Introduction to NBFCs
Nonbank Financial Companies (NBFCs), also known as Nonbank Financial Institutions (NBFIs), are entities offering various banking services without holding a traditional banking license. These institutions do not accept demand deposits, meaning readily available funds such as those in checking or savings accounts, from the public. As a result, NBFCs fall outside the purview of federal and state financial regulators that apply to conventional banks.
NBFCs offer an array of services including loans and credit facilities, currency exchange, retirement planning, money markets, underwriting, and merger activities. The Dodd-Frank Wall Street Reform and Consumer Protection Act categorizes nonbank financial companies into three types: foreign nonbank financial companies, U.S. nonbank financial companies, and U.S. nonbank financial companies supervised by the Board of Governors.
Foreign nonbank financial companies are incorporated or organized outside the United States and predominantly engaged in nonbank financial activities. U.S. nonbank financial companies are also predominantly involved in nonbank financial services but have been established in the United States. The third type is subject to oversight by the Federal Reserve Board of Governors due to their potential impact on the country’s financial stability.
Understanding the Role and Evolution of NBFCs
NBFCs gained significant attention following the 2008 financial crisis when they were labeled ‘shadow banks.’ The term was coined by economist Paul McCulley, referring to a growing network of institutions contributing to easy money lending environments. While it may seem ominous, prominent investment firms like Lehman Brothers and Bear Stearns were among the nonbank entities involved in shadow banking at the heart of the crisis.
Since the financial meltdown, traditional banks have undergone heightened regulatory scrutiny, leading to a decrease in lending activities. In response, NBFCs flourished as they could operate outside banking regulations. The term ‘shadow bank’ emerged due to their resemblance to conventional banks but with less oversight.
Nonbank Financial Companies: Advantages and Disadvantages
The advantages of nonbank financial companies include providing alternate sources of funding, direct contact between clients and the institutions, high yields for investors, and liquidity for the financial system. Conversely, critics argue that NBFCs lack accountability to regulators, may operate with a lack of transparency, and pose a potential risk to the financial system and economy.
Real-World Example: The Rise of Peer-to-Peer (P2P) Lending
Since the 2008 crisis, P2P lending has emerged as the fastest-growing segment of nonbank lending. P2P platforms connect borrowers with investors and have gained popularity through the power of social networking. Websites like LendingClub Corp., StreetShares, and Prosper facilitate loans between individuals. The growth in P2P lending has been significant; as per a report from IBIS World, $938.6 million was held in Peer-to-Peer Lending Platforms in the US during 2022, representing a 7.9% increase over the previous year.
Conclusion: NBFCs and Their Impact on the Financial Sector
NBFCs offer essential financial services to businesses and individuals outside the realm of traditional banking. While they are unregulated compared to banks, advocates argue that they provide valuable alternatives and efficiencies. However, critics remain concerned about their lack of transparency and potential systemic risks. With the rise of various types of NBFCs following the 2008 crisis, understanding their role and impact on the financial sector is crucial for both investors and regulators alike.
NBFCs: Services Offered
Nonbank Financial Companies (NBFCs) provide various financial services, allowing them to cater to diverse client needs beyond the scope of traditional banks. These institutions serve as an essential alternative for individuals and businesses seeking financing or credit solutions that may not meet the strict criteria set by conventional banking institutions. Understanding the array of services offered by NBFCs provides insight into their significance in today’s complex financial landscape.
1. Loans and Credit Facilities: NBFCs offer a multitude of loan options catering to diverse client segments, including business loans, mortgage loans, personal loans, student loans, auto loans, and various types of commercial property loans.
2. Currency Exchange: NBFCs facilitate currency exchange services for clients engaging in international trade or traveling abroad, helping them manage foreign currency transactions efficiently.
3. Retirement Planning: NBFCs provide financial advisory services tailored to retirement planning, assisting individuals in developing comprehensive plans designed to meet their long-term financial objectives and secure their future.
4. Money Markets: These institutions operate in the money markets, which deal with short-term borrowing and lending, offering access to liquidity for businesses, institutions, and individuals alike. NBFCs serve as intermediaries between various participants in the money market, ensuring a smooth exchange of funds and maintaining market stability.
