blockchain, Artificial 
Intelligence among others.   
What are the challenges Startup face in the current ecosystem?  
• Raising funds: A recent report indicated that 85% of the new companies are underfunded in the Indian startup 
parlance. Primary reason for this can be cited as weak Venture Capitalist and Angel investor framework 
alongside low risk appetite of the Indian market. 
Socio-economic impact created by startups 
Startups have showcased positive disruptive impact in the 
economic sphere with encouraging employment, accelerating 
adoption of technology and filling the prevalent economic gaps.  
Alongside, the startups are also changing the demographic 
characteristics of today’s business-  
• 44 per cent recognized startups have women directors and 
number of women working in these start up is very high.  
• 45 per cent startups are in tier 2 and tier 3 cities, working as 
the brand ambassadors of the local products.  
• Every state is supporting and incubating startups as per local 
possibilities and 80 percent of districts of the country are now 
part of the Startup India mission.  
• Youth from all types of background are able to realize their 
potential in this ecosystem resulting in a mindset change 
from aspiring for a job to being a job creator.  
Read More
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