In the present economic system of India, NBFCs (Non-Banking Financial Companies) have assumed a significant role in providing accessible and affordable financial services. We will be covering NBFCs in a series of articles. This article (Part I) will focus on the present status of NBFCs in India and try to understand how they have become a vital player in financial inclusion.
As per the RBI, an NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures or securities issued by Government or local authority or other marketable securities.
With the focus of Non-Banking Finance Companies on segments neglected by banks (non-salaried professionals, individuals, traders, transporters and stock brokers), and with the ongoing stress in the public-sector banks due to mounting bad debt, NBFCs have had a lucrative opportunity to expand their presence in the Indian financial story. The RBI, in line with the growing importance of NBFCs, has a separate Department of Non-Banking Supervision, the vision of which is “to have a strong, robust and vibrant NBFC sector, complementing the banking sector”. As per an MCA report (March’14), 36,347 NBFCs exist in India. Out of these, 11,682 (32.14%) were registered with RBI as of Mar ’16. Here are some key data points related to NBFCs –
- The aggregate balance sheet size of the NBFCs sector expanded by 14.5% during 2016-17 as compared to 15.5% during 2015-16.
- Loans and advances increased by 16.4% and investments increased by 11.9% in March 2017, YoY
- Whereas the banking sector has had an average NPA of around 10% in 2016-17, NBFCs have done a better job of managing risk by capping the sector’s NPAs at around 4.5%
- Overall, NBFCs were on their way to setting a record of a robust growth of 19–22% CAGR in retail credit to reach an AUM of approximately 6.044 trillion INR by March 2017.
- NBFCs have contributed to growth consistently over the past decade. For example, the contribution of NBFCs to commercial banking assets increased from 8.4% in 2006 to 14%+ in March 2015. Similarly, NBFC sector on an average witnessed a CAGR (Compound annual growth rate) 22% during the period between Mar ’06 and Mar ’13, with NBFCs growing faster than banking sector in most of the years
- It was surprising to note that NBFC sector clocked a growth of 25.7% in 2011-12 although GDP growth decelerated to 6.3% in 2011-12 from 10.5% in 2010-11 (counter-cyclical movements)
- Similar to the trend in recent years, over an extended period of time, NBFC credit grew more rapidly as compared to the banking sector – NBFC credit witnessed a CAGR of 24.3% during the period between Mar’07 and Mar’13 as against 21.4% by the banking sector.
- Infrastructure Financing: The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of 26.2% during the period between Mar’10 and Mar’13. In absolute terms, NBFC finance to infrastructure increased from Rs.2228 billion to Rs. 4479 billion in the mentioned period. NBFC finance to infrastructure accounted for 35.8% of their assets as of March 31, 2013, while in the case of banks it was a mere 7.6%.
- Loans Against Property: Low turnaround time and easier documentation has allowed NBFCs to invest assets in multiple segments, especially small-scale industries and MSMEs. According to a recent CRISIL report, loan against property segment for SMEs is expected to grow by Rs. 5 lakh crore by 2018-19 and NBFCs are expected to contribute nearly half of this.
- Market Perspective: has also been bullish. “Incrementally, in recent times, investors are allocating more to NBFCs, as compared to banks. Off late, NBFCs have outperformed banks,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.
The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, with a better understanding of their customer segments. Recent reforms have been on the lines of ‘rationalization’, i.e. stricter rules for NBFCs that have a significant impact on the economy to keep the negative effects of Shadow Banking in check, while providing certain easy passes to NBFCs that don’t systematically impact the Indian economy, thereby allowing them to solve real problems without the possibility of any major threat to the economic operations.
The next series of article on NBFCs will highlight upon the drawbacks that NBFCs are facing. Credy is actively partnering with NBFCs and helping improve lending processes through automated borrower sourcing, profiling, authentication, agreement signing, repayment management, legal processing etc. Automating processes to every extent possible and building better credit underwriting algorithms to increase accuracy and speed are critical for a healthy credit business.
Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech start-up Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.