5. Underwriting: NBFCs engage in underwriting activities, assisting businesses and governments in issuing securities through the creation and distribution of new financial instruments such as bonds or stocks. This service plays an integral role in providing access to capital markets for various sectors that may struggle to attract traditional banking support.
6. Merger Activities: NBFCs can also provide advisory services during mergers, acquisitions, or other corporate transactions, helping companies navigate the complex financial aspects of these deals and maximizing value for all parties involved.
By offering a wide range of financial services, NBFCs enable clients to access customized solutions tailored to their specific needs, ensuring they remain competitive in the marketplace. Additionally, they provide valuable liquidity to the financial system as a whole by offering alternative funding sources that complement those provided by traditional banking institutions.
Dodd-Frank Act and Nonbank Financial Companies
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, brought significant changes to the regulatory framework for financial institutions in the United States. One crucial aspect of this legislation was its definition of nonbank financial companies (NBFCs), which were not subject to banking regulations but primarily engaged in financial activities.
The Dodd-Frank Act defined three main types of NBFCs: foreign, U.S.-registered, and those supervised by the Federal Reserve Board of Governors (FRB).
1. Foreign nonbank financial companies (FNBFCs) are entities incorporated or organized outside the U.S. with more than 85% of their consolidated annual gross revenues or consolidated assets being financial in nature. FNBFCs may or may not have a presence in the United States, making it essential to understand their potential impact on the American financial system.
2. U.S.-registered nonbank financial companies (RNBFCs) are domestic entities primarily engaged in nonbanking financial activities with more than 85% of their consolidated annual gross revenues or consolidated assets being financial in nature. Unlike FNBFCs, RNBFCs are subject to various regulatory bodies depending on the specific industry or sector they operate in (e.g., SEC for securities firms, FINRA for broker-dealers).
3. Nonbank financial companies supervised by the Federal Reserve Board of Governors (Federal NBFCs) are entities primarily engaged in nonbanking financial activities and have been determined by the FRB to pose a systemic risk to the U.S. financial stability due to their size, scope, or interconnectedness with other financial institutions. As a result, these companies are subjected to enhanced regulatory oversight and supervision from the FRB.
The Dodd-Frank Act was enacted in response to the 2008 financial crisis when shadow banking—the operations of nonbank entities that perform traditional banking functions but outside the regulated banking system—played a significant role in amplifying the crisis and its subsequent economic downturn. The Act aimed to mitigate these risks by implementing increased transparency, regulation, and accountability for NBFCs.
Despite the efforts of Dodd-Frank, nonbank financial companies have continued to expand their presence and influence within the financial sector. Understanding the role and implications of NBFCs is essential as they represent an integral part of the global financial landscape.
Shadow Banks and the 2008 Financial Crisis
The term “shadow banking” was first coined by economist Paul McCulley during the run-up to the 2008 financial crisis. McCulley, who at that time served as the managing director of Pacific Investment Management Company LLC (PIMCO), used this term to describe the expanding matrix of institutions contributing to the easy-money lending environment that eventually led to the subprime mortgage meltdown and subsequent crisis.
Shadow banks are financial entities that provide bank-like services but do not possess a banking license. In the wake of the 2008 financial crisis, these nonbank financial companies (NBFCs) gained significant attention due to their role in the collapse. Well-known brokerages and investment firms, such as Lehman Brothers and Bear Stearns, were at the center of the crisis as shadow banks.
Traditional banks, which were subjected to stringent regulations following the crisis, tightened up on their lending activities. Consequently, people seeking alternative funding sources turned to NBFCs. This created a boom in nonbank financial institutions, providing an important role in meeting the credit demands that were unmet by traditional banks.
The 2008 financial crisis marked a turning point for the shadow banking sector, with the number and variety of NBFCs growing significantly since then. Critics argue that this increased presence poses a risk to the US economy due to their lack of transparency and accountability to regulatory authorities.
In the decade following the crisis, various types of nonbank financial companies emerged, including investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity firms, and peer-to-peer (P2P) lending platforms. These entities catered to both businesses and individuals, offering alternate sources of funding and credit with lower costs and fees through disintermediation.
The rapid growth in the P2P lending segment of the nonbank financial sector can be attributed to its ability to harness the power of social networking. Peer-to-peer (P2P) lending websites bring like-minded individuals together, enabling borrowers who might not qualify for a traditional bank loan and investors seeking high yields on their investments.
