NBFCs have registered a robust growth, a CAGR of 19% over the past few years to be precise.
Traditionally, the financial sector in India was dependent and solely dominated by the private financial institutions. There used to be a time when banks and other financial institutions hesitated in lending to small businesses, considering it as a risky proportion. But now the times have changed, the nation’s current financial scenario is being balanced out equally between both the private and public sector financial institutions.
This has paved the way for meeting the credit needs of the unorganized sector and filling up the long-left financial gap between the formal and medium enterprises on the one hand and the unorganized ones on the other. The small business finance market that was continually getting rejected from the banks have now turned out to be a great opportunity for the Non-banking finance companies (NBFCs) with localized presence and domain knowledge. Since their association with the small firm’s financial sector, the NBFCs have evolved substantially in terms of operation, a variety of products, instruments, technological sophistication, etc.
An Era of Progressive Shift
Undoubtedly, the NBFCs have scripted a great success story that will reap some of the most fruitful benefits in the near future. Taking a cue from the recent statistics, it’s evident that in terms of financial assets, NBFCs have registered a robust growth, i.e., a compound annual growth rate (CAGR) of 19% over the past few years. Their contribution to the Indian economy has risen all the way from 8.4% in 2006 to more than 14% in March 2015. The NBFCs stand supported by several factors such as superior product lines, low cost, broader and effective reach, robust risk management capabilities to check and control bad debts, and proper comprehension of their customer segments. While catering to the needs of the informal sector, the NBFCs primarily rely on their ability to assess the clients’ income, develop templates accordingly to gain a better insight of the margins and cash flows of local businesses, and have a strong in-house process of credit and security verification. The number of originators in the small sector and the value of assets managed by them are very less than the demand. If talking on an overall average market scale, presently they are collectively managing less than INR 4000 Crore.
While the banking industry struggled to get rid of the rising pile of bad loans, their counterparts, better known as the Non-banking financial companies, improved their performance on most of the metrics in the fiscal year 2015. It is mentioned in the financial stability report (FSR) of June 2016 the NBFC loans expanded 16.6% annually which was twice as fast as the 8.8% credit growth across the banking sector on an aggregate level.
The aggregate balance sheet of the NBFC sector expanded 15.5% in fiscal 2016 compared with 15.7% in the year 2015. The non-food credit data compiled by Reserve Bank of India clearly indicates that NBFCs have started moving at twice the pace of the banks. In August 2016, the regulated NBFCs got the union cabinet’s permit to enjoy the benefits of Foreign Direct Investment (FDI) but only from the automatic routes. According to a 2016 report by consulting firm PwC India, it is stated that by 2020, the credit lending ability of Indian NBFCs is estimated to account for anywhere between 18.2% and 20.9% of the total credit off-take in the country.
Dynamics of Growth
Indeed it is evident that the development of NBFCs segment within the overall financial system of India is picking up as a challenge for the other sectors – i.e., banks to innovate, to improve quality and competence. At times, in a number of un-treaded trajectories, NBFCs were the first to explore the market and develop before the banks entered the scene.
Their unique team of underwriting and credit delivery has gained much appreciation and credits for scaling up the finance provision for the small businesses while maintaining strong portfolio quality. The loans provisions provided by NBFCs further facilitate the small marketers with their occupational needs such as equipment purchase, business expansion, and technology up gradation and working capital requirements.
There are some from the many numbers of originators in the small sector that have developed their niche of operations to meet specific gaps of working capital needs of corporate, equipment financing for larger MSMEs, ongoing business requirements for smaller businesses, etc. On the other hand, rests of them are focused on developing their networks in specific geographies. These new lending institutions have developed innovative processes to expand target clientele – referral systems integrated with the supply chain, systematic cluster-based approaches, direct marketing, and strategic relationships with other institutions which work with the same target clientele.
The Road Ahead
For a huge and diverse country like India, ensuring financial access to fuel growth and entrepreneurship is essential. The rise of such specialized players and systems will definitely change the way of banking in the country. This will pave a strategic path ensuring sustainable growth for NBFCs over a long term. Further, as more and more consumers are taking the digital mode of transacting and trading, the digital wave could potentially open up new avenues for growth.
Moving forward, the latent credit demand of an emerging India will provide NBFCs with a chance to bridge the gap, particularly in the sectors where traditional banks were hesitant to serve. As the estimates indicate, more than 50 percent of micro, small and medium enterprises (MSMEs) are not able to access formalized credit. Additionally, improving macroeconomic conditions, higher credit penetration, enhanced consumption and disruptive digital trends will give enormous opportunities for NBFCs credit to rise at a robust rate of 7-10% in the coming years.