In India, both ๐๐ต๐ฒ ๐ฆ๐๐๐ ๐ฎ๐ป๐ฑ ๐๐ต๐ฒ ๐ฅ๐ฒ๐๐ฒ๐ฟ๐๐ฒ ๐๐ฎ๐ป๐ธ ๐ผ๐ณ ๐๐ป๐ฑ๐ถ๐ฎ are responsible for overseeing Non-Banking Financial Companies (NBFCs), which are integral to the financial sector. ๐ก๐๐๐๐ facilitate the lending process and play a pivotal role in the Indian financial system by addressing the diverse credit requirements of various economic sectors.
Over time, the NBFC sector has evolved significantly in terms of its operations, size, technological sophistication, and expansion into additional markets for financial services and products.
Beyond being successful in the financial sector, NBFCs face challenges in the form of risk.
Listed below are several significant risk factors that the NBFCs encounter in their daily operations. These key risk factors are:
๐๐ฟ๐ฒ๐ฑ๐ถ๐ ๐ฅ๐ถ๐๐ธ
Credit risk pertains to the possibility of a debt becoming uncollectible due to a borrowerโs failure to meet obligatory payments. This risk may materialize due to factors such as legal actions initiated by defaulting borrowers and collateral providers, a sluggish collateral market, or a decrease in the market value, potentially resulting in the company and its subsidiaries not being able to fully recover the collateralโs value or experiencing delays in doing so.
๐๐ถ๐พ๐๐ถ๐ฑ๐ถ๐๐ ๐ฅ๐ถ๐๐ธ
Liquidity risk refers to the potential situation in which there may not be sufficient funds readily available to meet a financial obligation when it becomes due. When there is an insufficient amount of cash to fulfil a pending liability, this situation is termed a liquidity risk. The biggest factor in a mismatch between assets and liabilities is the differing maturities between assets and liabilities.
๐ ๐ฎ๐ฟ๐ธ๐ฒ๐ ๐ฅ๐ถ๐๐ธ
The risk of experiencing financial losses as a result of fluctuations in prices within the markets in which the institution is involved, such as currency, stocks, bonds, commodities, etc. Market risk poses a potential challenge to our sustained competitive edge, which may arise from the choices we make regarding markets, resources, and delivery methods.
๐ข๐ฝ๐ฒ๐ฟ๐ฎ๐๐ถ๐ผ๐ป๐ฎ๐น ๐ฅ๐ถ๐๐ธ
Operational risk entails the potential for financial losses arising from mistakes, breaches, disruptions, or damages, whether deliberate or unintentional, attributed to individuals, internal procedures, systems, or external circumstances.
The RBI and the Ministry of Finance have periodically introduced various initiatives to support borrowers and institutions in navigating this unparalleled and challenging period. However, it remains the duty of each institution to proactively implement measures to mitigate the anticipated risks in their business.