The P2P lending market in the US is projected to reach $938.6 million by 2022 and has experienced a 7.9% annual increase. Despite its small fraction of the total loans issued, the growth of this sector underscores the growing importance of NBFCs as an essential alternative source of funding and credit for individuals and businesses outside the reach of traditional banking institutions.
While proponents argue that these nonbank financial companies provide valuable alternatives to conventional banks, critics express concerns about their lack of regulatory oversight and potential systemic risk to the US economy. However, NBFCs have continued to thrive as they offer a range of services, from investing to borrowing, while providing opportunities for individuals and businesses to access credit in an increasingly competitive financial landscape.
In summary, shadow banks or nonbank financial companies play a crucial role in meeting unmet credit demands following the 2008 financial crisis. The growth and variety of these entities have transformed the financial sector, presenting both opportunities and risks to the economy.
Advantages and Disadvantages of NBFCs
Nonbank financial companies (NBFCs), also known as nonbank financial institutions (NBFIs), have garnered considerable attention in the financial world due to their increasing significance since the 2008 financial crisis. NBFCs play a pivotal role in offering various banking services outside the conventional banking framework, without holding a banking license. They provide services such as loans and credit facilities, currency exchange, retirement planning, money markets, underwriting, and merger activities.
Understanding the Advantages of NBFCs:
1. Alternative Source of Funding and Credit
NBFCs serve as an alternative source of funding and credit for both businesses and individuals, particularly those who may face difficulty qualifying under stricter banking standards imposed by traditional banks.
2. Direct Client Contact
Unlike banks, which often act as intermediaries, NBFCs enable direct contact between clients and the institutions themselves, eliminating the need for intermediation and resulting in lower costs, fees, and rates through a process called disintermediation.
3. High Yields for Investors
NBFCs can offer higher yields for investors compared to traditional savings accounts or CDs provided by banks. This makes NBFC investments appealing for those seeking better returns on their capital.
4. Liquidity for the Financial System
Investment in NBFCs can contribute significantly to the overall liquidity of the financial system, helping to ensure an efficient flow of funds and maintaining a healthy economy.
Understanding the Disadvantages of NBFCs:
1. Limited Regulation and Oversight
As nonbank entities, NBFCs operate outside the regulatory oversight traditionally provided by federal and state authorities for banks, raising concerns about accountability and transparency.
2. Systemic Risk to Financial System and Economy
The lack of regulation and oversight may contribute to systemic risk within the financial sector and economy if NBFCs experience significant financial instability or collapse, as seen during the 2008 crisis.
In conclusion, while NBFCs offer advantages like alternate sources of funding, direct client contact, high yields for investors, and liquidity for the financial system, they also pose challenges due to their limited regulation and oversight and the potential systemic risk they present. It’s essential for policymakers, regulators, and investors to consider both the pros and cons when engaging with NBFCs and implementing regulations to mitigate the risks while preserving their benefits.
Examples of Nonbank Financial Companies
Various types of nonbank financial companies (NBFCs) contribute significantly to the financial sector by offering an array of services beyond those provided by traditional banks. These entities include casinos, securities firms, money services businesses, insurance companies, loan or finance companies, operators of credit card systems, and peer-to-peer (P2P) lenders.
Casinos and card clubs are not typically associated with banking activities, but they engage in financial transactions by offering loans to players, accepting payments for gaming chips, and providing financial services through ATMs on their premises.
Securities and commodities firms—encompassing brokers/dealers, investment advisers, mutual funds, hedge funds, and commodity traders—are significant contributors to the NBFC sector. They offer a diverse range of financial services involving buying and selling securities, managing clients’ investments, or trading commodities on behalf of their clients.
Money services businesses (MSBs) facilitate transactions related to foreign exchange, money transfers, check cashing, and payment processing services for individuals and businesses, providing alternatives to traditional banking institutions.
Insurance companies operate outside the traditional banking sector but are integral to risk management and wealth protection. They collect premiums, invest assets, issue policies, and pay claims to their policyholders.
Loan or finance companies focus on lending activities by offering various types of loans—mortgages, auto loans, personal loans, business loans, and more—to individuals and businesses. They often provide alternative financing solutions for those who may not qualify for traditional bank loans.
Operators of credit card systems process transactions for consumers using credit cards issued by banks, but they are considered NBFCs because they manage the payment processing infrastructure and provide other related services.
Peer-to-peer (P2P) lending platforms connect prospective borrowers with investors willing to fund their loans. These NBFCs have gained popularity due to their ability to offer high yields for investors while providing a diverse portfolio of investments. Borrowers benefit from accessing funding sources outside the traditional banking system, making P2P lending an essential part of the nonbank financial sector’s growth since the 2008 financial crisis.
Understanding NBFCs and their services is crucial for investors, borrowers, and regulators alike to navigate this complex landscape and make informed decisions in an increasingly digital financial world.
NBFC Controversy
Despite their significant contributions to financial services and meeting the growing demand for various types of loans and investments, nonbank financial companies (NBFCs) have been the subject of criticism regarding transparency, regulatory oversight, systemic risk, and accountability. This section examines NBFC controversies and their implications for the broader financial system and economy.
Lack of Transparency and Regulatory Oversight:
One major critique against NBFCs is their lack of transparency and regulatory oversight compared to traditional banks. With no standardized reporting requirements or clear regulations, these companies may operate in secrecy and face minimal accountability for their business practices. While some nonbank financial institutions fall under the jurisdiction of organizations like the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), others may escape any formal oversight altogether.
Impact on Financial System and Economy:
Another concern is the potential systemic risk that NBFCs pose to financial stability and economic growth. Given their relatively unregulated nature, NBFCs could create vulnerabilities in the financial system by engaging in riskier practices or concentrating on specific markets or sectors. During the 2008 financial crisis, nonbank financial companies played a significant role in exacerbating the crisis through complex and interconnected financial derivatives known as collateralized debt obligations (CDOs) and other derivative instruments.
The Dodd-Frank Wall Street Reform and Consumer Protection Act attempted to address concerns by regulating some NBFCs, but not all are subject to its provisions. For instance, foreign nonbank financial companies are generally excluded from the legislation’s regulations. This has left a gap in regulatory oversight for these entities.
Advantages and Disadvantages:
Proponents argue that NBFCs provide valuable services such as alternative sources of credit, investment opportunities, and efficient operations, particularly for underserved or unbanked populations. They also contribute to financial innovation and competition. However, they can carry certain disadvantages, including potential lack of transparency, systemic risk, and the absence of consumer protections provided by traditional banks.
Examples:
Real-world examples of NBFCs include entities like casinos, securities firms, money services businesses, insurance companies, loan or finance companies, operators of credit card systems, private equity funds, hedge funds, mortgage providers, and peer-to-peer (P2P) lending platforms. Some of the most well-known examples include Quicken Loans, Fidelity Investments, and LendingClub Corp.
Real-World Example: Peer-to-Peer (P2P) Lending
One specific example that has gained significant attention in recent years is peer-to-peer (P2P) lending, a type of NBFC where investors can directly fund loans to borrowers through online platforms. P2P lending has grown rapidly in popularity due to its ease of access and the potential for high returns on investment. However, it also raises concerns related to transparency, risk management, and accountability given that these platforms are not subject to the same regulatory framework as traditional banks.
FAQs:
1. What is a nonbank financial company?
A nonbank financial company is an entity primarily engaged in financial activities like investment banking, mortgage lending, money market funds, insurance companies, hedge funds, private equity funds, and P2P lending that does not have a traditional banking license.
2. Are NBFCs subject to regulatory oversight?
Not all nonbank financial companies are subject to the same level of regulatory oversight as traditional banks. While some may fall under the jurisdiction of organizations like the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), others operate without formal oversight.
3. What is the difference between a bank and a nonbank financial company?
A bank is an institution that accepts deposits from individuals and businesses, provides loans and other banking services, and holds a federal or state charter to conduct such activities under various regulations. A nonbank financial company offers similar services but does not have a traditional banking license, making it subject to different types of regulation, if any.
4. Are NBFCs safe for investors?
The safety of investments in NBFCs can vary depending on the specific institution and its regulatory oversight, transparency, risk management practices, and financial stability. Some NBFCs may offer attractive yields or investment opportunities but carry higher levels of risk compared to traditional banks. Investors should carefully consider their investment objectives and risk tolerance when investing in NBFCs.
5. What are the risks associated with nonbank financial companies?
The risks associated with nonbank financial companies include lack of transparency, minimal regulatory oversight, systemic risk, operational risks, and concentration risks. Additionally, investors should be aware that different types of NBFCs may carry unique risks based on their business model, industry sector, or size. Proper due diligence and risk management practices are essential when investing in NBFCs.
Real-World Example of NBFCs: Peer-to-Peer (P2P) Lending
Investing in peer-to-peer (P2P) lending platforms is an increasingly popular nonbank financial service that connects borrowers with investors willing to lend money, bypassing traditional banks as intermediaries. This innovative method of providing loans and generating returns has surged since the 2008 financial crisis, with an increasing number of P2P lenders expanding their offerings and attracting a growing customer base.
The rise of P2P lending is due in part to the limitations imposed on traditional banks following the crisis. Stricter regulations and requirements placed on banks to secure loans, combined with an increased focus on risk management, left many individuals and businesses unable to qualify for bank financing. This gap was filled by nonbank financial institutions like P2P platforms, which have been able to offer loans with more lenient terms and greater flexibility.
Investors in P2P lending platforms typically enjoy several benefits:
1. High returns: Peer-to-peer (P2P) investors can earn attractive yields compared to traditional fixed income investments like bonds or certificates of deposit (CDs). This is because P2P loans carry higher interest rates, making them more lucrative for investors.
2. Diversification: Investing in multiple loans spread across various borrowers and risk profiles reduces the overall risk to an investor’s portfolio. In contrast, traditional bonds are often concentrated in a single issuer or sector, leaving investors exposed to greater market risk.
3. Transparency: P2P platforms provide detailed information about the borrowers, loan terms, and credit history, allowing investors to make informed decisions before investing. Additionally, P2P sites usually facilitate communication between borrowers and lenders, creating a sense of community engagement that is often absent in traditional financial institutions.
4. Quick access: Peer-to-peer lending platforms offer a quicker turnaround for loan approvals compared to banks, which can be lengthy and cumbersome processes. This not only benefits borrowers seeking funds but also investors looking to diversify their portfolios in a timely fashion.
However, P2P lending is not without its challenges and risks:
1. Regulatory uncertainty: As nonbank financial institutions, peer-to-peer platforms operate outside the traditional banking regulations and frameworks, which can lead to inconsistent regulatory oversight, ambiguous rules, and potential investor confusion.
2. Liquidity risk: In a P2P loan, investors are generally required to hold their loans until maturity, meaning that they have limited liquidity when compared to traditional fixed income securities like bonds or mutual funds. This can make it difficult for investors to sell their loans if they need access to cash quickly.
3. Credit risk: As with all forms of lending, there is a potential for default on the part of borrowers. Peer-to-peer platforms generally employ various credit assessment tools and methodologies to minimize this risk; however, they cannot entirely eliminate it.
4. Platform risk: The success and stability of P2P lending platforms are dependent upon their ability to attract both borrowers and investors. If a platform fails, the investors may not be able to recover their funds or receive promised interest payments.
Despite these challenges, peer-to-peer lending remains an attractive option for many investors seeking high yields and alternative sources of income outside traditional financial institutions. As the sector continues to evolve and mature, it is likely that further advancements in technology, transparency, and regulatory oversight will help mitigate potential risks and solidify its place within the broader financial landscape.
Why Are NBFCs Called Shadow Banks?
The term ‘shadow banks’ emerged during the 2007-2008 financial crisis. Economist Paul McCulley, at that time Managing Director at PIMCO, coined this term to describe how various nonbank financial institutions (NBFCs) outside conventional banking frameworks contributed to the lending environment, which subsequently led to the crisis. While the moniker ‘shadow banks’ might sound ominous, it refers to financial entities that operate beyond traditional banking regulations and provide services akin to those offered by commercial banks.
The shadow banking sector includes various types of nonbank financial companies (NBFCs). They include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity firms, and P2P lenders. These entities have been growing in number and significance since the crisis, offering alternatives to credit and funding services that traditional banking institutions might not provide.
However, it is important to note that shadow banks do not accept deposits from the public, unlike commercial banks. Instead, they raise funds through debt issuance or by borrowing from other financial institutions. This fundamental difference in their business model sets NBFCs apart from banks and necessitates different regulatory oversight.
Shadow banking’s origins can be traced back to the late 1970s when the U.S. Federal Reserve adopted a monetary policy known as “monetarism.” The objective was to control inflation by limiting the growth of money supply. This shift led banks to seek alternative sources for liquidity, giving rise to the shadow banking sector.
The financial crisis of 2007-2008 brought shadow banking into sharp focus, with Lehman Brothers and Bear Stearns, two significant investment banks, being among its most prominent players. The ensuing crisis highlighted the importance of understanding the role these nonbank entities play in the financial system, leading to increased regulatory scrutiny and debate about their potential risks.
The term ‘shadow banking’ is often used interchangeably with terms like ‘nonbank financial sector,’ ‘alternative financial institutions,’ or ‘unregulated banks.’ Despite this semantic fluidity, it’s crucial to recognize that shadow banking refers to NBFCs primarily engaged in activities that mimic the functions of traditional banks but outside their regulatory framework.
The emergence and growth of shadow banking have significant implications for financial regulation. The lack of regulatory oversight and transparency could potentially lead to risks akin to those experienced during the 2008 financial crisis. In response, policymakers are exploring ways to strike a balance between fostering innovation in the financial sector while ensuring consumer protection and maintaining financial stability.
Understanding the intricacies of shadow banking is essential for investors, regulators, and anyone interested in the financial sector’s evolution. By shedding light on these nonbank entities and their role in the financial ecosystem, we can foster a more informed dialogue about their potential risks and benefits.
FAQs: Frequently Asked Questions about Nonbank Financial Companies
Nonbank financial companies (NBFCs) are entities that provide banking services but do not hold a banking license. They play an important role in meeting the increasing demand for credit and loans, especially for individuals and businesses that may not qualify under the stricter requirements set by traditional banks. NBFCs have existed since before the Dodd-Frank Act but gained significant attention following the 2008 financial crisis when they were dubbed ‘shadow banks’ due to their unregulated nature compared to traditional banking institutions. In this section, we answer some frequently asked questions about nonbank financial companies and their impact on the economy.
What Types of Services Does a Nonbank Financial Company Offer?
Nonbank financial companies (NBFCs) offer various services such as loans, credit facilities, currency exchange, retirement planning, money markets, underwriting, merger activities, and more. Their portfolio can include investment banking, mortgage lending, money market funds, insurance companies, hedge funds, private equity funds, and P2P lending platforms.
How Does the Dodd-Frank Act Define NBFCs?
The Dodd-Frank Wall Street Reform and Consumer Protection Act classifies nonbank financial companies (NBFCs) as entities predominantly engaged in a financial activity when over 85% of their consolidated annual gross revenues or consolidated assets are financial in nature. This law further categorizes NBFCs into three categories: foreign nonbanks, U.S. nonbanks, and those supervised by the Board of Governors based on potential risks to the US financial stability.
What Happened During the 2008 Financial Crisis?
During the 2008 financial crisis, traditional banks tightened their loan approval processes, leading many individuals and businesses to seek alternative financing options. This created an opportunity for NBFCs to fill the gap by offering loans and other financial services outside the constraints of banking regulations. Many well-known brokerages and investment firms like Lehman Brothers and Bear Stearns were involved in shadow banking activities, contributing to the crisis.
What Are the Pros and Cons of NBFCs?
NBFCs offer several advantages, including alternative sources of funding and credit, direct contact with clients, high yields for investors, liquidity for the financial system, and disintermediation. However, they lack regulatory oversight, which can result in non-transparent operations and systemic risks to the financial system and economy.
Examples of NBFCs: Casinos, Securities Firms, Money Services Businesses, Insurance Companies, Loan or Finance Companies, Operators of Credit Card Systems, P2P Lending Platforms.
What Is the Difference Between NBFCs and Banks?
NBFCs do not accept demand deposits from the public and are not subject to the same regulatory oversight as banks. They offer various financial services but operate outside the traditional banking framework.
Why Are NBFCs Called Shadow Banks?
NBFCs, also known as ‘shadow banks,’ gained this name because they function like banks but operate with fewer regulatory controls. Some argue that their unregulated nature poses risks to the financial system, while others see them as valuable alternative sources of credit and funding.